Understanding the Role of Section 194H TDS and Its Effect on Your Tax Filing

Section 194H of the Income Tax Act, 1961, deals with the deduction of tax at source (TDS) on commission or brokerage payments made by a person to another. This section is particularly important for businesses and professionals who make commission or brokerage payments to agents, distributors, or any other third parties. The TDS deducted under Section 194H is required to be deposited with the government, and the recipient of such payments can claim the TDS as a credit while filing their income tax returns (ITR). It is essential for businesses and individuals involved in these types of transactions to understand the rules and implications of Section 194H, as non-compliance can lead to penalties and interest. In this article, we will explore what Section 194H is, its applicability, the latest updates, when and how TDS is deducted, and the impact on tax filing.

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Table of Contents

• What is Section 194H?

• Applicability and Latest Updates

• When and How is TDS Deducted?

• Impact on Tax Filing

• Recent Legal and News Updates

• Conclusion

• FAQs

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What is Section 194H?

Section 194H of the Income Tax Act pertains to the tax deduction at source (TDS) on commission or brokerage payments. If an individual or a business entity pays commission or brokerage to a person (other than salary payments), TDS must be deducted on the payment. The person receiving the commission or brokerage is then able to adjust the TDS amount while filing their income tax return (ITR) as a credit against the total tax liability. The section specifically covers all types of commission or brokerage, including payments made for services like agency commissions, brokerage payments for insurance, marketing, and other related activities.

The TDS rate under Section 194H is typically 5% if the recipient's income is subject to normal tax rates and the total payment exceeds ₹15,000 during the financial year.

Applicability and Latest Updates

Section 194H applies to commission or brokerage payments made by businesses, individuals, or any other entities that are liable to deduct TDS. However, there are specific exemptions and conditions under which TDS is not required to be deducted:

• Exemptions: TDS under Section 194H is not applicable for payments made to employees or for amounts paid as salary, as salary payments are governed under other provisions like Section 192.
  

• Threshold Limit: TDS under Section 194H is applicable if the total commission or brokerage exceeds ₹15,000 in a financial year. If the payment is less than this amount, TDS is not applicable.
  

• Recent Updates: The government has introduced amendments over the years to clarify certain aspects of Section 194H, especially in terms of the definition of commission and brokerage, as well as the treatment of payments made through digital platforms. The Finance Act of 2023 made it clear that certain online platforms facilitating commission payments may also fall under Section 194H, requiring TDS to be deducted.

When and How is TDS Deducted?

TDS (Tax Deducted at Source) under Section 194H pertains to commission or brokerage payments, which are typically subject to a 5% tax deduction. It is important to note that TDS under this section must be deducted at the time of either crediting the commission/brokerage to the payee's account or the time of payment, whichever comes first. This provision ensures that TDS is deducted even if the payment is due but hasn't yet been made. Let’s break down the process of TDS deduction under Section 194H:

1. Identification

The first step in the TDS deduction process is identifying the types of payments that are subject to TDS under Section 194H. These are typically commission or brokerage payments, such as:

• Insurance commissions: For agents and intermediaries receiving commissions for selling insurance policies.
  

• Marketing commissions: Payments made to individuals or firms for services rendered in the promotion and marketing of products or services.
  

• Other commissions: Similar payments to agents, distributors, or brokers who facilitate the sale of goods or services.
  

TDS applies when these payments exceed ₹15,000 in a financial year. If the total amount of commission or brokerage paid during the year is below this threshold, no TDS is required to be deducted.

2. Calculation

TDS under Section 194H is calculated at a rate of 5% on the commission or brokerage amount that exceeds ₹15,000 in a financial year. This means that if a person receives ₹20,000 as commission in a year, TDS will be deducted on ₹5,000 (the amount exceeding ₹15,000). The calculation process works as follows:

• Total commission paid in a year: ₹20,000

• Threshold limit: ₹15,000

• Commission subject to TDS: ₹20,000 - ₹15,000 = ₹5,000

• TDS at 5%: ₹5,000 * 5% = ₹250

Thus, ₹250 will be deducted as TDS and the remaining ₹19,750 will be paid to the recipient.

It’s important to note that if the commission or brokerage is paid in installments, TDS must be deducted at the time of each installment based on the payment made.

3. Deduction

TDS should be deducted at the time of either crediting the commission amount to the payee’s account or when the payment is actually made, whichever occurs first. This means that if a business credits a commission amount of ₹20,000 to an agent's account in a given month, but does not make the payment immediately, TDS must still be deducted on the amount credited, as the credit is considered a 'payment' for the purposes of TDS under this section.

Conversely, if the payment is made upfront, the TDS will be deducted at the time of the payment, regardless of when the commission is credited to the recipient’s account. This timing ensures that tax is withheld in a timely manner, consistent with the transaction.

4. Payment to Government

After TDS is deducted, the next step is to deposit the amount with the government. The TDS amount must be deposited with the government within the prescribed time frame. This is typically done through the Electronic Tax Payment System (ETPS), or a similar online platform provided by the Income Tax Department. The payment must be made under the correct challan, i.e., Challan 281, for TDS on commission and brokerage.

The due date for depositing TDS is as follows:

• For non-government deductors: By the 7th of the following month. For example, if TDS is deducted in June, it must be deposited by July 7th.
  

• For government deductors: The TDS amount must be deposited on the same day of deduction.

Failure to deposit TDS within the prescribed time frame can lead to penalties, and the deductor will be liable to pay interest for late payment.

5. Issuance of TDS Certificate

Once the TDS is deducted and paid to the government, the deductor must issue a TDS certificate, specifically Form 16A, to the payee. This certificate serves as proof that TDS has been deducted and deposited with the government. It is an essential document for the recipient when filing their Income Tax Return (ITR), as it enables them to claim the deducted tax as a credit against their total tax liability.

The TDS certificate should be issued quarterly, with the following timelines for the year:

• For Q1 (April-June): By July 31st

• For Q2 (July-September): By October 31st

• For Q3 (October-December): By January 31st

• For Q4 (January-March): By May 31st

The TDS certificate should include details like the name and PAN of both the deductor and the payee, the amount of commission or brokerage paid, the TDS amount, and the TAN (Tax Deduction Account Number) of the deductor.

Impact on Tax Filing

The deduction of TDS under Section 194H plays an important role in the tax filing process for recipients. Once the TDS is deducted, the recipient can use the TDS certificate (Form 16A) to claim the tax paid as a credit against their total tax liability. This reduces the amount of tax the recipient needs to pay when they file their income tax return. Here are the key impacts on tax filing:

• Claiming TDS Credit: The amount of TDS deducted is credited to the recipient’s account, which they can use to offset their tax liability when filing their ITR. This is important for individuals and businesses that receive substantial commissions.
  

• Tax Refunds: If the TDS deducted is higher than the total tax liability, the taxpayer can claim a refund from the Income Tax Department.
  

• Accuracy: It is essential for the recipient to ensure that the TDS amount reflected in Form 16A is correct. Any discrepancies can lead to delays or errors in processing their tax return, and in some cases, the recipient may need to file a revised return.

Recent Legal and News Updates

There have been several recent legal updates concerning Section 194H, especially in terms of digital transactions and the expanding scope of commission payments. Some important updates include:

• Online Platforms and Commission Payments: The Income Tax Department has clarified that commissions paid through online platforms are also subject to TDS under Section 194H. This has been a significant change, as many individuals and businesses may not have considered these payments as falling under the section.
  

• Clarification on Insurance Commission: The scope of commission payments in the insurance sector has been explicitly defined, and it is now clear that insurance commissions paid to agents are subject to TDS under Section 194H.
  

• TDS for E-commerce Operators: E-commerce platforms like Amazon, Flipkart, and others that facilitate the sale of goods through third-party sellers are now required to deduct TDS on the commissions paid to sellers. This is a relatively new provision that was introduced in the Finance Act 2021 to address the growing e-commerce industry.

Conclusion

Section 194H ensures that commission and brokerage payments are taxed at source, promoting compliance and transparency. Businesses and professionals must understand these provisions to avoid penalties and file their taxes accurately. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: What is the rate of TDS under Section 194H?

The rate of Tax Deducted at Source (TDS) under Section 194H is generally 5% on commission or brokerage payments made to a person. However, this rate may be subject to change based on the latest tax laws and amendments announced by the government. For example, in case of non-residents or foreign entities, the TDS rate may be higher. It is important to stay updated on the latest tax provisions to ensure compliance.

Q2: Is TDS applicable on all commission payments?

TDS under Section 194H is applicable only to commission or brokerage payments exceeding ₹15,000 in a financial year. This threshold ensures that only larger commission transactions are subject to TDS. However, certain payments may be exempt from TDS under this section, such as salary payments to employees, which are governed by a different section (Section 192). It’s crucial to assess the nature of the payment to determine whether TDS is applicable.

Q3: How is TDS calculated under Section 194H?

TDS under Section 194H is calculated at the rate of 5% on the commission or brokerage paid to the recipient, provided the total commission exceeds ₹15,000 in a financial year. For example, if a business pays ₹50,000 as commission, TDS of ₹2,500 (5% of ₹50,000) is deducted. It’s essential to track commission payments accurately and ensure that the TDS deduction is made based on the total amount paid in the financial year.

Q4: When should TDS under Section 194H be deducted?

TDS under Section 194H should be deducted at the time of payment or when the commission/brokerage is credited to the payee’s account, whichever occurs first. This means if the payment is made immediately, TDS must be deducted at that time. If the payment is not made immediately but is credited to the payee’s account (for example, in case of credit-based transactions), TDS should be deducted when the credit is made.

Q5: What happens if TDS is not deducted under Section 194H?

If TDS is not deducted under Section 194H, the deductor (the person making the payment) may face penalties and interest. Additionally, the recipient of the commission or brokerage may face challenges while claiming the TDS credit during tax filing. This could result in incorrect tax filing, delayed refunds, or the need to pay additional taxes. It is therefore essential to deduct and deposit TDS in compliance with the law.

Q6: Can I claim TDS deducted under Section 194H while filing my ITR?

Yes, you can claim the TDS deducted under Section 194H as a credit while filing your Income Tax Return (ITR). To claim the TDS credit, you need to verify the TDS amount mentioned in the TDS certificate (Form 16A) issued by the deductor. It is essential to ensure that the TDS credit reflected in Form 16A matches the details in your ITR to avoid discrepancies or delays in processing your return.

Q7: Is there any exemption from TDS under Section 194H?

Yes, TDS under Section 194H is not applicable if the total commission or brokerage payments in a financial year are less than ₹15,000. If the payments are below this threshold, no TDS needs to be deducted. Additionally, salary payments are not subject to Section 194H, as they are governed by Section 192, which applies to income paid to employees.

Q8: Do online platforms need to deduct TDS under Section 194H?

Yes, e-commerce operators are required to deduct TDS under Section 194H on commissions paid to third-party sellers using their platforms. This includes well-known platforms such as Amazon, Flipkart, and other similar e-commerce websites. The TDS is deducted on the commission or fees paid to the sellers for using the platform. E-commerce operators must comply with these provisions to avoid penalties and ensure proper TDS credit to their sellers.

Q9: What is the consequence of filing incorrect TDS returns?

If TDS returns are filed incorrectly or if there is a mismatch in the details provided, the deductor may face penalties for incorrect filing. These penalties can include fines and interest charges. Inaccurate TDS returns may also delay the processing of refunds or create complications for the recipient in claiming their TDS credit. To avoid such issues, it’s essential to ensure that TDS returns are filed accurately, and all relevant details are correctly reported.

Q10: How can I ensure that TDS credits are accurately reflected in my ITR?

To ensure that TDS credits are accurately reflected in your ITR, you should check your Form 16A or Form 26AS before filing. These forms will provide a detailed summary of the TDS deducted and deposited on your behalf. If there are discrepancies between the TDS credit shown in your forms and the TDS amounts claimed in your ITR, you should resolve the issue with the deductor or file a revised return if necessary.

Q11: Can I avoid TDS deduction under Section 194H?

No, you cannot avoid TDS deduction under Section 194H if the commission or brokerage payments exceed ₹15,000 in a financial year. This is a statutory requirement. However, if you are eligible for lower TDS rates or exemptions, you may apply for a lower deduction certificate from the Income Tax Department. This certificate allows you to deduct TDS at a reduced rate, but it must be obtained before making the payment.

Q12: What should I do if TDS is not deducted from my commission payment?

If TDS is not deducted from your commission payment, you have a few options. First, you can request the deductor to rectify the issue and deduct the TDS. If the deductor fails to do so, you can directly pay the TDS amount to the government and claim it as a credit while filing your income tax return. This ensures that the TDS is accounted for and helps you avoid issues during the tax filing process.