Section 194H: TDS on Commission and Brokerage
Updated: Oct 1, 2024
Section 194H of the Income Tax Act is a crucial provision that governs the deduction of tax at source (TDS) on commission or brokerage income. For businesses and individuals involved in any form of commission-based transactions, understanding Section 194H is essential to ensure compliance with tax regulations. Whether it’s payments for advertising, insurance, or professional services, commission income forms a significant part of many financial transactions. In this article, we will explore the key aspects of Section 194H, including its applicability, rates, exemptions, and filing procedures, to help you overcome the complexities of TDS on commission and brokerage with ease.
Table of Contents
Budget 2024 Update: TDS on Commission and Brokerage Reduced to 2%
The government, in the 2024 Budget, has proposed a welcome change to ease the burden on those earning from commissions and brokerage. Starting from 1st October 2024, the rate of Tax Deducted at Source (TDS) on commission and brokerage payments will be reduced from 5% to 2%.
This change is especially beneficial for agents, brokers, and service providers who often operate with tight margins. By lowering the TDS rate, the government is giving a little more breathing room to businesses, especially smaller ones, helping them maintain better cash flow without the worry of a hefty tax deduction upfront.
The reduced rate applies to payments above Rs. 15,000 in a year, so smaller transactions will continue to be exempt. This move not only makes life a bit easier for those working on commissions but also encourages compliance by making tax deductions more manageable.
In short, the government is aiming to simplify tax processes, making it easier for businesses to focus on growth rather than navigating complex tax rules.
What is Section 194H of the Income Tax Act?
The Income Tax Act's Section 194H addresses the TDS deduction on commission or brokerage payments. When the sum reaches Rs. 15,000 in a year, it requires tax deduction by the entity (other than an individual or HUF) in charge of paying commission or brokerage to residents at a rate of 5%.
[3.75% from May 14, 2020, to March 31, 2021, at a lower rate in accordance with the Finance Minister's relief declaration owing to the coronavirus epidemic].
All individuals and Hindu Undivided Families (HUFs) that are required to have their accounts audited under section 44AB of the Income Tax Act shall also deduct TDS under section 194H of the Act. TDS is also required for individuals and HUFs with revenue above Rs. 1 crore and professional income exceeding Rs. 50 lakhs. Section 194D provides that the insurance commission is not included in this.
Meaning of Commission and Brokerage Received
The fundamentals of commission and brokerage must be understood in order to comprehend section 194H. A commission or brokerage is defined as any payment earned or receivable, whether directly or indirectly, by any individual acting on behalf of another individual. It consists of:
Services provided aside from professional services
Services while purchasing or selling products
Any deal involving valuable items or assets
Commission: A commission is a sum of money that an individual or organisation receives in exchange for helping to carry out a particular transaction or rendering a service. Usually, it represents a portion of the sale's or transaction's total value. In sales, real estate, finance, and other business endeavours where an agent or middleman helps to close a deal or complete a transaction, commissions are frequently received.
Brokerage: The payment a broker receives for helping buyers and sellers complete deals is referred to as a brokerage fee. Brokers serve as middlemen, bringing together buyers and sellers in a variety of markets, including commodities, stocks, real estate, and insurance. In exchange for their services, they are paid a brokerage fee or commission, which could be calculated as a percentage of the transaction value or a fixed amount.
Inclusions of TDS on Commission or Brokerage
A variety of services are included in the tax deduction at source on brokerage or commission. These are listed in the following order:
Services provided, with the exception of professional services
Any services provided when purchasing or selling products
Any service provided in connection with a transaction involving an asset or valued item, with the exception of securities.
Exemptions of TDS on Commission or Brokerage
There are a few commissions and brokerages that fall outside of this category and are not eligible for this section's tax deduction at the source. They are as follows:
Payments made by the RBI to financial institutions
Commissions paid to underwriters of insurance or loans
Any brokerage fees associated with the public offering of securities
Any type of brokerage fees associated with the transactions of securities listed on the stock market
LIC insurance or other investments in cooperative societies
Payments made to Financial Corporations under the Central Finance Bill
Payments made as an income tax refund
Payment of direct taxes
Interest earned on savings bank account, regular deposits, NSC or Kisan Vikas Patra, Indra Vikas Patra
Interest from an NRE account
Any commission or brokerage payment made to franchisees of public call offices by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited
Any income received from a public or private institution designated as a NIL TDS organisation
Any interest revenue received for the Motor Vehicles Claims Tribunal compensation
Tax Rate and Time Limit for Deduction under Section 194H
According to the income tax laws, the rate of tax deduction at source is set at 5% [3.75% from May 14, 2020, to March 31, 2021, at a reduced rate as per the relief offered by the Finance Minister owing to the coronavirus epidemic]. The rate of tax deduction at source (TDS) will be 20% if the deductee does not quote the PAN. All taxes are included in this stipulated rate of taxation; no additional health or education cess is needed.
Generally speaking, TDS deductors have until the seventh day of the month after the month in which the deduction was made to deposit the TDS amount with the Income Tax Department. For instance, by July 7th, the Income Tax Department must receive the TDS deducted in June by the same day the following month, July 7.
When TDS is Deducted under Section 194H?
Section 194H of the Income Tax Act of 1961 provides for tax deduction at source in the event that income connected to commission or brokerage is credited to the payee's account or any other account. Tax deduction at source (TDS) is carried out under section 194H even if these incomes are recorded in suspense accounts or under a different name at the moment of payment that is made in cash, by cheque or by draft.
When TDS is Not Deductible under Section 194H?
Section 194H does not allow for the Tax deduction at source under a number of circumstances. They are as follows:
If, at the time of payment in the financial year, the total amount of any brokerage or commission income falls below the threshold of Rs. 15,000. This section will not result in any deductions.
Under section 197, the individual may apply to the assessing officer for a deduction at a reduced rate of tax or at zero percent.
TDS at a Lower Rate
The deductee may request from the assessing officer a reduced rate or the NIL rate of TDS. The assessing officer must do this by taking a number of steps.
The deductor must submit 197 certifications in order to validate the individual's PAN
The certificate that is filed needs to have a legitimate rate, financial year, PAN, sections, and so on
No quarter shall ever surpass the threshold limit mentioned in the certificate
Make sure you quote the certificate number correctly
The assessing officer may approve the deductee's application after verifying each of these actions. When submitting this application for a reduced or NIL rate of tax deduction at source, certain information must be included. It includes the assessee's name and address, PAN details, the reason for payment, information on income from the previous three years, projected income for the current financial year, any tax payments made in the previous three years, and tax payments made for the current financial year.
Conclusion
It is imperative that both payers and recipients of commission and brokerage revenue comprehend the terms and conditions of Section 194H. The obligations for withholding and transmitting TDS on such payments are described in this provision of the Income Tax Act. It is imperative to conform to the relevant TDS rate, meet the deposit dates, and satisfy the prerequisites in order to qualify for a reduced TDS rate or exemption.
FAQ
Q1. Who is liable for TDS under Section 194H?
Anybody who receives revenue through a brokerage or commission must withhold taxes at the source. Any person, business, or other organisation that pays a resident payee a commission or brokerage fee is subject to the Section 194H TDS rate.
Q2. What is the rate of TDS deduction under Section 194H?
The tax is deducted at the source at a rate of 5%. Nevertheless, this rate rises to 20% if the PAN details are withheld.
Q3. What is the threshold limit for TDS deduction under Section 194H?
Only when the commission or brokerage payment to the payee surpasses Rs. 15,000 in total throughout the financial year does the TDS requirements of Section 194H come into play. No TDS is required if the total payment is less than this amount.
Q4. When is the TDS deducted?
When a commission is paid in cash, by check or by draft, as appropriate, TDS is deducted.
Q5. What happens if TDS is deducted but not deposited?
From the day the tax was deductible until the date the tax was actually deducted, interest at the rate of 1.5% per month, or part of a month, is payable on the amount of TDS.
Q6. What happens if rent is not subject to TDS deductions?
If the total amount of rent that needs to be paid exceeds Rs. 2,40,2000, TDS @ 10% must be withheld. In the event that interest at the rate of 1% per month is not deducted, or if a portion of the month is levied, TDS is payable from the date the tax was deducted until the date it is actually paid.
Q7. Which income from commission 194H should be reported on an ITR?
If commission money is your primary source of income, you must file an ITR-3.
Q8. In Section 194H, how do I report commission revenue in addition to salary income?
ITR-3 must be filed if commission income exceeds salary income; otherwise, ITR-1 may be filed and commission income may be reported under other sources.
Q9. Which ITR do I need to file to report both my salary and commissions (194H)?
Filing ITR-1 is appropriate if the commission is minimal; filing ITR 3 is recommended if the commission is substantial.
Q10. Can we deduct our expenses from commission income?
Yes, you can deduct all of your expenses from your commission income when you file your income tax return.
Q11. What are the main considerations when it comes to TDS on commission and brokerage?
Important factors to take into account are making sure that TDS is deposited even if the agent keeps the fee, surpassing the Rs 15,000 threshold, and deducting TDS without accounting for GST.
Q12. What is the due date for depositing TDS under Section 194H?
TDS deducted under Section 194H must be deposited with the government by the 7th of the following month. For March, the due date is April 30th.
Q13. Is TDS applicable on GST component in the commission or brokerage amount?
No, TDS under Section 194H is not applicable on the GST portion of the commission or brokerage. It is deducted only on the base commission amount.
Q14. What forms are required for TDS compliance under Section 194H?
The deductor must submit TDS in Form 26Q on a quarterly basis and provide the deductee with Form 16A, which is the TDS certificate.
Q15. Can TDS under Section 194H be refunded if excess TDS is deducted?
Yes, if excess TDS is deducted, the deductee can claim a refund by filing their income tax return and providing relevant documentation to show the actual tax liability.
Q16. Is TDS under Section 194H applicable on payments made to non-residents?
No, Section 194H applies only to payments made to resident individuals. Payments to non-residents are covered under Section 195.
Q17. What are the consequences of non-compliance with Section 194H?
Failure to deduct or deposit TDS under Section 194H can result in penalties, including interest and disallowance of the commission or brokerage expense under Section 40(a)(ia) of the Income Tax Act.
Q18. Is TDS under Section 194H applicable to partnership firms?
Yes, TDS under Section 194H is applicable to commission or brokerage paid to resident partnership firms as well as individuals and other entities.
Q19. Can the commission recipient apply for a lower TDS rate under Section 194H?
Yes, the recipient of the commission or brokerage can apply for a certificate from the Income Tax Officer under Section 197 to receive payments at a lower or nil TDS rate.
Q20. Is TDS under Section 194H deducted on commission payments made to banks?
No, TDS under Section 194H is not applicable to commission or brokerage payments made to banks, including cooperative banks.
Q21. Are there any exemptions for small businesses under Section 194H?
There are no specific exemptions for small businesses under Section 194H, but TDS is only applicable if the total commission or brokerage exceeds Rs. 15,000 in a financial year.
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