Section 194H – TDS on Commission
Tax Deducted at Source (TDS) is one of the most important mechanisms under the Indian Income Tax Act to ensure smooth tax collection. Section 194H specifically deals with TDS on income earned through commission or brokerage . It ensures that taxes on such earnings are deducted at the source itself, reducing the chances of tax evasion and simplifying compliance for both deductors and recipients.
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What is Section 194H?
Section 194H mandates that any person (other than an individual or HUF not liable to tax audit) who pays commission or brokerage to a resident must deduct TDS at the applicable rate. This section helps streamline taxation on intermediary earnings, ensuring timely collection of tax revenue.
What is Commission and Brokerage?
For the purpose of Section 194H:
- Commission includes any payment received or receivable for services rendered (other than professional services).
- Brokerage includes any payment received for facilitating a transaction between two parties, such as selling goods, securing services, or dealing in securities.
Examples include:
- Insurance commission paid to agents
- Commission to brokers in real estate transactions
- Referral commissions in banking or financial services
Who can deduct TDS under Section 194H?
TDS under Section 194H can be deducted by:
- Any individual, company, partnership firm, or entity making commission or brokerage payments.
However, individuals and HUFs not covered under tax audit (Section 44AB) in the preceding year are not required to deduct TDS under this section.
TDS Rate on Commission and Brokerage
The rate of TDS on commission under Section 194H is:
- 5% of the commission or brokerage amount.
- If the payee does not provide PAN, TDS is deducted at 20% (higher rate under Section 206AA).
When is TDS Deducted under Section 194H?
TDS must be deducted at the time of credit of the commission/brokerage in the payee’s account or at the time of payment, whichever is earlier.
This ensures that TDS is not delayed until final settlement.
Provisions for Nil Tax or Lower TDS under Section 194H
A payee can apply for a Nil or Lower TDS deduction certificate under Section 197 by submitting Form 13 to the Assessing Officer. Once approved, the payer can deduct TDS at the lower/nil rate specified in the certificate.
Exemptions of TDS on Commission
TDS under Section 194H is not applicable if:
- Commission or brokerage paid during a financial year does not exceed ₹15,000 per payee.
- Payments are made by individuals/HUFs not liable for a tax audit.
- Certain specified transactions, such as bank guarantee commission, are exempt.
Cases in which TDS is Not Deducted
- Commission paid by banks to their employees (salary component).
- Commission on insurance renewal (subject to separate provisions).
- Direct trade discounts given to customers (not commission).
Things to Remember / Key Points about TDS on Commission and Brokerage
- Deduct TDS at 5% if payment & ₹15,000 in a financial year.
- Deposit the TDS with the government within the due date.
- Issue TDS certificate (Form 16A) to the payee.
- File quarterly TDS returns (Form 26Q) for compliance.
- Higher TDS (20%) if PAN is not provided.
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Frequently Asked Questions (FAQs)
- What is Section 194H and what transactions does it cover?Section 194H covers TDS deduction on commission or brokerage payments made to a resident exceeding ₹15,000 in a financial year.
- Who is responsible for deducting TDS under Section 194H?Any entity (other than individuals/HUFs not liable for audit) paying commission or brokerage must deduct TDS.
- What is the applicable TDS rate on commission and brokerage under Section 194H?The standard rate is 5%, but if PAN is not furnished, the rate is 20%.
- When should TDS be deducted under Section 194H?At the time of crediting commission in the books or at the time of payment, whichever is earlier.
- Are there any exemptions or cases where TDS is not deducted under Section 194H?Yes, if the commission is below ₹15,000 in a financial year or if payments are made by small taxpayers (individuals/HUFs not under audit).
- How can one apply for nil or lower TDS deduction under Section 194H?By applying to the Assessing Officer under Section 197 with Form 13 and obtaining a lower/nil deduction certificate.
