Section 194H – TDS on Commission and Brokerage

Introduction

Section 194H of the Income Tax Act, 1961, deals with the deduction of TDS (Tax Deducted at Source) on commission or brokerage paid to a resident. This section came into effect from July 1, 2018, and applies to all payments made after this date.

Under Section 194H, the person making the payment of commission or brokerage is required to deduct TDS at the rate of 5% if the total amount of such commission or brokerage paid or payable during a financial year exceeds Rs. 30,000. The TDS deducted under this section is to be deposited with the Government and a TDS certificate (Form 16A) is to be issued to the payee.

What is Section 194H?

Section 194H is a provision of the Income Tax Act that deals with the deduction of tax at source on commission or brokerage payments. It applies to any person who is responsible for paying any income by way of commission or brokerage to a resident in India. The rate of TDS is 5%, unless a lower deduction certificate is obtained from the income tax authorities. There are some exceptions where TDS is not deducted on commission or brokerage, such as when the amount is less than or equal to Rs.15,000 in a financial year. For more details, you can refer to the web search results below. I hope this helps.

Section 194H – TDS on Commission and Brokerage – ClearTax
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Section 194H of Income Tax Act – Digit Insurance

When does TDS Under Section 194H Needs to be Deducted?

TDS (Tax Deducted at Source) under Section 194H of the Income Tax Act, 1961, needs to be deducted at the time of payment itself, if the total amount of commission or brokerage paid or payable during a financial year exceeds Rs. 30,000 to a resident. This section applies to all payments made by any person, whether resident or non-resident, to a resident for commission or brokerage. The rate of TDS under Section 194H is 5%. Failure to deduct and deposit TDS under this section may result in penalties and interest charges as per the provisions of the Income Tax Act, 1961. Therefore, it is essential for deductors to adhere to the requirements under this section strictly.

What do you Mean by Brokerage and Commission?

Brokerage and commission are both forms of fees or payments made to an intermediary for facilitating a transaction.

Brokerage refers to the fee charged by a broker for executing a trade on behalf of an investor. In the context of the stock market, a broker is an individual or a firm that facilitates the buying and selling of securities on behalf of investors. The brokerage charged by the broker is a percentage of the transaction value.

Commission, on the other hand, refers to the fee charged by an agent or a salesperson for facilitating a sale or purchase of goods or services. In this context, the commission is a percentage of the sale value.

Both brokerage and commission are considered as income under the Income Tax Act, 1961, and are subject to taxation as per the applicable tax slab. Additionally, TDS (Tax Deducted at Source) is required to be deducted under certain circumstances, as explained in my previous answer regarding Section 194H.

Exceptions to Commission/Brokerage

There are certain exceptions to the applicability of TDS (Tax Deducted at Source) on commission or brokerage payments under Section 194H of the Income Tax Act, 1961. These exceptions are:

1. Commission or brokerage paid to a non-resident: TDS is not required to be deducted on commission or brokerage paid to a non-resident as per the provisions of the Income Tax Act, 1961. However, the recipient may be liable to pay income tax on such income in their respective countries of residence, as per their tax laws.

2. Commission or brokerage paid by a government department or public sector undertaking: TDS is not required to be deducted on commission or brokerage paid by a government department or public sector undertaking to a resident as per the provisions of the Income Tax Act, 1961.

3. Commission or brokerage paid by a banking company, co-operative society engaged in banking business, or a post office: TDS is not required to be deducted on commission or brokerage paid by a banking company, co-operative society engaged in banking business, or a post office to a resident as per the provisions of the Income Tax Act, 1961.

4. Commission or brokerage paid by an insurance company: TDS is not required to be deducted on commission or brokerage paid by an insurance company to a resident as per the provisions of the Income Tax Act, 1961.

5. Commission or brokerage paid for securitization transactions: TDS is not required to be deducted on commission or brokerage paid for securitization transactions as per the provisions of the Income Tax Act, 1961.

What is the Rate of TDS?

The rate of TDS (Tax Deducted at Source) on various types of income is specified under different provisions of the Income Tax Act, 1961. Here are some common rates of TDS:

1. Salaries: TDS is deducted at a rate of 10% on salary income, subject to certain exemptions and deductions.

2. Interest: TDS is deducted at a rate of 5% on interest income, subject to certain exceptions and thresholds.

3. Rent: TDS is deducted at a rate of 5% on rent income, subject to certain exceptions and thresholds.

4. Commission or brokerage: TDS is deducted at a rate of 5% on commission or brokerage income, subject to certain exceptions as mentioned earlier.

5. Professional fees: TDS is deducted at a rate of 10% on professional fees received by doctors, lawyers, architects, and other professionals, subject to certain exceptions and thresholds.

6. Winnings from lotteries, horse races, and card games: TDS is deducted at a rate of 30% on winnings from lotteries, horse races, and card games, subject to certain exceptions and thresholds.

7. Payment to contractors: TDS is deducted at a rate of 2% on payments made to contractors for carrying out construction work exceeding Rs. 25,000 in a financial year.

These rates are subject to change from time to time as per the provisions of the Income Tax Act, 1961. It is essential to keep updated with the latest rates and exceptions while making payments for various types of income to avoid penalties and interest charges as per the provisions of the Income Tax Act, 1961.

Under What Circumstances TDS u/s 194H is not Deductible?

TDS (Tax Deducted at Source) under Section 194H is not deductible on commission or brokerage payments in the following circumstances:

The total amount of commission or brokerage paid or credited in a financial year does not exceed Rs. 15,000.
The commission or brokerage is paid by an employer to an employee, which is subject to TDS under Section 192 as salary.
The commission or brokerage is paid to insurance or loan underwriters.
The commission or brokerage is paid for the public issue of securities.
The commission or brokerage is paid on the transactions of securities that are listed in the stock exchange.
The commission or brokerage is paid by the Reserve Bank of India to any banking company.
The commission or brokerage is paid by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
The commission or brokerage is paid by an acquirer bank to a merchant organisation for the use of credit or debit cards.
The payer has obtained a certificate from the Assessing Officer for deduction of tax at nil or lower rate under Section 197.

TDS at a Lower Rate

TDS stands for Tax Deducted at Source, which is a method of collecting income tax from the payee by the payer on behalf of the government. Sometimes, the payee may be eligible for a lower or nil rate of TDS deduction, depending on their income and tax liability. In such cases, the payee can apply for a certificate under Section 197 of the Income Tax Act, 1961, which allows them to get the benefit of lower or nil TDS deduction. The payee has to submit Form 13 to the Assessing Officer (TDS) along with the relevant documents and details of the income and tax liability. The Assessing Officer may issue the certificate after verifying the application and the income tax returns of the payee. The certificate is valid for the financial year for which it is issued, unless it is cancelled earlier by the Assessing Officer. The payee can furnish the certificate to the payer, who can deduct TDS at the lower or nil rate specified in the certificate.

What are Some Important Points to Consider in Section 194H?

Section 194H of the Income Tax Act is a provision that deals with the deduction of tax at source on commission or brokerage payments. It applies to any person who is responsible for paying any income by way of commission or brokerage to a resident in India. Some important points to consider in Section 194H are:

The rate of TDS is 5%.
TDS is deducted at the time of credit or payment of the commission or brokerage, whichever is earlier.
The threshold limit for TDS deduction is Rs. 15,000 in a financial year.
There are certain exceptions where TDS is not deducted on commission or brokerage, such as commission paid to employees, insurance commission, commission on credit card transactions, etc.
Individuals and HUFs who are liable for tax audit under section 44AB or have a turnover above Rs. 1 crore or gross receipts above Rs. 50 lakh are also required to deduct TDS under Section 194H.