Section 194H

Introduction

Section 194H of the Income Tax Act mandates a tax deduction at source (TDS) on commission or brokerage payments. Commission or brokerage refers to earnings that an individual or agent receives in exchange for facilitating the sale or purchase of goods, services, or other valuable assets. Notably, this income source falls under the ambit of TDS regulations, with certain criteria and exemptions outlined in the law.

This guide covers the essential points regarding Section 194H, including eligibility, deduction rates, and exemptions, to streamline the compliance process for individuals and entities responsible for TDS.

What is Section 194H?

Section 194H of the Income Tax Act requires entities to deduct TDS on commission or brokerage income at a specified rate. Under this section:

Entities are required to deduct TDS at a rate of 5% on commission or brokerage amounts if the total earnings exceed ₹15,000 in a financial year.
The deductor, typically an individual or business entity, is responsible for deducting TDS before making the payment.
Both the TAN of the deductor and the PAN of the deductee must be furnished to ensure proper documentation of TDS deductions.

This section, however, does not apply to insurance commissions, which fall under Section 194D.

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Who is Required to Deduct TDS Under Section 194H?

Entities and individuals that pay commission or brokerage are obligated to deduct TDS when:

The annual commission exceeds ₹15,000.
The payee is a resident individual or entity.
HUFs and individuals are also subject to TDS deduction under Section 194H if they are required to audit their tax accounts according to Section 44AB.

Note: Section 194H excludes HUFs and individuals unless they meet the above audit requirements. Additionally, education cess and surcharges do not apply to TDS deductions under this section.

TDS Rate on Commission and Brokerage

Under Section 194H, the TDS rate on commission and brokerage is set at 5%. However:

If the payee fails to provide their PAN, the TDS rate increases to 20%.
Surcharges and education cess do not apply to the TDS rate.

Staying informed about these rates and limits is essential to ensure compliance.

When to Deduct TDS Under Section 194H?

TDS under Section 194H must be deducted when the payment or credit of the commission occurs, which includes:

When the amount of commission or brokerage is credited to the payee’s account.
When the commission or brokerage is paid out in cash, by cheque, or through bank transfers.

For TDS deducted between April to February, it must be deposited by the 7th of the following month. For example, if TDS is deducted on April 15th, it must be deposited by May 7th.

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Provisions for NIL or Lower TDS Deduction under Section 194H

Taxpayers can apply for a lower TDS deduction rate or nil deduction certificate under Section 197 of the Income Tax Act if they expect their income tax liability to be lower than the deducted TDS amount.

Form 13 is used to request this certificate, submitted to the Assessing Officer.

Documents required include:

Assessment orders for the last three financial years.
PAN card.
Financial statements and audit reports for the past three fiscal years.
Income projections for the current fiscal year.
Income tax returns and acknowledgment copies from the past three years.

Upon approval, the Assessing Officer issues the certificate allowing for a lower or nil TDS deduction on commission and brokerage income.

Exemptions under Section 194H – TDS on Commission and Brokerage

Section 194H outlines certain exemptions where TDS on commission or brokerage is not applicable. These include:

Commission or brokerage amounts less than ₹15,000 in a financial year.
Commission payments made by employers to employees, which fall under Section 192.
Insurance commission, which falls under Section 194D.
Commissions paid to underwriters for loan transactions.
Transactions where service tax is deducted at source.
Payments to Financial Corporations are covered under the Central Finance Bill.
Warehouse service charges are not included under Section 194H.
Interest on savings accounts, recurring deposits, or other savings instruments like NSC or Kisan Vikas Patra.
Brokerage payments involving securities issuance for the public.
Transactions involving acquirer banks and merchant establishments do not fall under Section 194H TDS obligations.

These exemptions help clarify when TDS on commission and brokerage is not required, ensuring smooth and compliant financial transactions.

Key Points on TDS Deduction for Commission and Brokerage

Entities responsible for TDS deductions on commission and brokerage should remember:

TDS must be calculated on the basic commission amount, excluding GST.
TDS is applicable if the total commission earnings exceed ₹15,000.
If the agent retains a portion of the commission, the TDS should still be deposited based on the deducted amount.
TDS collected on behalf of government entities should be deposited on the same day of deduction.

Conclusion

Section 194H of the Income Tax Act is crucial for ensuring accurate tax deductions on commission and brokerage income. By understanding TDS rates, exemptions, and the necessary filing dates, both deductors and deductees can maintain compliance and avoid unnecessary penalties. Knowing the basics and staying updated on changes in TDS laws can significantly streamline tax responsibilities for entities involved in commission or brokerage payments.

Frequently Asked Questions

What is the TDS rate for commission under Section 194H?

The TDS rate for commission and brokerage under Section 194H is 5%. If the deductee does not provide their PAN, the TDS rate increases to 20%.

Are individuals required to deduct TDS under Section 194H?

Only individuals or HUFs who are subject to tax audit under Section 44AB are required to deduct TDS on commission and brokerage under Section 194H.

Are insurance commissions covered under Section 194H?

No, insurance commissions fall under Section 194D of the Income Tax Act, not Section 194H.

When is TDS under Section 194H to be deposited?

For TDS deductions from April to February, TDS should be deposited by the 7th of the following month.

Is there a way to request a nil or lower TDS deduction under Section 194H?

Yes, taxpayers can apply for a lower or nil TDS certificate by submitting Form 13 to the Assessing Officer, subject to verification and approval.

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