Section 194H of Income Tax Act in India focuses on TDS for commission or brokerage payments. Simply put, if you are paying a resident commission or brokerage that goes over a certain limit, you must deduct TDS at the specified rates before making the payment. Understanding and following this section is essential for compliance with tax regulations.
Table of Contents
What is Section 194H of Income Tax Act?
Section 194H of Income Tax Act focuses on TDS deduction for commission or brokerage payments. It requires the person responsible for making these payments (excluding individuals/HUF) to deduct 5% TDS when the amount surpasses Rs. 15,000 in a year. Note that during the COVID-19 pandemic relief period (from May 14, 2020, to March 31, 2021), the reduced rate was 3.75%.
Individuals and HUFs with audited accounts under section 44AB, along with those with turnover over Rs. 1 crore and professional income exceeding Rs. 50 lakhs, are also obligated to deduct TDS under Section 194H. However, this rule doesn’t apply to insurance commission, as outlined in section 194D. Understanding these provisions is crucial for complying with Section 194H of the Income Tax Act.
What is TDS on Commission or Brokerage?
Any payment received directly or indirectly by someone acting on behalf of another is considered commission or brokerage. Tax deduction at source (TDS) on brokerage or commission covers a range of services, including:
- Any service rendered, excluding professional services.
- Services provided during the buying or selling of goods.
- Services offered in transactions involving assets or valuable items, excluding securities.
Exceptions of TDS on Commission or Brokerage
There are exceptions to the rule of tax deduction at the source under Section 194H of Income Tax Act for certain types of commissions or brokerages. These exceptions include:
- Commission to Insurance or Loan Underwriters
- Brokerage for Public Issue of Securities
- Brokerage on Transactions of Listed Securities
- Payments by RBI to Banking Companies
- Income Tax Refund Payments
- Payments to Financial Corporations under the Central Finance Bill
- Payments for LIC Policies or Investments in Cooperative Societies
- Direct Tax Payments
- Interest Income from Savings Bank Account, Recurring Deposits, Indra Vikas Patra, NSC, or Kisan Vikas Patra
- Interest from NRE Account
- Commission or Brokerage by BSNL or MTNL to Public Call Office Franchisees
- Income from Institutions Notified as NIL TDS Organizations
- Interest Income for Compensation in Motor Vehicles Claims Tribunal
What is the 194H TDS Rate and Threshold Limit?
Section 194H of Income Tax Act is set at 5%, reduced to 3.75% from May 14, 2020, to March 31, 2021, as part of COVID-19 relief measures. It’s important to note that if the deductee doesn’t provide their PAN, the TDS rate increases to 20%. The specified rate includes all taxes, and there’s no need to separately add health and education cess.
| Particulars | If PAN is provided | If PAN is not provided |
|---|---|---|
|
194H Threshold Limit |
₹15000 |
₹15000 |
|
194H TDS rate |
5% |
20% |
Time limit for deducting TDS
Under Section 194H of Income Tax Act, whenever there is a credit of income related to brokerage or commission to the payee’s account or any other account, TDS is applied. This holds true even if these incomes are temporarily recorded in suspense accounts or under a different name. Whether the payment is made in cash, by cheque, or draft, TDS is mandated under Section 194H.
Time limit for depositing TDS
Those deducting TDS under Section 194H of Income Tax Act must ensure timely deposits. Typically, the TDS amount needs to reach the Income Tax Department by the 7th day of the month following the deduction month. For instance, if TDS is deducted in June, it should be deposited by July 7th. Meeting this deadline is crucial to stay compliant with Section 194H requirements.
Exemptions under section 194H of Income Tax Act
There are specific cases exempted from Tax Deduction at Source (TDS) under Section 194H of Income Tax Act. Here they are:
- Brokerage or Commission below Rs. 15000: If the annual brokerage or commission is less than Rs. 15000, TDS is not applicable.
- NIL or Lower TDS Certificate: If the deductee has a NIL or lower TDS certificate issued by the assessing officer, TDS is exempted.
- BSNL or MTNL Public Call Franchisees: Income from brokerage or commission by BSNL or MTNL towards public call franchisees is exempt.
- Company Commission to Workers: If a company pays commission to its workers, TDS falls under section 192, not Section 194H.
- Insurance or Loan Underwriting Commission: TDS is not applicable on commission from insurance or loan underwriting.
TDS not Deductible on Tax Amount
Under Section 194H of the Income Tax Act, if tax is applicable, TDS should only be deducted from the brokerage or commission amount, not on the tax component. This means no TDS is required on the GST amount.
Read also: Latest TDS Rate Chart for FY 2023-24 (AY 2024-25)
Key Points to be Considered in Section 194H
Under Section 194H of Income Tax Act in India, if you’re paying commissions or brokerages to a resident, here’s what you need to know:
- Who it Applies To: This section applies to anyone, be it an individual, firm, or company, making commission or brokerage payments to a resident payee.
- Type of Payment: It specifically deals with TDS on payments in the form of commission or brokerage.
- Threshold Limit: TDS applies only if the total commission or brokerage payment exceeds ₹15,000 during the financial year. If it doesn’t cross this limit, no TDS is necessary.
- 194H TDS Rate: The 194H TDS rate is 5% of the commission or brokerage amount. This rate may change based on current tax laws.
- When to Deduct and Deposit: Deduct TDS when crediting the amount to the payee’s account or at the time of payment, whichever is earlier. Ensure timely deposit with the government.
- TDS Certificate (Form 16A): Issue this certificate to the payee, detailing the TDS deducted. It is crucial for the payee’s income tax filing.
- TDS Return Filing (Form 26Q): Quarterly filing is required by the payer, providing TDS details for the respective quarter.
- Form 15G/15H: Payees can submit these forms if they believe their income is below the taxable limit, and if conditions are met, TDS will not be deducted.
- Valid PAN: Ensure the correct PAN is obtained from the payee. Non-quoting or incorrect PAN may result in higher TDS.
- Timely Compliance: Stick to the TDS deduction and deposit timelines to avoid penalties or interest for late payment.
Conclusion
If you earn income through brokerage or commission, be aware of tax implications under the Income Tax Act 1961, specifically covered in section 194H. This section mandates Tax Deduction at Source (TDS) when paying commission or brokerage, with a few exceptions like commission on insurance sales being exempt. TDS is deducted at the time of actual payment. While navigating through Income Tax Return (ITR) filings can be complex and prone to errors, seeking assistance from an expert is a wise move to ensure accuracy and compliance.
Frequently Asked Questions (FAQ)
Section 194H requires individuals who receive income from commissions or brokerage to pay TDS.
Section 194H TDS Rate is 5%. However, if the PAN details are not provided, the rate increases to 20%.
If the commission income exceeds the salary income, ITR-3 must be filed; otherwise, ITR-1 can be filed and commission income reported under other sources.
ITR-3 must be submitted if commission income is your primary source of income.
Yes, all expenses against commission income are deductible when you file your ITR.