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

Section 194H of Income Tax Act - TDS on Commission & Brokerage. Section 194H of Income Tax Act in India governs the rules related to the deduction of Tax at Source (TDS) on payments made as commission or brokerage to resident individuals. This provision ensures that tax is collected at the source before the commission or brokerage is credited or paid. It applies to entities such as companies, firms, and individuals or Hindu Undivided Families (HUFs) subject to tax audit under section 44AB. This article discusses in detail the key provisions, applicability, exemptions, TDS rate, compliance requirements, and FAQs related to Section 194H.
What is Section 194H of Income Tax Act?
Section 194H of Income Tax Act mandates that a person, other than an individual or HUF not liable for tax audit, who is responsible for paying any income by way of commission or brokerage to a resident shall deduct income tax at the rate of 5% at the time of credit or payment, whichever is earlier. However, with effect from October 1, 2024, as per the Union Budget 2024, the TDS rate under Section 194H will be reduced to 2%. The provision applies only when the total amount of commission or brokerage paid during the financial year exceeds Rs. 15,000.
For individuals and HUFs, TDS under Section 194H is applicable only if their total sales, gross receipts, or turnover from business exceeds Rs. 1 crore or from profession exceeds Rs. 50 lakhs in the preceding financial year. It is important to note that payments covered under Section 194D (like insurance commission) are not included under this section.
Meaning of Commission and Brokerage
Commission and brokerage are defined as any payment received directly or indirectly by a person for acting on behalf of another person. These payments are typically for facilitating a transaction or securing a deal. Commission is usually earned for services like promoting sales or securing orders, while brokerage is earned for bringing together buyers and sellers for a transaction involving goods, property, or services.
In simpler terms, if a person earns an amount for helping another party close a business deal or transaction, that amount is considered commission or brokerage. This includes services rendered in the course of buying or selling goods or services, but excludes professional services.
Inclusions under Section 194H - TDS on Commission & Brokerage
TDS under Section 194H applies to a wide range of payments that are made as commission or brokerage. The inclusions are:

Payments received for rendering services (other than professional services) such as marketing, selling, or referring business.

Any amount paid in the course of buying or selling goods, including trade commissions.

Payments made to intermediaries for facilitating deals involving movable or immovable property or other valuable articles.

This means even if the person is not directly involved in the transaction but has contributed in facilitating it, the income earned is considered commission or brokerage.
Exemptions under Section 194H - TDS on Commission & Brokerage
There are certain payments that are not subject to TDS under Section 194H of Income Tax Act. The key exemptions are:

Payments made by the Reserve Bank of India to banks or financial institutions.

Commission or brokerage paid to underwriters of loans or insurance policies.

Brokerage paid for public issue of securities.

Brokerage paid on securities transactions listed on a recognized stock exchange.

Commission or incentive payments under LIC or other cooperative investment schemes.

Payments to Financial Corporations governed by the Central Finance Act.

Income tax refunds are not subject to TDS.

Interest income from instruments like NSC, Kisan Vikas Patra, Indira Vikas Patra, and recurring deposits.

Interest earned on Non-Resident External (NRE) accounts.

Commission or brokerage paid by BSNL or MTNL to their public call office (PCO) franchisees.

Payments made by institutions notified for NIL TDS.

Interest compensation awarded by the Motor Vehicles Claims Tribunal.

When is TDS Deducted under Section 194H?
TDS under Section 194H of Income Tax Act must be deducted either:

At the time of credit of commission or brokerage to the payee's account,

Or at the time of actual payment, whichever is earlier.

Even if the payment is credited to a suspense account or any other temporary account, the liability to deduct TDS arises. The deduction must be done before the amount is disbursed, regardless of the mode of payment (cash, cheque, or bank transfer).
Time Limit for Depositing TDS
The TDS deducted under Section 194H must be deposited with the government within specific timelines:

For deductions made in any month except March, the due date is the 7th of the following month.

For TDS deducted in the month of March, the due date is April 30.

Timely deposit of TDS is essential to avoid penalties and interest charges.
TDS Rate under Section 194H
The standard rate of TDS on commission and brokerage under Section 194H is 5%. However, as per the Union Budget 2024, this rate will be reduced to 2% effective from October 1, 2024. If the payee does not furnish a valid PAN, the TDS must be deducted at a higher rate of 20%.
It is also important to note that no surcharge, health and education cess is added to the above rate. The rate is flat and final for TDS purposes.
When is TDS Not Applicable under Section 194H?
TDS under Section 194H is not applicable in the following situations:

When the total commission or brokerage paid or credited during the financial year does not exceed Rs. 15,000.

When the payee submits Form 15G or Form 15H, declaring that their income is below the taxable limit.

When a certificate under Section 197 is obtained by the payee for a lower or NIL TDS rate.

These exceptions are subject to the submission of valid documentation and timely verification by the payer.
How to Get Lower or NIL Rate of TDS under Section 194H?
The deductee (recipient of commission/brokerage) may apply to the Assessing Officer for a certificate under Section 197 to get TDS deducted at a lower or NIL rate. The following details are required while applying:

Name and address of the assessee.

PAN details.

Purpose for which payment is received.

Income details for the last three financial years.

Estimated income for the current financial year.

Details of tax payments made in the last three years.

Tax paid or payable in the current financial year.

The Assessing Officer will verify the application and, if satisfied, issue a certificate specifying the applicable rate and conditions.
Compliance Requirements for Payers
Entities responsible for deducting TDS under Section 194H must ensure:

Timely deduction of TDS at the time of credit/payment.

Deposit of TDS to the government account within the prescribed due dates.

Issuance of TDS certificate (Form 16A) to the payee within the stipulated period.

Filing of quarterly TDS return (Form 26Q) with complete details of deductions.

Any delay or failure in compliance may result in interest, penalties, and disallowance of expenditure under the Income Tax Act.
Which ITR to File for Commission Income?
Commission or brokerage income is treated as business income and must be reported under the head "Profits and Gains of Business or Profession" in the income tax return.

If commission income is the primary source of income, the taxpayer must file ITR-3.

If the taxpayer has both salary and small commission income, ITR-1 may be filed by reporting the commission income under "Other Sources."

If commission income is substantial and business-like, ITR-3 should be preferred.

Expenses related to earning commission income, such as travel, communication, and office costs, can be claimed as deductions.
Budget 2025 Updates
As per the Union Budget 2025, the following changes are notable:

The threshold for TDS on rent has been increased from Rs. 2.4 lakhs to Rs. 6 lakhs per year.

The threshold for TDS on interest income for senior citizens has been increased from Rs. 50,000 to Rs. 1 lakh per year.

These changes will be effective from April 1, 2025, i.e., for FY 2025-26.

Conclusion
Section 194H of Income Tax Act plays an important role in ensuring that tax is collected at the source on income earned through commission and brokerage. Taxpayers and payers must understand its provisions thoroughly to comply with the law, avoid penalties, and file accurate returns. If you require assistance in filing your TDS returns or understanding the requirements of Section 194H, you can consult the experts at Compliance Calendar LLP for smooth and efficient compliance support.
For hassle-free TDS compliance and ITR filing, contact Compliance Calendar LLP today!
Email: info@ccoffice.in
Call/Whatsapp: +91 9988424211
Frequently Asked Questions (FAQs)
Q1. What is the threshold for TDS under Section 194H?
Ans. TDS is applicable if the total commission or brokerage in a financial year exceeds Rs. 15,000.
Q2. What is the TDS rate under Section 194H?
Ans. The TDS rate is 5%, which will be reduced to 2% from October 1, 2024. If PAN is not provided, TDS is deducted at 20%.
Q3. How can TDS on commission be avoided legally?
Ans. By ensuring the payment does not exceed Rs. 15,000 or by obtaining a NIL/lower deduction certificate under Section 197.
Q4. What is the TDS rate for travel agent commissions?
Ans. Typically, 1% for individual/HUF payees and 2% for others, provided PAN is furnished. If PAN is not available, TDS is 20%.
Q5. Is commission income taxable?
Ans. Yes, it is taxable under the head "Profits and Gains of Business or Profession" as per Section 28 of the Income Tax Act.
Q6. Can business expenses be claimed against commission income?
Ans. Yes, expenses directly related to earning commission income can be claimed as deductions.
Q7. Is GST applicable on commission and brokerage?
Ans. Yes, GST is generally applicable at 18% on commission and brokerage unless specifically exempted.

Section 194H of Income Tax Act in India governs the rules related to the deduction of Tax at Source (TDS) on payments made as commission or brokerage to resident individuals. This provision ensures that tax is collected at the source before the commission or brokerage is credited or paid. It applies to entities such as companies, firms, and individuals or Hindu Undivided Families (HUFs) subject to tax audit under section 44AB. This article discusses in detail the key provisions, applicability, exemptions, TDS rate, compliance requirements, and FAQs related to Section 194H.

What is Section 194H of Income Tax Act?

Section 194H of Income Tax Act mandates that a person, other than an individual or HUF not liable for tax audit, who is responsible for paying any income by way of commission or brokerage to a resident shall deduct income tax at the rate of 5% at the time of credit or payment, whichever is earlier. However, with effect from October 1, 2024, as per the Union Budget 2024, the TDS rate under Section 194H will be reduced to 2%. The provision applies only when the total amount of commission or brokerage paid during the financial year exceeds Rs. 15,000.

For individuals and HUFs, TDS under Section 194H is applicable only if their total sales, gross receipts, or turnover from business exceeds Rs. 1 crore or from profession exceeds Rs. 50 lakhs in the preceding financial year. It is important to note that payments covered under Section 194D (like insurance commission) are not included under this section.

Meaning of Commission and Brokerage

Commission and brokerage are defined as any payment received directly or indirectly by a person for acting on behalf of another person. These payments are typically for facilitating a transaction or securing a deal. Commission is usually earned for services like promoting sales or securing orders, while brokerage is earned for bringing together buyers and sellers for a transaction involving goods, property, or services.

In simpler terms, if a person earns an amount for helping another party close a business deal or transaction, that amount is considered commission or brokerage. This includes services rendered in the course of buying or selling goods or services, but excludes professional services.

Inclusions under Section 194H - TDS on Commission & Brokerage

TDS under Section 194H applies to a wide range of payments that are made as commission or brokerage. The inclusions are:

Payments received for rendering services (other than professional services) such as marketing, selling, or referring business.
Any amount paid in the course of buying or selling goods, including trade commissions.
Payments made to intermediaries for facilitating deals involving movable or immovable property or other valuable articles.

This means even if the person is not directly involved in the transaction but has contributed in facilitating it, the income earned is considered commission or brokerage.

Exemptions under Section 194H - TDS on Commission & Brokerage

There are certain payments that are not subject to TDS under Section 194H of Income Tax Act. The key exemptions are:

Payments made by the Reserve Bank of India to banks or financial institutions.
Commission or brokerage paid to underwriters of loans or insurance policies.
Brokerage paid for public issue of securities.
Brokerage paid on securities transactions listed on a recognized stock exchange.
Commission or incentive payments under LIC or other cooperative investment schemes.
Payments to Financial Corporations governed by the Central Finance Act.
Income tax refunds are not subject to TDS.
Interest income from instruments like NSC, Kisan Vikas Patra, Indira Vikas Patra, and recurring deposits.
Interest earned on Non-Resident External (NRE) accounts.
Commission or brokerage paid by BSNL or MTNL to their public call office (PCO) franchisees.
Payments made by institutions notified for NIL TDS.
Interest compensation awarded by the Motor Vehicles Claims Tribunal.

When is TDS Deducted under Section 194H?

TDS under Section 194H of Income Tax Act must be deducted either:

At the time of credit of commission or brokerage to the payee's account,
Or at the time of actual payment, whichever is earlier.

Time Limit for Depositing TDS

The TDS deducted under Section 194H must be deposited with the government within specific timelines:

For deductions made in any month except March, the due date is the 7th of the following month.
For TDS deducted in the month of March, the due date is April 30.

Timely deposit of TDS is essential to avoid penalties and interest charges.

TDS Rate under Section 194H

The standard rate of TDS on commission and brokerage under Section 194H is 5%. However, as per the Union Budget 2024, this rate will be reduced to 2% effective from October 1, 2024. If the payee does not furnish a valid PAN, the TDS must be deducted at a higher rate of 20%.

It is also important to note that no surcharge, health and education cess is added to the above rate. The rate is flat and final for TDS purposes.

When is TDS Not Applicable under Section 194H?

TDS under Section 194H is not applicable in the following situations:

When the total commission or brokerage paid or credited during the financial year does not exceed Rs. 15,000.
When the payee submits Form 15G or Form 15H, declaring that their income is below the taxable limit.
When a certificate under Section 197 is obtained by the payee for a lower or NIL TDS rate.

These exceptions are subject to the submission of valid documentation and timely verification by the payer.

How to Get Lower or NIL Rate of TDS under Section 194H?

The deductee (recipient of commission/brokerage) may apply to the Assessing Officer for a certificate under Section 197 to get TDS deducted at a lower or NIL rate. The following details are required while applying:

Name and address of the assessee.
PAN details.
Purpose for which payment is received.
Income details for the last three financial years.
Estimated income for the current financial year.
Details of tax payments made in the last three years.
Tax paid or payable in the current financial year.

The Assessing Officer will verify the application and, if satisfied, issue a certificate specifying the applicable rate and conditions.

Compliance Requirements for Payers

Entities responsible for deducting TDS under Section 194H must ensure:

Timely deduction of TDS at the time of credit/payment.
Deposit of TDS to the government account within the prescribed due dates.
Issuance of TDS certificate (Form 16A) to the payee within the stipulated period.
Filing of quarterly TDS return (Form 26Q) with complete details of deductions.

Any delay or failure in compliance may result in interest, penalties, and disallowance of expenditure under the Income Tax Act.

Which ITR to File for Commission Income?

Commission or brokerage income is treated as business income and must be reported under the head "Profits and Gains of Business or Profession" in the income tax return.

If commission income is the primary source of income, the taxpayer must file ITR-3.
If the taxpayer has both salary and small commission income, ITR-1 may be filed by reporting the commission income under "Other Sources."
If commission income is substantial and business-like, ITR-3 should be preferred.

Expenses related to earning commission income, such as travel, communication, and office costs, can be claimed as deductions.

Budget 2025 Updates

As per the Union Budget 2025, the following changes are notable:

The threshold for TDS on rent has been increased from Rs. 2.4 lakhs to Rs. 6 lakhs per year.
The threshold for TDS on interest income for senior citizens has been increased from Rs. 50,000 to Rs. 1 lakh per year.
These changes will be effective from April 1, 2025, i.e., for FY 2025-26.

Conclusion

Section 194H of Income Tax Act plays an important role in ensuring that tax is collected at the source on income earned through commission and brokerage. Taxpayers and payers must understand its provisions thoroughly to comply with the law, avoid penalties, and file accurate returns. If you require assistance in filing your TDS returns or understanding the requirements of Section 194H, you can consult the experts at Compliance Calendar LLP for smooth and efficient compliance support.

For hassle-free TDS compliance and ITR filing, contact Compliance Calendar LLP today!

Email: info@ccoffice.in

Call/Whatsapp: +91 9988424211