TDS on commission vs brokerage under 194H
- Bhavika Rajput
- Apr 30
- 11 min read
Section 194H of the Income Tax Act, 1961 mandates that any person who makes payments as commission or brokerage to residents must deduct TDS at a prescribed rate if the payments exceed a specified threshold. In this blog, we explore the distinctions between commission and brokerage under Section 194H, the latest threshold and rate changes, and important exemptions. This insight is essential for businesses and individuals looking to ensure compliance with TDS rules in FY 2024-25 and FY 2025-26.
Table of Contents
Is there any difference between TDS on Commission vs Brokerage?
Section 194H applies TDS to both commission and brokerage payments made to residents. While commission is typically paid for services rendered in facilitating a transaction, brokerage refers to fees paid for bringing two parties together for a deal. Both are subject to TDS under Section 194H, with the TDS rate for FY 2024-25 set at 2%, down from 5% from October 1, 2024. The threshold limit for TDS applicability is ₹15,000 for FY 2024-25, which will increase to ₹20,000 in FY 2025-26.
Applicability of TDS on Commission and Brokerage
Section 194H of the Income Tax Act, 1961 makes it clear that any person, except individuals or Hindu Undivided Families (HUFs), must deduct Tax Deducted at Source (TDS) on commission or brokerage payments made to residents in India. The application of TDS under this section is crucial for compliance with tax regulations, particularly for businesses and professionals who frequently make such payments. The provision is designed to ensure that commissions and brokerage payments are taxed at the source before they reach the recipient, simplifying tax collection for the government.
Who must deduct TDS?: Any person or entity paying commission or brokerage must deduct TDS, with the exception of individual or HUF payers whose turnover or professional receipts do not exceed the prescribed limits.
Scope of Payments: Commission payments can be made for a variety of services, such as sales commissions, referral fees, and other intermediary roles. Brokerage, on the other hand, typically refers to fees paid for facilitating a transaction between two parties, such as in the case of real estate, stock markets, or even insurance brokerage (not covered under Section 194H but under Section 194D).
TDS Deduction Threshold: TDS is only applicable if the total commission or brokerage paid in a financial year exceeds the threshold amount, which varies by financial year. For FY 2024-25, the threshold limit is ₹15,000, and in FY 2025-26, it increases to ₹20,000. This ensures that only significant transactions are taxed at the source.
Understanding the applicability of TDS on commission and brokerage is essential for businesses to maintain compliance and avoid penalties.
Threshold Limits and Rate Changes in Budget 2024 and 2025
The changes introduced in the recent budgets, particularly regarding the threshold limits and the rate of TDS, aim to streamline tax collection and reduce the compliance burden for smaller businesses. Here's a breakdown of how these changes affect commission and brokerage payments:
TDS Rate: Effective from October 1, 2024, the TDS rate under Section 194H will be reduced from 5% to 2%. This reduction is significant as it lowers the tax burden for both the payer and the recipient of the commission or brokerage. The reduction is expected to make the compliance process smoother for payers who previously had to deduct a higher percentage of tax.
Threshold Limit for FY 2024-25: For the financial year 2024-25, TDS on commission or brokerage is applicable if the total payments exceed ₹15,000 in a year. This means that smaller transactions will not be burdened with TDS deduction, and only larger payments will be subject to tax.
Threshold Limit for FY 2025-26: In FY 2025-26, the threshold limit will increase to ₹20,000. This means that businesses will have more flexibility in handling smaller payments without being obligated to deduct TDS. This change is part of a broader government initiative to ease the tax compliance process for smaller transactions.
These rate reductions and threshold increases are designed to reduce the administrative burden on businesses and ensure that only significant payments are subject to tax deductions.
Exemptions from TDS under Section 194H
Section 194H provides several exemptions for commission and brokerage payments, ensuring that certain payments are not subject to TDS, even if they fall under the general scope of the section. Some key exemptions include:
RBI Payments: Payments made by the Reserve Bank of India (RBI) to financial institutions are exempt from TDS under Section 194H.
Underwriters’ Commissions: Commissions paid to underwriters in relation to public securities are also exempt from TDS under this section.
Stock Market Brokerage: Brokerage fees for transactions carried out on a stock exchange or through a registered stockbroker are exempt from Section 194H, as they are covered by other provisions.
Insurance Commissions: Commissions earned through insurance policies (like LIC) are covered under Section 194D and are not subject to Section 194H TDS.
Interest Earnings and Tax Payments: Commissions on income tax refunds, direct tax payments, and certain savings instruments such as NRE accounts are exempt from TDS under Section 194H.
BSNL/MTNL Franchise Commissions: Commissions paid to franchisees of BSNL or MTNL are also exempt from this section.
These exemptions are crucial for ensuring that only relevant and significant commission and brokerage payments are taxed under Section 194H, reducing unnecessary TDS deductions on payments that don't fall within the scope of the section.
TDS on Commission/Brokerage for Individual or HUF Payers
Under Section 194H, individuals and Hindu Undivided Families (HUFs) are only required to deduct TDS on commission or brokerage payments if their business turnover exceeds the prescribed limits. These limits are set to ensure that smaller businesses are not burdened with unnecessary tax deduction obligations.
Business Turnover Requirement: Individuals and HUFs must deduct TDS only if their total business turnover exceeds ₹1 crore during the financial year. This threshold ensures that small businesses are not required to comply with TDS requirements unless they are significantly involved in commercial transactions.
Professional Receipts Requirement: Similarly, if the individual or HUF is engaged in a profession, TDS must be deducted only if their receipts exceed ₹50 lakhs in a financial year. This ensures that professionals with relatively small practices are not burdened by complex tax compliance obligations.
This provision helps small-scale individuals and HUFs avoid excessive tax deductions while ensuring that businesses of a certain scale are contributing appropriately to tax collection.
Is TDS Deducted on Non-Cash Payments or Payments in Kind?
TDS under Section 194H applies to both cash and non-cash payments. If the commission or brokerage is paid in non-cash form (such as goods, services, or any other form of payment in kind), TDS is still required. Here’s how it works:
Non-Cash Payments/Payments in Kind: If a commission or brokerage is paid in kind (goods, services, or other forms), the payer must determine the fair market value of the goods or services provided. The TDS should be calculated based on this value, just as it would be for cash payments.
TDS Timing: The timing of TDS deduction remains the same for both cash and non-cash payments. It must be deducted at the time of crediting the payment to the payee's account or when the payment is made, whichever occurs first.
This provision ensures that TDS is deducted not only for monetary transactions but also for non-cash transactions, maintaining consistency in the tax deduction process.
Changes in TDS Threshold and Rates for FY 2025-26
As per the Budget 2025, the threshold for TDS applicability on commission and brokerage payments will increase from ₹15,000 in FY 2024-25 to ₹20,000 in FY 2025-26. This change is expected to ease the tax compliance burden for businesses by reducing the number of small payments subject to TDS. The TDS rate of 2% remains unchanged, but the higher threshold limit means that fewer businesses will need to deal with TDS deductions for smaller transactions.
Impact of Change: With the increased threshold, only larger payments will be subject to TDS. This simplification is expected to benefit businesses that make frequent, smaller payments, as they will no longer be required to deduct TDS for such transactions.
How TDS on Commission/Brokerage Works in Different Regimes
TDS under Section 194H applies equally under both the old tax regime and the new tax regime. However, the way TDS impacts the final tax calculation differs based on the tax regime chosen. Here's how TDS on commission and brokerage works in each:
Is TDS on Commission/Brokerage Allowed in the New Tax Regime?
In the new tax regime, taxpayers do not benefit from deductions available under sections like 80C, 80D, etc. However, TDS on commission or brokerage remains applicable under the new regime just like in the old regime. The key difference is that no exemptions or deductions can be claimed for these payments under the new regime, so TDS does not reduce the taxable income but is simply deducted and credited against the overall tax liability.
How TDS on Commission/Brokerage Works in the Old Tax Regime
In the old tax regime, taxpayers can still claim deductions for commission and brokerage payments under relevant sections. This means that while TDS will still be deducted at the source, individuals and businesses can offset the TDS against their taxable income, reducing the overall tax liability. Thus, the TDS deduction effectively reduces the taxable income, lowering the overall tax liability for those who opt for the old regime.
Summary Table: Key Highlights of Section 194H for TDS on Commission/Brokerage
Parameter | FY 2024-25 | FY 2025-26 |
TDS Rate | 2% (reduced from 5% on 1 Oct 2024) | 2% |
Threshold Limit | ₹15,000 | ₹20,000 |
Applicability | All payers except individual/HUF with turnover limits | Same |
Exemptions | RBI payments, underwriters, stock market brokerage, LIC commissions, etc. | Same |
Conclusion
Section 194H ensures that commission and brokerage payments are appropriately taxed at the source. With the reduction in the TDS rate and the increase in the threshold limits for FY 2024-25 and FY 2025-26, businesses and individuals are better positioned to comply with tax obligations without facing undue administrative burdens. Understanding the nuances of these provisions and exemptions helps ensure smoother tax filing and minimizes the risk of penalties for non-compliance.
Frequently Asked Questions (FAQs)
Is TDS applicable on commission paid to an individual broker?
Yes, TDS is applicable if the total commission paid to an individual broker exceeds the threshold limit. For FY 2024-25, the threshold limit is ₹15,000, and for FY 2025-26, it increases to ₹20,000. If the total commission paid surpasses these limits in a financial year, the payer must deduct TDS at the prescribed rate of 2%.
Does Section 194H apply to insurance commission?
No, insurance commission is specifically covered under Section 194D of the Income Tax Act, not Section 194H. Therefore, commission earned by insurance agents or brokers is subject to TDS under Section 194D, not Section 194H, and follows different TDS deduction rules.
What if the payer is an individual or HUF?
Individuals and Hindu Undivided Families (HUFs) are only required to deduct TDS on commission or brokerage payments if their business turnover exceeds ₹1 crore or their professional receipts exceed ₹50 lakhs in a financial year. If these limits are not met, they are not obligated to deduct TDS under Section 194H, regardless of the commission or brokerage paid.
Are brokerage fees for stock market transactions subject to TDS under Section 194H?
No, brokerage fees related to transactions in the stock market are exempt from TDS under Section 194H. These fees are covered by different tax provisions related to securities transactions and are not subject to the TDS rules set out in Section 194H.
How is TDS deducted when commission or brokerage is paid in kind or through non-cash modes?
TDS must be deducted when the commission or brokerage is credited to the payee's account or when the payment is made, whichever occurs first. If the payment is in kind (non-cash payment), the fair market value of the goods or services provided must be used to calculate the TDS amount, ensuring that the same TDS deduction process is followed as with cash payments.
What is the impact of the increased threshold from ₹15,000 to ₹20,000 in FY 2025-26?
The increase in the threshold from ₹15,000 to ₹20,000 in FY 2025-26 will reduce the number of smaller payments subject to TDS. This change benefits businesses and individuals by reducing the administrative burden of deducting TDS on smaller commission and brokerage payments, making tax compliance simpler and less cumbersome.
Is TDS applicable on commission paid to a foreign broker?
Section 194H applies only to payments made to residents in India. Therefore, commission paid to foreign brokers is generally exempt from TDS under this section. Payments made to non-residents may be subject to different tax provisions under Section 195 or other applicable sections of the Income Tax Act.
Can TDS be deducted in advance for commission payments?
TDS is typically deducted at the time of crediting the commission or brokerage to the payee’s account or at the time of making the actual payment, whichever comes first. It is not deducted in advance, as the timing of TDS deduction aligns with when the transaction or payment occurs, ensuring that the correct tax amount is deducted at the right time.
Is there a penalty for failing to deduct TDS under Section 194H?
Yes, failing to deduct or deposit TDS as required under Section 194H can lead to penalties under the Income Tax Act. These penalties can include interest on the amount of TDS that was not deducted or deposited, and in some cases, the payer could be subject to a fine. It is important to ensure timely compliance with TDS obligations to avoid such penalties.
How is TDS on commission/brokerage treated in the final tax return?
TDS that has been deducted on commission or brokerage payments is adjusted against the final tax liability when filing the income tax return. The deducted TDS is claimed as a credit in the return, reducing the total amount of tax payable. If the TDS exceeds the actual tax liability, the taxpayer may be entitled to a refund of the excess amount.
Can commission payments to employees be excluded from TDS under Section 194H?
No, commission payments to employees are generally subject to TDS under Section 194H, provided the total payment exceeds the prescribed threshold. Employees receiving commission as part of their compensation package must have TDS deducted, just as with any other form of income that falls under the purview of the Income Tax Act.
Are foreign exchange payments subject to TDS under Section 194H?
Payments made in foreign exchange may be subject to TDS under Section 194H if they meet the required conditions. If the commission or brokerage paid to a resident in India exceeds the threshold limit and is made in foreign exchange, the payer is obligated to deduct TDS. However, foreign currency payments are typically subject to different tax provisions under other sections, such as Section 195, for non-resident transactions.
Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
Yes, TaxBuddy offers both self-filing and expert-assisted plans for ITR filing. While it initially provided only expert-assisted filing options, TaxBuddy has expanded its offerings to include self-filing plans as well. This gives users the flexibility to choose between completing the process on their own or getting assistance from tax experts, based on their needs. The expert-assisted plans are particularly beneficial for those who need professional guidance, while the self-filing option is ideal for those comfortable managing their tax filing independently.
Which is the best site to file ITR?
The best site to file your Income Tax Return (ITR) depends on your individual needs. TaxBuddy is highly recommended for those seeking a seamless, AI-driven, and expert-assisted tax filing experience. It simplifies the entire filing process and provides support throughout the year. Alternatively, you can also file directly with the Government portal (incometax.gov.in), which offers an official and straightforward filing option, but without the additional expert assistance that platforms like TaxBuddy provide.
Where to file an income tax return?
TaxBuddy is an authorized e-filing platform for Income Tax Returns and provides a safe, easy-to-use interface for taxpayers. While it offers expert-assisted plans, the platform also caters to users who prefer a hands-off approach. TaxBuddy ensures a smooth and reliable filing experience, with a focus on providing expert guidance throughout the process. For those seeking a direct and official filing method, they can also use the incometax.gov.in portal. Both options are secure, but TaxBuddy provides an extra layer of assistance for those who need it.
Comments