Section 194H applicability for freelancers
Rajesh Kumar Kar- Apr 30
- 7 min read
Section 194H of the Income Tax Act, 1961 addresses the Tax Deducted at Source (TDS) on commission or brokerage income, impacting individuals and businesses involved in commission-based transactions. This section plays a crucial role in ensuring that taxes are collected at the source of the income, specifically when commission payments exceed a specified threshold. The provisions under Section 194H apply to both residents and non-residents receiving commission or brokerage income. With the recent changes in the TDS rate and thresholds, it is important for taxpayers to understand how these provisions impact their income, especially in relation to Goods and Services Tax (GST) on commission.
Table of Contents
Applicability of Section 194H to Freelancers
Freelancers often earn commission-based income through work such as providing intermediary services, consulting, or acting as a broker between clients. Section 194H is highly relevant to freelancers who receive commission for services provided.
Freelancers as Commission Recipients: If a freelancer receives commission-based income (such as from referring clients, selling products or services for another business, or acting as an intermediary), Section 194H applies to them just like it applies to agents and brokers.
TDS Deduction on Commission: When freelancers earn commission above the prescribed threshold, the payer is required to deduct TDS before releasing the payment. Freelancers must ensure they are providing the correct PAN details to avoid higher TDS rates and ensure proper credit of the TDS amount during income tax filing.
Non-Applicability to Salaried Freelancers: If a freelancer receives a salary in addition to commission-based income, Section 194H does not apply to the salaried component. Only the commission income, if it exceeds the threshold, is subject to TDS under Section 194H.
What is Section 194H?
Section 194H applies to freelancers when they receive commission or brokerage payments. If Section 194H of the Income Tax Act, 1961 mandates the deduction of Tax Deducted at Source (TDS) on commission or brokerage income. This section ensures that tax is collected at the source of income when commission or brokerage is paid to an individual or entity for services rendered. The TDS is typically deducted by the payer (the business or individual paying the commission) before making the actual payment to the recipient (agent, broker, or freelancer).
Who does it apply to? Section 194H applies to commissions paid to both individuals and non-individuals (such as companies or firms), including agents, brokers, and intermediaries, who are involved in facilitating transactions in exchange for commission or brokerage.
When is TDS deducted? The TDS is deducted when commission or brokerage exceeds a specified threshold limit in a financial year, which is subject to periodic revisions.
This section is important for anyone in commission-based work, as it ensures compliance with tax regulations by deducting taxes at the point of income generation rather than waiting for the individual or entity to pay taxes on the total income.
Thresholds and Rates for FY 2024-25 and FY 2025-26
For the Financial Years (FY) 2024-25 and 2025-26, the threshold and rates for TDS under Section 194H are as follows:
Threshold Limit for TDS Deduction:
₹15,000 for Individuals/HUFs: If the commission amount exceeds ₹15,000 in a financial year, TDS is applicable for individuals and Hindu Undivided Families (HUFs).
₹20,000 for Others: For non-individual entities (e.g., companies, firms), TDS will apply when the commission exceeds ₹20,000 in a financial year.
TDS Rate:
2%: Effective from October 1, 2024, the TDS rate has been revised to 2% on the commission amount. Prior to this, the rate was 5%.
This revised TDS rate of 2% simplifies tax compliance and provides a reduced tax burden for individuals and businesses engaged in commission-based activities.
Specifics for Freelancers Regarding TDS
Tax Deduction at Source (TDS): Freelancers must ensure that they are aware of the threshold limits for TDS deduction. If they earn commission exceeding ₹15,000 (individuals/HUFs) or ₹20,000 (other entities) in a financial year, TDS will be deducted at 2% on the base commission amount.
No TDS on GST: Freelancers need to understand that TDS is deducted only on the base commission and not on the GST that may be charged on the commission. The GST component (usually 18%) is separate from the commission and is not subject to TDS.
Filing and Compliance: Freelancers must file their income tax returns (ITR) and report both the commission income and the TDS deducted under Section 194H. The TDS amount deducted by the payer will be reflected in Form 26AS, which freelancers can use to claim credit during their tax filing.
Bank Account Opening Forms and Section 194H
Freelancers receiving commission income must be mindful of bank account opening forms when they open a business or personal account for receiving such payments:
PAN and TDS Compliance: In the case of commission income, providing PAN details is essential when opening a bank account, as TDS will be deducted at the prescribed rate under Section 194H. Without a PAN, the TDS rate is higher (20% instead of 2%).
GST Registration: If a freelancer is registered under GST, they may need to mention their GSTIN (Goods and Services Tax Identification Number) in the bank forms for commission-related transactions. This is necessary for proper tax reporting and GST compliance.
Accurate Reporting: Freelancers should also ensure that commission income and TDS details are accurately reported in the bank account forms for easy reconciliation of payments, TDS deductions, and tax filings.
Summary Table: Section 194H Applicability for Freelancers
Aspect | Details |
TDS Rate on Commission | 2% (reduced from 5% effective October 1, 2024) |
Threshold for TDS Deduction | ₹15,000 for individuals/HUFs; ₹20,000 for others |
GST on Commission | 18% |
TDS Applicability on GST | No TDS on GST component, only on base commission |
Compliance Forms | TDS return in Form 26Q; TDS certificate in Form 16A |
Additional Notes for FY 2024-25 & FY 2025-26
Revised TDS Rates: The TDS rate for commission income is revised to 2% from 5% for the period starting October 1, 2024. Freelancers should ensure that the new rate is applied for payments after this date.
GST Compliance: Freelancers must ensure proper GST registration and compliance if they are providing commission-based services and are registered under GST. GST is applicable separately on commission income, at 18%.
Tax Filing and TDS Credit: Freelancers must file their tax returns using the Form 26AS statement, which shows the TDS deducted by clients or businesses paying them commission. This ensures they can claim the TDS credit during their income tax filing.
Conclusion
Section 194H plays a significant role in regulating the TDS deductions for freelancers involved in commission-based services. Understanding the thresholds, TDS rates, and the interaction between GST and TDS is crucial for freelancers to ensure accurate compliance and avoid penalties. By staying informed about the thresholds and rates for the financial years 2024-25 and 2025-26, freelancers can ensure they are meeting their tax obligations while receiving the benefits of proper deductions and credits. Accurate reporting in bank account forms and maintaining proper documentation for both TDS and GST will help facilitate smooth tax compliance and avoid any issues during income tax filing.
Frequently Asked Question (FAQs)
1. Is GST applicable on commission income?
Yes, GST is applicable on commission income. Since commission is considered a supply of service under GST law, it is subject to an 18% GST rate. This is separate from TDS provisions under Section 194H.
2. What is the TDS rate on commission income under Section 194H?
The TDS rate on commission or brokerage income under Section 194H is 2%. This rate was revised from 5% to 2% effective from October 1, 2024, to simplify the process for taxpayers involved in commission-based transactions.
3. What is the threshold for TDS deduction under Section 194H?
TDS under Section 194H applies when the commission or brokerage income exceeds:
₹15,000 for individuals and Hindu Undivided Families (HUFs)
₹20,000 for others (including companies and partnerships)
If the commission exceeds these limits in a financial year, TDS must be deducted.
4. Does GST apply to all commission payments?
GST applies to all commission payments as a supply of service. The commission amount is subject to an 18% GST, irrespective of whether the commission is paid by an individual or an entity.
5. How does TDS interact with GST on commission income?
TDS under Section 194H is deductible only on the base commission amount, not on the GST portion. The payer should deduct TDS before applying GST. Therefore, GST is calculated separately, and TDS is applied on the commission portion alone.
6. How do I calculate TDS when GST is applicable?
To calculate TDS when GST is applicable, first, calculate the base commission amount (excluding GST). Deduct TDS on this base commission according to the applicable TDS rate (2% from October 1, 2024). After deducting TDS, GST at 18% is added to the commission amount.
7. Do I need to provide PAN and GST registration details when opening a bank account for commission income?
Yes, when opening a bank account that involves commission income, you may need to provide your PAN details for TDS compliance. Additionally, if you are registered under GST, you should also provide your GST registration details for correct GST reporting and compliance.
8. Can I claim GST input tax credit on commission income?
Yes, commission agents who are registered under GST can claim input tax credit (ITC) on the GST paid for business-related expenses. However, if the commission is part of an exempt supply or outside the scope of GST, ITC may not be available.
9. What happens if TDS is not deducted from commission payments?
Failure to deduct TDS from commission payments can lead to penalties and disallowance of expenses under Section 40(a)(ia) of the Income Tax Act. Additionally, the payer may face interest charges and possible legal consequences.
10. Do e-commerce operators need to comply with Section 194H for commission income?
No, e-commerce operators have separate provisions under Section 194O for TDS on payments made to e-commerce participants. Section 194O applies to transactions facilitated by e-commerce platforms and is distinct from Section 194H, which deals with commission paid in traditional brokerage scenarios.
11. Is TDS applicable on the GST component of commission income?
No, TDS is not applicable on the GST component of commission income. TDS is deducted only on the base commission amount and not on the GST that is separately calculated and paid to the government by the agent or broker.
12. What are the compliance forms required for TDS on commission income?
For TDS compliance on commission income, the following forms are required:
Form 26Q: For filing TDS returns
Form 16A: For issuing TDS certificates to the recipient of commission, showing the amount of TDS deducted and remitted.
These forms ensure that TDS is properly reported and the recipient can claim credit for the TDS deducted while filing their income tax return.
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