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Understanding Section 194H of Income Tax Act - TDS on Commission & Brokerage



Section 194H of Income Tax Act - TDS on Commission & Brokerage Explained

The Income Tax (IT) Act's Section 194H allows a resident individual to deduct taxes at the source (TDS) on commission or brokerage. Since commission or brokerage is a source of income, anyone who pays any of these amounts is subject to TDS under section 194H. This section does, however, also list several circumstances in which commission or brokerage fees are exempt from TDS. In this comprehensive guide, we will explain Section 194H in detail.

 

Table of Contents

 

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 ₹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.




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