What is Section 194H of the Income Tax Act?

Section 194H of the Income Tax Act, 1961 mandates the deduction of Tax Deducted at Source (TDS) on commission or brokerage payments made to residents. It applies to various types of commission or brokerage payments, including those related to the sale of goods, services, or transactions involving valuable assets (excluding securities).

Who needs to deduct TDS under Section 194H?

TDS under Section 194H needs to be deducted by any person, except an individual or Hindu Undivided Family (HUF), who pays commission or brokerage to a resident. However, individuals and HUFs are also required to deduct TDS if their accounts are audited under Section 44AB, generally applicable when their turnover exceeds Rs. 1 crore or professional receipts exceed Rs. 50 lakh.

What payments are covered under Section 194H?

Section 194H applies to payments made in the form of commission or brokerage. This includes payments for services related to the sale or purchase of goods, services other than professional services, and transactions involving valuable assets or articles (excluding securities). It covers both direct and indirect commissions, including referral fees, sales commissions, and similar payments.

What is the new TDS rate for commission payments under Section 194H?

As of October 1, 2024, the TDS rate under Section 194H has been reduced from 5% to 2% for commission or brokerage payments. This reduction aims to ease the tax burden for individuals or entities receiving such payments.

How is TDS calculated under Section 194H?

The TDS amount is calculated as a percentage (2% as per recent changes) of the total commission or brokerage paid to the recipient in a given financial year, provided the total amount exceeds the threshold limit of Rs. 15,000. If the recipient fails to provide PAN details, the TDS rate increases to 20%.

When should TDS be deducted under Section 194H?

TDS under Section 194H must be deducted at the earliest of the following events: When the commission or brokerage is credited to the payee’s account. When the payment is made to the payee.

Is TDS under Section 194H applicable to HUFs and individuals?

TDS under Section 194H applies to HUFs and individuals only if their accounts are audited under Section 44AB of the Income Tax Act. This typically applies if their turnover exceeds Rs. 1 crore or professional receipts exceed Rs. 50 lakh in the preceding financial year.

What happens if PAN details are not provided under Section 194H?

If the recipient does not provide a valid PAN number, the TDS rate increases to 20% under Section 194H. This higher rate is designed to ensure compliance with tax regulations and discourage non-disclosure of PAN details.

What is the due date for depositing TDS under Section 194H?

The deducted TDS must be deposited with the government by the 7th of the following month in which the TDS was deducted. For instance, if TDS is deducted in June, the payment must be made by July 7th. Failure to deposit the TDS on time can result in penalties.

Do banks need to deduct TDS on commission payments?

Yes, banks and financial institutions that make commission or brokerage payments (such as referral fees or agent commissions) are required to deduct TDS under Section 194H, provided the payment exceeds the prescribed threshold of Rs. 15,000 in a financial year.

What are the consequences of failing to deduct TDS under Section 194H?

Failing to deduct TDS under Section 194H can lead to penalties and interest charges. The deductor may be liable to pay interest on the delayed deduction and deposit of TDS. Additionally, the deductor may face disallowance of the expenditure related to the commission or brokerage payment while filing income tax returns.

Who is liable to deduct TDS under Section 194H?

Rajesh Kumar Kar
Apr 30
6 min read

Section 194H of the Income Tax Act, 1961 mandates the deduction of Tax Deducted at Source (TDS) on commission or brokerage payments made to residents. This blog explains who is responsible for deducting TDS under this section, covering key compliance requirements, the threshold for deduction, and the recent changes to the TDS rate for FY 2024-25 and FY 2025-26. Whether you're an individual, business, or financial institution, understanding these provisions is crucial for ensuring timely and accurate tax deductions.

Who is Liable to Deduct TDS under Section 194H?
Nature of Payment Covered under Section 194H
Threshold Limit for TDS Deduction
TDS Rate and Recent Changes
Timing and Compliance for TDS Deduction
Specific Points Related to Bank Account Opening Forms and Commission Payments
Summary Table of Key Points for FY 2024-25 and FY 2025-26
Conclusion
FAQs

Who is Liable to Deduct TDS under Section 194H?

TDS under Section 194H must be deducted by any person who makes commission or brokerage payments to a resident. This includes businesses, companies, partnership firms, and other entities. However, individuals and Hindu Undivided Families (HUFs) are also liable if their accounts are audited under Section 44AB, typically when their turnover exceeds Rs. 1 crore or professional receipts surpass Rs. 50 lakh in the previous financial year.

Nature of Payment Covered under Section 194H

Section 194H specifically applies to payments made in the form of commission or brokerage. These payments are generally made in relation to services connected to buying or selling goods, or services that are not classified as professional services. The section also covers payments for transactions involving valuable assets or articles. However, it's important to note that securities are excluded from the scope of this section, meaning that brokerage fees for securities transactions are not subject to TDS under Section 194H.

This provision ensures that individuals or entities paying commission or brokerage on various types of transactions, other than professional services, fulfill their tax obligations under the Income Tax Act. Examples include commission payments made by sellers to agents involved in sales, or payments made for promotional or referral services.

Threshold Limit for TDS Deduction

Under Section 194H, TDS is required to be deducted only when the aggregate commission or brokerage paid to a resident exceeds Rs. 15,000 in a financial year. This threshold ensures that smaller payments, which might be more cumbersome for the deductor to track and deduct, are not subject to TDS.

For instance, if a person pays Rs. 10,000 in commission to a resident in a financial year, no TDS needs to be deducted. However, once the total commission paid exceeds Rs. 15,000, TDS must be deducted as per the prescribed rates.

TDS Rate and Recent Changes

As per the latest amendments, the TDS rate under Section 194H has been reduced for the financial year 2024-25. The previous rate of 5% has been lowered to 2%, effective from October 1, 2024. This reduction was introduced to ease the tax burden on commission recipients and align with the broader tax reforms in the Indian economy.

However, if the payee fails to provide a valid Permanent Account Number (PAN), the TDS rate increases to 20%, as per the provisions laid out in the Income Tax Act. This is done to encourage PAN compliance and ensure proper tracking of the payee’s income.

Timing and Compliance for TDS Deduction

TDS under Section 194H must be deducted at the earliest of the two events: either when the commission or brokerage is credited to the payee’s account or when the payment is actually made. This ensures that TDS is deducted promptly in accordance with the timing of the transaction.

Once the TDS is deducted, the deducted amount must be deposited with the government within the prescribed due date, which is typically by the 7th of the following month after the deduction. For example, if the deduction occurs in June, the TDS must be deposited by July 7th. Additionally, the deductor must file TDS returns with the government and issue TDS certificates to the deductee, detailing the amounts deducted and deposited.

Specific Points Related to Bank Account Opening Forms and Commission Payments

When opening bank accounts for entities or individuals who receive commission or brokerage, it is essential to collect PAN details from them. This helps ensure that the correct amount of TDS is deducted and deposited with the government. Failure to provide PAN details can result in the application of the higher TDS rate of 20%.

Financial institutions, including banks and financial service providers, that pay commission or brokerage (such as referral fees or agent commissions) are also liable to deduct TDS under Section 194H, provided that the payments exceed the threshold limit of Rs. 15,000. Proper documentation, including the PAN details, is crucial to track and report the commission payments and ensure compliance with TDS regulations.

Summary Table of Key Points for FY 2024-25 and FY 2025-26

Aspect	Details
Applicability	Any person (except individual/HUF unless audited) paying commission/brokerage
Threshold	Rs. 15,000 aggregate commission/brokerage per year
TDS Rate	2% (reduced from 5% effective Oct 1, 2024)
Higher TDS Rate (no PAN)	20%
Time of Deduction	At credit or payment, whichever is earlier
Deposit Due Date	By 7th of next month
Applicability to Individuals/HUF	Only if accounts audited under Section 44AB

Conclusion

Section 194H imposes an important responsibility on individuals and entities making commission or brokerage payments to residents. By understanding the rules, deductors can ensure compliance with the Income Tax Act and avoid penalties. The reduced TDS rate effective from October 2024 offers relief to taxpayers, making the deduction process smoother.

FAQ

What is Section 194H of the Income Tax Act?
Section 194H of the Income Tax Act, 1961 mandates the deduction of Tax Deducted at Source (TDS) on commission or brokerage payments made to residents. It applies to various types of commission or brokerage payments, including those related to the sale of goods, services, or transactions involving valuable assets (excluding securities).
Who needs to deduct TDS under Section 194H?
TDS under Section 194H needs to be deducted by any person, except an individual or Hindu Undivided Family (HUF), who pays commission or brokerage to a resident. However, individuals and HUFs are also required to deduct TDS if their accounts are audited under Section 44AB, generally applicable when their turnover exceeds Rs. 1 crore or professional receipts exceed Rs. 50 lakh.
What payments are covered under Section 194H?
Section 194H applies to payments made in the form of commission or brokerage. This includes payments for services related to the sale or purchase of goods, services other than professional services, and transactions involving valuable assets or articles (excluding securities). It covers both direct and indirect commissions, including referral fees, sales commissions, and similar payments.
What is the threshold for TDS deduction under Section 194H?
TDS must be deducted under Section 194H only if the aggregate commission or brokerage paid to a resident exceeds Rs. 15,000 in a financial year. If the total commission or brokerage is below this amount, no TDS deduction is required.
What is the new TDS rate for commission payments under Section 194H?
As of October 1, 2024, the TDS rate under Section 194H has been reduced from 5% to 2% for commission or brokerage payments. This reduction aims to ease the tax burden for individuals or entities receiving such payments.
How is TDS calculated under Section 194H?
The TDS amount is calculated as a percentage (2% as per recent changes) of the total commission or brokerage paid to the recipient in a given financial year, provided the total amount exceeds the threshold limit of Rs. 15,000. If the recipient fails to provide PAN details, the TDS rate increases to 20%.
When should TDS be deducted under Section 194H?
TDS under Section 194H must be deducted at the earliest of the following events:
- When the commission or brokerage is credited to the payee’s account.
- When the payment is made to the payee.
Is TDS under Section 194H applicable to HUFs and individuals?
TDS under Section 194H applies to HUFs and individuals only if their accounts are audited under Section 44AB of the Income Tax Act. This typically applies if their turnover exceeds Rs. 1 crore or professional receipts exceed Rs. 50 lakh in the preceding financial year.
What happens if PAN details are not provided under Section 194H?
If the recipient does not provide a valid PAN number, the TDS rate increases to 20% under Section 194H. This higher rate is designed to ensure compliance with tax regulations and discourage non-disclosure of PAN details.
What is the due date for depositing TDS under Section 194H?
The deducted TDS must be deposited with the government by the 7th of the following month in which the TDS was deducted. For instance, if TDS is deducted in June, the payment must be made by July 7th. Failure to deposit the TDS on time can result in penalties.
Do banks need to deduct TDS on commission payments?
Yes, banks and financial institutions that make commission or brokerage payments (such as referral fees or agent commissions) are required to deduct TDS under Section 194H, provided the payment exceeds the prescribed threshold of Rs. 15,000 in a financial year.
What are the consequences of failing to deduct TDS under Section 194H?
Failing to deduct TDS under Section 194H can lead to penalties and interest charges. The deductor may be liable to pay interest on the delayed deduction and deposit of TDS. Additionally, the deductor may face disallowance of the expenditure related to the commission or brokerage payment while filing income tax returns.