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

Section 194H of the Income Tax Act in India mandates the deduction of Tax at Source (TDS) on commission or brokerage payments made to a resident individual. As a significant source of income, commission and brokerage are subject to TDS when the payment exceeds a specified threshold amount. This provision ensures that taxes are deducted at prescribed rates before disbursing such payments, with certain exemptions available under specific circumstances. Understanding the intricacies of Section 194H is crucial for individuals and entities involved in transactions related to non-professional services, the sale or purchase of goods, and other valuable assets. This article provides detailed information regarding Section 194H of the Income Tax Act. IndiaFilings streamlines your TDS return filing with expert assistance!! [shortcode_35]

What is Section 194H?

Section 194H of the Income Tax Act mandates TDS deduction on payments made as commission or brokerage. Under this section, the person responsible for paying commission, other than an individual or Hindu Undivided Family (HUF), must deduct tax at 5% when the amount exceeds ₹15,000 in a financial year. As per the Union Budget 2024, the TDS rate under Section 194H will be reduced from 5% to 2% effective from October 1, 2024. From 14th May 2020 to 31st March 2021, the TDS rate was temporarily reduced to 3.75% as part of the relief measures announced by the Finance Minister due to the Coronavirus pandemic. Additionally, individuals and HUFs with a turnover exceeding ₹1 crore or professional income above ₹50 lakhs are also required to deduct TDS under Section 194H, except in cases involving insurance commission, covered under Section 194D.

What is the Meaning of Commission and Brokerage?

To comprehend the section 194H, the meaning of commission and brokerage must be understood. Below, we have given the precise definition for the commission and brokerage:

Commission:

A commission is a sum of money an individual or organisation receives in exchange for assisting in completing a particular transaction or rendering a service. Typically, it represents a portion of the total value of the sale or transaction. Commissions are common in various business endeavours, including sales, real estate, and finance, where an agent or middleman plays a crucial role in closing deals or facilitating transactions. This form of compensation incentivises those securing successful outcomes for the parties they represent.

Brokerage:

Brokerage refers to the payment a broker receives for facilitating deals between buyers and sellers. Brokers act as middlemen, connecting participants in various markets such as commodities, stocks, real estate, and insurance. For their services, brokers are compensated with a brokerage fee or commission. This fee may be calculated as a percentage of the transaction value or as a fixed amount, depending on the terms of the agreement.

What are the Inclusions of TDS in commission and brokerage?

Tax Deducted at Source (TDS) on commission and brokerage covers a range of services. The inclusions are as follows:

Services Provided, Except Professional Services: TDS applies to most services rendered for commission or brokerage, excluding those that fall under professional services.
Services Related to Purchase or Sale of Products: Any service provided in connection with buying or selling products is subject to TDS. This includes brokerage for transactions involving goods.
Services Connected to Transactions Involving Assets or Valued Items: TDS applies to services associated with transactions involving assets or valuable items, excluding securities. This covers various types of transactions where brokers or agents are involved in facilitating deals.

What are the Exemptions of TDS in commission and brokerage?

Certain commissions and brokerages are exempt from TDS under Section 194H. The exemptions include:

Payments by RBI: Commissions and brokerages paid by the Reserve Bank of India (RBI) to financial institutions are exempt from TDS.
Underwriters’ Commissions: Commissions paid to underwriters of insurance policies or loans are not subject to TDS.
Public Offering Fees: Brokerage fees related to the public offering of securities are exempt from TDS.
Stock Market Transactions: This section does not cover brokerage fees for transactions involving securities listed on the stock market.
LIC and Cooperative Societies: Commissions related to LIC insurance or investments in cooperative societies are exempt from TDS.
Financial Corporations: Payments made to Financial Corporations under the Central Finance Bill are excluded from TDS.
Income Tax Refunds: Payments made as income tax refunds do not attract TDS on commission or brokerage.
Direct Taxes: The payment of direct taxes is exempt from TDS on commission and brokerage.
Interest Earnings: Interest earned on savings bank accounts, regular deposits, NSC, Kisan Vikas Patra, and Indira Vikas Patra is not subject to TDS.
NRE Account Interest: Interest from Non-Resident External (NRE) accounts is exempt from TDS.
Franchisee Payments: Commissions or brokerage payments made to franchisees of public call offices by Bharat Sanchar Nigam Limited (BSNL) or Mahanagar Telephone Nigam Limited (MTNL) are exempt.
NIL TDS Institutions: Income received from public or private institutions designated as NIL TDS organisations is not subject to TDS.
Motor Vehicle Claims Tribunal: Interest revenue received as compensation from the Motor Vehicles Claims Tribunal is excluded from TDS.

When is TDS deductible under Section 194H?

TDS is deductible under Section 194H of the Income Tax Act of 1961 when income related to commission or brokerage is credited to the payee's account or any other account. This tax deduction at source (TDS) is applicable even if the income is recorded in suspense accounts or under a different name. The deduction must occur at the time of payment, whether made in cash, by cheque, or by draft.

When TDS is not deductible under Section 194H?

TDS is not deductible under Section 194H in certain circumstances. Specifically, if the total amount of brokerage or commission income in a financial year falls below the threshold of ₹15,000, no deductions are required under this section. Additionally, under Section 197, an individual may apply to the assessing officer for a deduction at a reduced tax rate or even at zero percent. In such cases, Section 194H will not be used, allowing for a lower or no tax deduction.

What is the Time Limit to Deposit TDS?

The time limit for depositing TDS generally falls on the 7th day of the month subsequent to the month when the TDS was deducted. This means, TDS deducted in June should be deposited by July 7th. However, an exception is made for TDS deducted in March, which must be deposited by April 30th.

How to get TDS at a Lower rate?

To secure a reduced or nil TDS rate, the deductee must submit a request to the assessing officer. This request involves a few key steps:

197 Certification Submission: The deductor must provide 197 certifications to validate the deductee's PAN.
Certificate Verification: The certificate should contain accurate information, including the desired rate, financial year, PAN, relevant sections, and more.
Threshold Limit Adherence: Ensure that quarterly TDS deductions do not exceed the threshold limit mentioned in the certificate.
Correct Certificate Number: Quote the certificate number accurately in your request.

Once the assessing officer verifies these steps, they may approve the deductee's application for a reduced or nil TDS rate. When applying, provide the following information:

Assessee's name and address
PAN details
Reason for payment
Income details from the previous three years
Projected income for the current financial year
Tax payments made in the previous three years
Tax payments made for the current financial year

Conclusion

Section 194H of the Income Tax Act is crucial for individuals and entities involved in commission or brokerage-related transactions. It mandates the deduction of TDS on such payments to ensure tax compliance. Understanding the scope of Section 194H, including the inclusions, exemptions, and time limits for TDS deposition, is essential for avoiding penalties and ensuring accurate tax reporting. By adhering to the provisions of this section, taxpayers can contribute to the country's overall tax revenue while maintaining their financial obligations. Simplify your TDS return filing process with IndiaFilings experts!! [shortcode_35]

FAQ’s - Section 194H of the Income Tax Act

1. What is the 194H TDS limit?

TDS under Section 194H is deducted if the aggregate earnings from commission or brokerage exceed ₹15,000 in a financial year. Even if the agent retains the commission amount while setting off payment, the TDS must still be deposited to the government.

2. What is the TDS rate for a commission agent?

The TDS rate for a commission agent is 5% as per the Income Tax Act, 1961. This rate applies to authorised entities that are neither an individual nor a Hindu Undivided Family (HUF). However, the TDS rate will be reduced to 2% as per the decisions made in the Union Budget 2024.

3. Under which head is commission income taxable?

Commission income is taxable under the head "Profits and Gains of Business or Profession" as per Section 28 of the Income Tax Act.

4. What is the TDS rate for the travel agent commission?

The TDS rate for payments to travel agents is 1% for individual taxpayers and HUFs. However, if the travel agent does not provide their PAN, the TDS rate can increase to 20%. For businesses and companies, the TDS rate is 2%.

5. How do I avoid TDS on commission?

TDS on commission is applicable only if the total amount paid or credited exceeds ₹15,000 in a financial year. To avoid TDS, ensure that the commission or brokerage does not exceed this threshold.