Section 194H of Income Tax Act - TDS on Commission & Brokerage

What is Section 194H?

Section 194H of the Income Tax Act deals with TDS deduction on the payment of commission or brokerage. It mandates tax deduction by the person (other than individual/HUF) responsible for paying commission or brokerage to resident persons at the rate of 5% when the amount exceeds Rs.15000 in a year. [3.75% from 14th May 2020 to 31st March 2021, at a reduced rate as per the relief announced by the Finance Minister due to the Coronavirus pandemic].

TDS under section 194H of the Income Tax Actshall also be deducted by all the individuals and HUFs (Hindu Undivided Family) who are required to get their accounts audited under section 44AB.

Individuals and HUFs with a turnover exceeding Rs. 1 crore and professional income exceeding Rs.50 lakhs also have to deduct TDS. However, it does not include insurance commission, as provided in section 194D.

What is the Meaning of Commission and Brokerage?

To understand section 194H, you have to understand the basics of commission and brokerage. Any payment that is received or receivable, directly or indirectly, by any person acting on behalf of another person is said to be a commission or brokerage. It includes -

• Services rendered except professional services
• Services in the course of buying or selling goods
• Any transaction done for valuable assets or articles.

What are the Inclusions of TDS on Commission or Brokerage?

Tax deduction at source on brokerage or commission includes various services. These are as follows:

• Any service rendered except professional services
• Any service rendered in the process of selling or buying goods
• Any service that is given during any transaction related to any asset or any valuable thing excluding securities.

What are the Exemptions of TDS on Commission or Brokerage?

There are a few exceptions to these sorts of commissions or brokerage on which no tax deduction at the source is made under this section. They are -

• Commission paid to insurance or loan underwriters,
• Any brokerage paid for the public issue of securities,
• Any sort of brokerage paid on the transactions of securities that are listed in the stock exchange,
• Payments made by RBI to banking companies,
• Payment as an income tax refund,
• Payments towards Financial Corporations under the central finance bill,
• Any payments towards LIC policies or other investments in any cooperative societies,
• Payment of direct taxes,
• Income from interest from the savings bank account, recurring deposits, Indra Vikas Patra, NSC or Kisan Vikas Patra,
• Interest from NRE account,
• Any payment in respect of commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees,
• Any income from a public or private institution that is notified as NIL TDS organization.
• Any income from interest for the compensation in respect to Motor Vehicles Claims Tribunal.

When does TDS Under Section 194H Need to be Deducted?

Whenever there is a credit of income related to brokerage or commission to the account of the payee or any other account, tax deduction at source will be done under section 194H of the Income Tax Act 1961. Even if these incomes are accounted in suspense accounts or by another name at the time of payment that is made in cash or by cheque or draft, tax deduction at source (TDS) is done under section 194H.

What is the time limit for depositing TDS?

Generally, the TDS deductors are required to deposit the TDS amount with the Income Tax Department by the 7th day of the month following the month in which the deduction was made. For example, the TDS deducted in the month of June must be deposited with the Income Tax Department by the 7th of the next month, i.e., the 7th of July.

What is the Rate of Tax Deduction at Source Under Section 194H?

The rate of tax deduction at source is fixed at the rate of 5% [3.75% from 14th May 2020 to 31st March 2021, at a reduced rate as per the relief announced by the Finance Minister due to the Coronavirus pandemic] in the income tax act. If in case the PAN is not quoted by the deductee, the rate of tax deduction at source (TDS) will be charged at 20%.

This prescribed rate of tax is inclusive of all taxes, and no health & education cess is required to be added separately.

What are the Cases in Which TDS is Nnot Deductible?

There are various conditions in which the Tax deduction at source is not applicable under section 194H. They are:

If the amount or aggregate amount of any income from brokerage or commission does not exceed the limit of Rs. 15,000 during the payment in the financial year. No deduction will be made under this section.

The Individual can apply to the assessing officer for deduction at a NIL rate or lower rate tax under section 197.

How to Deposit Tax Deductions at Source?

The tax amount that is deducted from April to February is to be deposited before the 7th of the next month. For March, it is to be deposited by the 30th of April.

Example:

• If tax is deducted on the 20th of April, it is to be deposited by the individual before or on the 7th of May.
• If tax is deducted on 20th March, it is to be deposited on or before 30th April.

What are the Conditions for Tax Deduction at the Source at a Lower Rate?

As discussed above, the deductee can apply for a lower rate or NIL rate of TDS to the assessing officer. For this, various actions are to be taken by the assessing officer.

• The deductor has to validate the PAN of the individual with the submission of 197 certificates.
• The certificate submitted should have a valid rate, financial year, PAN, sections, and so on for which it is filed.
• The threshold limit that is specified in the certificate should not exceed in any quarter.
• The certificate number should be correctly quoted.

After validating all these actions, the assessing officer can agree to the application of the deductee.

Some of the details that are required to be given at the time of filing this application of lower or NIL rate of Tax Deduction at Source are:

• Name and address of the assessee,
• PAN details,
• The purpose for which payment has been received,
• Details of the income in the last three years,
• Projected income in the present financial year,
• Any tax payment done in the last three years,
• Tax payments done for the present financial year.

Exemptions under section 194H

Few cases are there in which the Tax Deduction at Source(TDS) is exempted under section 194H. They are:

• If the brokerage or commission does not exceed Rs. 15000 in a financial year.
• If the deductee obtained NIL or lower Tax Deduction at Source(TDS) certificate by the assessing officer.
• Income made in terms of brokerage or commission by BSNL or MTNL towards public call franchisees
• If any company pays a commission to their workers, TDS will be applicable under section 192 and not under section 194H.
• Any insurance commission or loan underwriting commission.
• Income from service tax payment.

What are the Important Points to be Considered in Section 194H?

Section 194H of the Income Tax Act in India deals with the deduction of tax at source (TDS) rate on commission or brokerage payments. If you are a payer responsible for making commission or brokerage payments to a resident, here are the important points to consider under Section 194H:

1. Applicability: Section 194H TDS rate applies to all individuals, firms, companies, or any other entity that makes commission or brokerage payments to a resident payee.
2. Nature of Payment: TDS under Section 194H of the Income Tax Act is applicable to payments made in the form of commission or brokerage.
3. Threshold Limit: The TDS provisions of Section 194H are applicable only if the commission or brokerage payment to the payee exceeds ₹15,000 in aggregate during the financial year. If the total payment does not cross this threshold, no TDS needs to be deducted.
4. TDS Rate: The TDS rate on commission under Section 194H of the Income Tax Act is 5% of the commission or brokerage amount. This rate is subject to change as per the prevailing tax laws.
5. Time of Deduction and Deposit: TDS must be deducted at the time of credit of the commission or brokerage amount to the payee's account or at the time of payment, whichever is earlier. The deducted TDS must be deposited with the government within the specified due dates.
6. TDS Certificate: The payer is required to issue a TDS certificate (Form 16A) to the payee, which includes details of the TDS deducted. This certificate serves as proof of TDS deduction and is essential for the payee while filing their income tax return.
7. TDS Return Filing: The payer is required to file a TDS return (Form 26Q) on a quarterly basis, providing details of TDS deducted and deposited during the respective quarter.
8. Form 15G/15H: If the payee believes that their total income is below the taxable limit and they are not liable to pay taxes, they can submit Form 15G (for individuals) or Form 15H (for senior citizens) to the payer. If the conditions are met, the payer will not deduct TDS on the commission or brokerage payments.
9. Valid PAN: It is essential to ensure that the payee's PAN (Permanent Account Number) is correctly obtained and quoted for TDS purposes. Non-quoting or incorrect quoting of PAN may result in higher TDS deductions.
10. Timely Compliance: Adhering to the TDS deduction and deposit timelines is crucial to avoid any penalties or interest for late payment.

Conclusion

If you earn any income from brokerage or commission, you are liable to pay tax deduction at source(TDS) under the Income Tax Act 1961. All the provisions regarding this Tax Deduction at Source (TDS) are made under section 194H. However, there are a few exceptions of commission or brokerage, such as commission on Insurance sales and so on, that are exempted from TDS under section 194H. Under this, the tax is deducted at the time of payment of commission or brokerage is done.

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