Section 194H -TDS on Commission & Brokerage
A quick guide on Section 194H- TDS on commission and brokerage. Sec.194H of the Income Tax Act deals with TDS on Commission and brokerage income. This blog post provides a comprehensive understanding of Section 194H, covering its applicability, rates, exemptions, and compliance requirements.
As per this section, any person responsible for paying to a resident any income by way of commission (not being insurance commission referred u/s 194D) or brokerage shall, at the time of credit of such income or at the time of payment, whichever is earlier, deduct an amount equal to 5% (2% w.e.f 1st October 2024) of such income as TDS.
As per the Union Budget 2024, the TDS rate under Section 194H was reduced from 5% to 2% effective from October 1, 2024.
What is TDS?
TDS stands for Tax Deducted at Source, it is a system of tax collection by the central govt., where the person responsible for making specified payments such as salary, rent, professional fees, commission, etc. is liable to deduct a certain percentage of tax before making payment in full to the recipient.
Understanding Section 194H
Section 194H of the Income Tax Act mandates the deduction of TDS on income earned by a person as a commission or brokerage. As per this section, any person (not being an Individual or HUF) responsible for paying a resident:
- any income by way of commission (not being insurance commission referred u/s 194D) or brokerage,
- shall, at the time of credit of such income or at the time of payment, whichever is earlier, deduct an amount equal to 5% of such income as income tax thereon.
Thus in simple words, Section 194H specifies that if the commission or brokerage payment exceeds a certain threshold (currently Rs.15,000), you are liable to deduct 5% (2% w.e.f., 01.10.2024) of the payment as TDS.
The remaining 95% is to be paid. The TDS amount deducted needs to be submitted to the government account on or before the due date specified.
What Constitutes Commission and Brokerage?
As per the Act, commission or brokerage includes any payment received or receivable, directly or indirectly, for:
- Services rendered (excluding professional services under Section 194J)
- Acting as an intermediary in transactions related to buying and selling of goods or services
- Arranging financial transactions, such as loans, insurance policies, or investments
However, it does not include commission on securities transactions, which are covered under different provisions.
Threshold limit for deduction of TDS under section 194H
Section 194H is applicable only if the commission or brokerage paid in a financial year exceeds the limit of Rs. 15,000.
A person deducting TDS must also obtain a PAN from the payee and mention it in the TDS return.
Applicability of Section 194H
TDS under Section 194H applies to individuals or entities making commission or brokerage payments, except:
- Individuals and HUFs not required to audit their books under Section 44AB.
- Banks and Insurance Companies on payments made for banking or insurance services.
Exemptions from TDS under Section 194H
Certain payments are not covered under Section 194H, such as:
- Commission paid to banks on credit card transactions
- Discounts given to distributors or agents (if considered as trade discounts)
- Commission paid on securities transactions (covered under Section 194G or 194D)
Who is liable to deduct TDS under section 194H?
Any person who is responsible for paying commission or brokerage to a resident person is liable to deduct TDS under Section 194H.
Therefore, businesses need to be aware of TDS provisions like 194H to fulfill their tax obligations. By deducting and depositing the TDS correctly, businesses can comply with the law and avoid any penalties or legal complications.
Time of Deduction and Payment of TDS
- TDS should be deducted at the time of credit or payment, whichever is earlier.
- The deducted amount must be deposited with the government by the 7th of the following month.
Timely deduction and deposit of TDS not only ensure compliance but also help avoid penalties.
You may also like to read:
- TDS on Payment to Contractor or sub-contractor
- TDS on Payment of Rent – 194I
- Section 194K – TDS on Mutual Fund Dividend
- TDS Rate Chart for FY 2022-23
Rate of TDS under section 194H
The rate of TDS under section 194H is fixed at 5%**. However, in case the payee (deductee) doesn’t furnish his PAN, TDS will be deducted @ 20% i.e. at a higher rate.
**Union Budget 2024 has proposed to reduce the rate to 2% from 5%. The new TDS rate will be effective from 1st October 2024.
Note: The recipient of the commission or brokerage can claim a refund of the TDS amount by filing his or her income tax return (ITR)
Consequences of Non-deduction
Failure to deduct or deposit TDS under Section 194H can result in:
- Interest at 1% per month for non-deduction and 1.5% per month (or part of month) for non-payment.
- Disallowance of expenses under Section 40(a)(ia), leading to an increased taxable income.
- Penalties and prosecution under Sections 271C and 276B of the Income Tax Act.
FAQs on TDS on commission under section 194H
Here are some frequently asked questions about Section 194H:
Any person who is responsible for paying commission or brokerage to a resident person is liable to deduct TDS under Section 194H.
The rate of TDS under Section 194H is 5% (2% w.e.f., 1st October 2024) on the amount of commission or brokerage paid.
Yes, TDS under Section 194H is applicable only if the amount of commission or brokerage paid during the financial year exceeds Rs. 15,000.
TDS deducted under Section 194H must be deposited on or before the due date. The due date is by the 7th of the following month* in which the deduction is made.
*For the month of April to Feb: 7th of the next month
For the month of March: 30th April
If the TDS deducted under Section 194H is not deposited or is deposited late, then the deductor may be subject to penalties and interest under the Income Tax Act.
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