TDS Under 194H and 194C: Explore Differences, Key Changes and Implications for 2025
- Rashmita Choudhary
- Apr 21
- 13 min read
TDS (Tax Deducted at Source) is a mechanism introduced by the Indian government to ensure that taxes are collected at the point of income generation. Under the Income Tax Act, 1961, Sections 194H and 194C play significant roles in tax deduction, but they apply to different types of payments. Section 194H applies to commission or brokerage payments, while Section 194C covers contract payments made for work or services.
With the updates from Budget 2025, there have been crucial changes in the threshold limits and TDS rates under these sections, which are effective from April 1, 2025. Understanding these differences, along with the latest revisions, is important for businesses, contractors, and individuals alike to ensure compliance and optimize their tax strategies.
Table of content
Brief Overview of TDS Under 194H and 194C
Section 194H governs TDS on commission or brokerage payments. It targets individuals or entities that pay a commission or brokerage to a third party, typically seen in transactions involving agents, sales representatives, or brokers.
Section 194C is aimed at payments made to contractors or subcontractors for the execution of work or services. It applies to a wide range of contract-based services, including those for the construction industry or other service-based contracts.
Both sections have distinct implications, and the recent Budget 2025 changes are designed to make the compliance process more streamlined, particularly for smaller payments.
Budget 2025 Updates
The Budget 2025 updates bring important revisions to TDS, specifically with respect to Section 194H. The threshold for commission or brokerage payments has been increased from Rs. 15,000 to Rs. 20,000, reducing the compliance burden for smaller businesses and individuals. Additionally, the TDS rate under Section 194H has been reduced to 2%, effective from October 1, 2024, which further simplifies the process for taxpayers in this category.
In contrast, the thresholds under Section 194C remain unchanged, although other provisions in the Budget 2025 aim to reduce the tax deduction burden for small transactions across various TDS sections. These updates are crucial for ensuring better compliance and less paperwork for taxpayers, while also promoting a smoother experience for contractors and commission earners.
What is TDS Under Section 194H?
TDS under Section 194H applies to commission or brokerage payments made to individuals or entities. Commission or brokerage payments are typically earned by agents or brokers who act as intermediaries between buyers and sellers. These payments can come from various sources, including the sale of goods or services, and they may be part of an agreement where the agent or broker earns a percentage of the transaction value.
The key aspect of Section 194H is that it targets payments where a commission or brokerage is involved, rather than a straight payment for goods or services.
Overview of Commission or Brokerage Payments
A commission is typically paid for services rendered in facilitating a transaction. It can be a percentage of the total value of a deal, often paid to agents, brokers, or intermediaries who bring together parties for a financial transaction. Brokerage, on the other hand, is specifically related to financial services, such as stockbroking, real estate, or insurance brokerage. Both commission and brokerage payments are subject to TDS under Section 194H, which ensures that tax is deducted on payments made for facilitating such transactions.
Threshold Limit and Rate Under Section 194H
Under Section 194H, the threshold for TDS deduction has undergone a significant revision as part of the Budget 2025 updates. Previously, the threshold for commission or brokerage payments was set at Rs. 15,000 per year. However, from April 1, 2025, the threshold limit has been increased to Rs. 20,000 per year. This means that if the total commission or brokerage paid to an individual or entity is below Rs. 20,000 in a financial year, no TDS needs to be deducted.
The TDS rate under Section 194H has been reduced from 5% to 2% effective from October 1, 2024. This reduction is aimed at reducing the tax burden on smaller commission payments and ensuring ease of compliance for taxpayers engaged in commission-based activities.
What is TDS Under Section 194C?
Overview of Contract Payments for Work or Service Contracts
Section 194C of the Income Tax Act deals with TDS on payments made for work or service contracts. It applies when a business or individual makes payments to contractors for carrying out work, including any type of contract that involves the execution of a task or providing a service. This section ensures that tax is deducted at the time of payment for these services, making it easier for the government to collect taxes on income generated through contracts.
The term "contract" is broad, encompassing various industries, such as construction, transportation, or other service-based work. For instance, if a business hires a contractor to complete a specific project or deliver services, the payments made to that contractor are subject to TDS under this section.
Threshold Limit and Rate Under Section 194C
Under Section 194C, TDS is deducted when the payment for a contract exceeds certain limits. The threshold for TDS to apply is Rs. 30,000 per single payment or Rs. 1,00,000 for aggregate payments made during the financial year.
TDS Rate for Individuals and Hindu Undivided Families (HUF): 1%
TDS Rate for Others (e.g., companies, firms): 2%
The TDS is to be deducted at the time of payment or credit to the contractor, whichever occurs earlier. The rate is applicable based on the status of the contractor, whether they are an individual/HUF or a non-individual entity.
Key Differences Between TDS Under 194H and 194C
Nature of Payments Covered
Section 194H (Commission or Brokerage): This section specifically targets commission or brokerage payments. It applies to individuals or entities who receive commission or brokerage for services rendered. Common examples include real estate agents, insurance agents, or anyone acting as an intermediary in a business transaction.
Section 194C (Contract Payments): This section applies to payments made for executing a contract. Unlike Section 194H, which is focused on commission, Section 194C covers a broader range of services, from construction contracts to transport services, or any work carried out under a contractual agreement. This includes payments for work or services provided by contractors, irrespective of whether the contractor is an individual or an organization.
Rate of TDS and Applicability
Section 194H (Commission or Brokerage):
TDS Rate: 2% (Effective from October 1, 2024)
This section applies specifically to commission and brokerage payments, with a focus on agents or intermediaries in business transactions.
Section 194C (Contract Payments):
TDS Rate for Individuals/HUF: 1%
TDS Rate for Other Entities: 2%
This section applies more broadly to payments made under work or service contracts, encompassing a wide range of contractors and service providers, from construction companies to transport service providers.
The key difference lies in the scope of the payments: while Section 194H is specific to commission-based transactions, Section 194C applies to a broader set of contractual agreements, making it applicable to a wide range of industries. The thresholds also differ, with Section 194C applying to payments exceeding Rs. 30,000 per payment or Rs. 1,00,000 in aggregate, whereas Section 194H applies to commission payments exceeding Rs. 20,000 per year (effective from April 1, 2025).
Latest Changes to TDS Under Section 194H (Budget 2025)
Increase in Threshold from Rs. 15,000 to Rs. 20,000
The Budget 2025 introduced an important revision for Section 194H, which pertains to commission or brokerage payments. Previously, TDS was required to be deducted if the total commission or brokerage payments exceeded Rs. 15,000 in a financial year. With the new changes effective from April 1, 2025, this threshold has been increased to Rs. 20,000. This revision aims to reduce the compliance burden on smaller transactions, benefiting commission agents and individuals receiving commission payments on a regular basis.
Reduction in TDS Rate to 2% Effective October 1, 2024
In addition to the threshold increase, the TDS rate under Section 194H has also been reduced from 5% to 2%. This reduction, effective from October 1, 2024, provides significant relief to individuals and businesses involved in commission-based income. The lowered rate means less money is deducted at the source, which can improve cash flow for businesses and individuals who receive commission or brokerage payments.
Impact of These Changes on Taxpayers
For taxpayers, these changes result in reduced compliance complexity and lower tax deductions. The increase in the threshold means that smaller businesses and individuals earning less than Rs. 20,000 in commission per year will no longer need to worry about TDS deductions. The reduction in the TDS rate to 2% also provides financial relief, allowing individuals and businesses to retain more of their earnings upfront, rather than waiting for a refund or tax adjustment. These changes align with the government’s efforts to ease tax compliance for smaller businesses and self-employed professionals.
Impact of Budget 2025 on Section 194C
Confirmation that Section 194C Thresholds Remain Unchanged
Unlike Section 194H, the thresholds for TDS under Section 194C remain unchanged after Budget 2025. Under Section 194C, TDS is applicable on contract payments, and the threshold continues to be Rs. 30,000 for a single payment or Rs. 1,00,000 for aggregate payments in a financial year. This means that businesses and contractors will continue to be subject to TDS if their payments exceed these limits, without any change in the reporting requirements for this section.
General Tax Relief Under the New Budget Provisions
While the specific thresholds for Section 194C remain the same, Budget 2025 has broadly raised the exemption limits for various types of incomes across different TDS sections. These adjustments are part of the government’s ongoing efforts to simplify tax compliance and reduce the burden on smaller taxpayers. With a general rise in thresholds across multiple income categories, businesses and individuals can expect a more streamlined process when it comes to filing taxes and dealing with TDS deductions.
When Does TDS Under 194H Apply vs TDS Under 194C?
Common Scenarios Where 194H Applies
Section 194H applies to commission or brokerage payments made to agents, brokers, or any other individual or entity receiving a commission for services rendered. Common scenarios where this section applies include:
Sales agents: Businesses paying commission to agents for bringing in customers or sales.
Real estate brokers: Payments made to brokers for facilitating property transactions.
Insurance agents: Commissions paid to agents for selling insurance policies.
Stockbrokers: Brokerage fees paid to stockbrokers for trading services. In these cases, if the total commission paid exceeds the prescribed threshold, TDS must be deducted.
Common Scenarios Where 194C Applies
Section 194C pertains to contract payments, specifically for work or service contracts. This section is applicable in the following common scenarios:
Construction contracts: Payments made to contractors for building or civil work.
Consulting services: Payments made to contractors for professional services such as consultancy, design, or implementation.
Freelancers and service providers: Businesses hiring freelance service providers for specific work, like content writing, graphic design, or IT services.
Transport contracts: Payments made to transporters for delivery of goods or logistics services. For these types of payments, TDS is deducted if the contract value exceeds the prescribed threshold, either per payment or in aggregate over the financial year.
Is TDS Under Section 194H Applicable for Small Payments?
With the revised threshold limit for Section 194H, small payments are now subject to more lenient TDS compliance. As per the new provisions in Budget 2025, the threshold for commission or brokerage payments under Section 194H has been increased from Rs. 15,000 to Rs. 20,000 per year, reducing the frequency with which businesses need to deduct TDS for smaller amounts. This change offers relief to businesses and individuals dealing with smaller commissions or brokerages, as they are not required to deduct TDS on transactions below the updated threshold.
For instance, if a person receives commission payments of Rs. 18,000 in a year, no TDS would be deducted, as the amount is below the new threshold. This revision simplifies compliance, especially for small businesses and agents who deal with relatively lower commission payments.
Application of the New Threshold Limits Post-Budget 2025
Following the Budget 2025 updates, the application of TDS under Section 194H now includes a revised threshold of Rs. 20,000 annually, up from Rs. 15,000. This adjustment means that any commission or brokerage payment exceeding Rs. 20,000 in a financial year will be subject to TDS at the revised rate of 2%. The revised threshold significantly reduces the compliance burden for those who receive smaller commission payments, which were previously subject to TDS even for modest amounts.
For example, if a freelance agent earns Rs. 12,000 commission from a single client, TDS will not apply under Section 194H, as the payment falls below the threshold. However, if the commission exceeds Rs. 20,000 during the year, the agent will have to comply with TDS deductions.
How to Calculate TDS Under 194H and 194C
TDS Under Section 194H To calculate TDS under Section 194H, follow these steps:
Identify the total commission or brokerage amount received in the year.
Check if the total commission exceeds the threshold limit (Rs. 20,000 post-Budget 2025).
If the total exceeds Rs. 20,000, deduct TDS at the applicable rate of 2%.
Example:
Commission earned = Rs. 30,000
Threshold = Rs. 20,000
TDS Rate = 2%
TDS to be deducted: 30,000 * 2% = Rs. 600
TDS Under Section 194C TDS under Section 194C applies to contract payments, and its calculation depends on the nature of the contract. The rate of TDS is 1% for individual/HUF contractors and 2% for others.
Identify the payment made for contract work (e.g., supply of materials or labor).Ensure the payment exceeds Rs. 30,000 per transaction or Rs. 1,00,000 aggregate annually.
Apply the applicable TDS rate (1% or 2%).
Example:
Payment to contractor = Rs. 50,000
TDS rate for a company = 2%
TDS to be deducted: 50,000 * 2% = Rs. 1,000
Practical Examples of TDS Calculation Under Both Sections
Section 194H Example (Commission)
A freelance agent earns Rs. 25,000 in commission from various sources.
TDS is applicable, as the amount exceeds Rs. 20,000.
TDS to be deducted: 25,000 * 2% = Rs. 500
Section 194C Example (Contract Payment)
A business hires a contractor for a project and makes a payment of Rs. 75,000.
TDS rate = 2% (as the payment is to a non-individual contractor).
TDS to be deducted: 75,000 * 2% = Rs. 1,500
Is TDS Under 194H and 194C Required for Businesses?
Applicability for Businesses and Professionals
Both Section 194H and Section 194C apply to businesses and professionals, but their applicability depends on the nature of the transactions:
Section 194H: Businesses or professionals paying commission or brokerage to agents, salespersons, or intermediaries are required to deduct TDS. This includes payments made for services like sales commission or marketing fees.
Section 194C: Businesses and professionals who enter into contracts for work or services are required to deduct TDS on payments to contractors for executing contracts. This includes payments for labor, supply of goods, or other contractual obligations.
Compliance Requirements
Section 194H: Businesses must ensure that the total commission or brokerage payments exceed the threshold of Rs. 20,000 per year before deducting TDS. They also need to file TDS returns and provide Form 16A to recipients for the amount deducted.
Section 194C: Businesses must check if payments to contractors exceed the threshold of Rs. 30,000 per transaction or Rs. 1,00,000 in aggregate during the year. Once TDS is deducted, the business must submit TDS returns and issue Form 16A to contractors.
Conclusion
Understanding the differences between TDS under Section 194H and Section 194C is vital for businesses and professionals to ensure compliance with the tax laws. The recent updates under Budget 2025, such as the increase in the threshold limit for Section 194H and the reduction in TDS rates, offer significant relief to smaller taxpayers and businesses, reducing their compliance burden. By staying informed about these updates and understanding the calculation methods, businesses can manage their tax obligations efficiently while avoiding penalties for non-compliance.
FAQs
1. What is the threshold limit for TDS under Section 194H as per Budget 2025?
The threshold limit for commission or brokerage payments under Section 194H has been increased from Rs. 15,000 to Rs. 20,000 per year, effective from April 1, 2025.
2. What is the TDS rate under Section 194C?
The TDS rate under Section 194C is 1% for individual/HUF contractors and 2% for all other contractors (e.g., companies or firms).
3. When do I need to deduct TDS under Section 194H vs 194C?
TDS under Section 194H applies when payments are made as commission or brokerage, while Section 194C applies when payments are made to contractors for work or services, including labor, supply of goods, or other contractual obligations.
4. How does the reduction in TDS rate under Section 194H impact commission payments?
The reduction in TDS rate under Section 194H to 2%, effective from October 1, 2024, means that businesses will now deduct less TDS on commission or brokerage payments, making it more favorable for commission recipients.
5. Are there any exemptions under Section 194H for small payments?
Yes, there are exemptions for smaller payments. If the total commission or brokerage received in a year is below Rs. 20,000 (after Budget 2025 updates), no TDS is required to be deducted under Section 194H.
6. What is the effect of Budget 2025 on the TDS threshold for commission payments?
The Budget 2025 increased the threshold limit for commission payments under Section 194H from Rs. 15,000 to Rs. 20,000, reducing the compliance burden for businesses making smaller payments.
7. Is TDS applicable on payments to contractors under Section 194C for work contracts?
Yes, TDS is applicable on payments to contractors under Section 194C when the payments exceed the threshold of Rs. 30,000 per transaction or Rs. 1,00,000 in aggregate for the financial year.
8. How do the new TDS threshold limits affect businesses in 2025?
The updated TDS threshold limits under Budget 2025 ease compliance for businesses, especially those making smaller commission payments. Businesses can avoid the hassle of TDS deductions for amounts below Rs. 20,000 (Section 194H) or Rs. 30,000 (per contract under Section 194C).
9. Is it necessary to deduct TDS on contract payments made by small businesses?
TDS needs to be deducted on contract payments exceeding the prescribed threshold limits under Section 194C, regardless of the size of the business. However, smaller businesses that make payments below these thresholds are exempt.
10. How do I calculate TDS for contracts under Section 194C?
To calculate TDS under Section 194C, check if the payment to the contractor exceeds Rs. 30,000 per transaction or Rs. 1,00,000 in aggregate. Deduct 1% if the contractor is an individual/HUF, or 2% if the contractor is a company or firm.
11. Does the increase in TDS exemption limit under Section 194H affect all taxpayers?
The increase in the TDS exemption limit under Section 194H applies to all taxpayers receiving commission or brokerage. If the total commission payments in a year exceed Rs. 20,000, TDS must be deducted.
12. How can small businesses ensure compliance with TDS under Section 194H and 194C?
Small businesses can ensure compliance by keeping track of their total commission payments (Section 194H) and contract payments (Section 194C) to verify if they exceed the updated threshold limits. If payments are below the thresholds, TDS is not required. Businesses should also file TDS returns and issue Form 16A to recipients when TDS is deducted.
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