194h of Income Tax Act

194h of Income Tax Act: TDS on Commission & Brokerage

ByDiksha Chawla

Introduction

Tax Deducted at Source (TDS) is a crucial aspect of tax compliance in India. Among various TDS provisions, Section 194H of the Income Tax Act specifically deals with the deduction of tax on commission and brokerage payments. This provision ensures that taxes are collected at the source of income, reducing the chances of tax evasion.

Why is Section 194H Important?

  • Regulates tax collection on commission-based earnings
  • Ensures transparency in financial transactions
  • Prevents revenue leakage through undisclosed commissions

This guide delves into the scope, applicability, compliance requirements, penalties, and practical implications of Section 194H Income Tax Act.

What is Section 194H of the Income Tax Act?

Section 194H of the Income Tax Act deals with the deduction of TDS on commission or brokerage. This section applies to payments made to agents, brokers, and intermediaries for services rendered in facilitating transactions.

The objective of Section 194H of the Income Tax Act is to ensure proper tax collection at the source, reducing the possibility of tax evasion. The deductor (payer) is responsible for deducting TDS and depositing it with the government before making payments to the recipient (deductee).

What is the Meaning of Commission and Brokerage?

Definition Under Section 194H

According to Section 194H Income Tax Act, commission or brokerage refers to any payment received for services rendered, excluding professional services. This includes:

  • Acting as an intermediary in sales transactions
  • Bringing buyers and sellers together
  • Facilitating business agreements

Examples of Commission and Brokerage Payments:

  • Banking: Charges for loan processing intermediaries
  • Retail Sector: Commissions paid to sales agents
  • Real Estate: Brokerage fees for property deal
  • Stock Market: Commissions earned by sub-brokers

TDS on commission or brokerage includes,

  • for services rendered (not being professional services), or
  • for any services in the course of buying or selling of goods, or
  • in relation to any transaction relating to any asset, valuable article or thing, except securities

Commission is quite common across industries like real estate, financial services, sales where agents/intermediaries plays a key role in closing the deals or facilitating transactions. This form of compensation motivates individuals to deliver successful results. Similarly, brokerage is received by a broker for completing deals between buyers and sellers in markets such as stocks, insurance, real estate etc. 

What are the Exemptions on TDS Deduction on Commissions and Brokerages?

  • Brokerage or commission is less than or equal to Rs.20,000 in a financial year.
  • When an employer is paying a commission to the employee, TDS is deducted under Section 192 of the IT Act.
  • Commission on insurance income and loan underwriting.
  • Service Tax deduction is not included in the Section 194H
  • Individuals with a NIL TDS certificate from an authorised body will get a TDS exemption for all services.
  • Payments made by television channels/newspaper companies to the advertising agency for booking or procuring of or canvassing for advertisements.
  • Turnover Commission payable by the RBI to the Agency Banks.
  • Brokerage or commission for providing securities to the public.
  • No TDS deduction on the interest accrued on NRE accounts.
  • Interest on refunds are not subject to TDS under Section 194H.
  • Any payment of commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
  • Interest earned on deposits in savings bank account, NSC, Indira Vikas Patra and Kisan Vikas Patra are not subject to TDS.

In a significant development, the Supreme Court recently held that under Section 194-H of the Income Tax Act, 1961, cellular mobile service providers are not liable to deduct tax at source on income/profit component in payments received by their franchisees/distributors from third parties/customers.

Who Should Deduct TDS under 194H?

  • Businesses and corporations paying commissions to agents or brokers
  • Banks and financial institutions making payments to intermediaries
  • Online platforms paying commissions to affiliates

Examples of Transactions Covered Under 194H:

  • Real estate brokerage payments
  • Commission paid to sales agents
  • Referral commissions in financial services
  • Advertising agency commissions

What is the Rate of TDS?

The rate of TDS is 2% with effect from 1 October 2024. The rate was 5% for transactions before 1 October 2024. No surcharge, education cess, or SHEC shall be added to the above rates. Hence, the tax will be deducted at source at the basic rate. The rate of TDS will be 20% in all cases if the deductee does not quote PAN.

Under What Circumstances TDS u/s 194H is Not Deductible?

  • No deduction shall be made under this section in a case where the amount or the aggregate amounts of such income to be credited or paid during the financial year does not exceed INR 20,000
  • The person can make an application to the assessing officer under Section 197 for deduction of tax at NIL rate or at a lower rate.

What is the Time Limit for Depositing TDS?

  • Tax Deducted during the month of April to February is to be deposited on or before the 7th of next month. Tax Deducted in the month of March is to be deposited on or before 30th April.
  • For example, tax deducted on 25 April is to be deposited on or before 7th May and tax deducted on 15 March is to be deposited on or before 30 April.

TDS at a Lower Rate

The deductee (the person whose tax is deducted) can make an application to the assessing officer under section 197 for deduction of tax at NIL rate or at a lower rate.

  • Validate the PAN of the deductee submitting 197 certificate.
  • The Certificate should be valid for the PAN, Section, Rate and relevant financial year which has been mentioned in the statement filed.
  • Verify that the threshold limit for the certificate has not been exceeded in previous quarters.
  • Correct certificate number should be quoted in the statement. Example of Correct Certificate Number – 3XXXAH7X

Points to Remember about TDS on Commission and Brokerage

  • If the commission or brokerage comes under the GST, TDS is deducted from its primary value and is exclusive of the GST component.
  • TDS is deducted if the aggregate earnings are more than Rs.20,000.
  • Even if the agent retains the commission amount while setting payment, the TDS will be deposited to the government.
  • When a TDS deduction is made on behalf of or by the government, it is deposited on the same day.

Learn more about the tax system in our The Indian Tax System: What You Need to Know.

Conclusion

Understanding Section 194H of the Income Tax Act is crucial for businesses making commission or brokerage payments. By ensuring timely deduction and deposit of TDS, taxpayers can avoid penalties and legal issues.

To stay compliant, always deduct TDS, file TDS returns on time, and keep proper records of transactions. If you have further questions on 194H Income Tax Act, consult a tax professional for guidance.

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