Section 194H: TDS on Commission or brokerage

Section 194H of the Income Tax Act governs the taxation of commission or brokerage. According to this section, any person responsible for paying to any income by way of commission or brokerage shall deduct tax at source of such income.

Important Points

• Applicable to all individuals, firms, companies, or any other entity.
• The TDS rate is 5%
• No TDS deduction is required, if commission or brokerage payments to a payee does not exceed ₹15,000 in total during the financial year. 
• The rate of TDS will be 20%, if fails to provide PAN.

Who are eligible to deduct TDS under Section 194H?

As per Section 194H, any person who is responsible for paying to any income by way of commission or brokerage is eligible to deduct TDS (Tax Deducted at Source) under this section. This includes individuals, companies, partnerships, firms, association of persons (AOPs), Hindu Undivided Families (HUFs), trusts, etc. who are making payment of commission or brokerage.

Meaning of Commission or brokerage

Commission is a fee which is charged by a person or entity for providing a service, typically related to buying or selling goods or services. Whereas, brokerage means the business of acting as an intermediary between buyers and sellers in financial markets, typically earning commissions for facilitating trades.

Applicable TDS rates on Commission or brokerage

The TDS (Tax Deducted at Source) rate applicable on commission or brokerage is 5% as per Section 194H of the Indian Income Tax Act. This rate is applicable for all types of commission or brokerage unless specified otherwise under the act.

If the payee (the recipient of commission or brokerage) fails to furnish their PAN (Permanent Account Number), the rate of TDS (Tax Deducted at Source) on commission or brokerage shall be 20% as per the provisions of Section 206AA of the Indian Income Tax Act. This higher rate of TDS is applicable as a measure to discourage non-compliance with PAN requirements.

Time Limit for depositing TDS u/s 194H

When TDS under Section 194H is not deductible?

TDS (Tax Deducted at Source) under Section 194H of the Income Tax Act is not deductible in the following cases:

• TDS is not required to be deducted if the amount of commission or brokerage is less than the prescribed limit, which is currently ₹15,000.
• As per the provisions of Section 197 of the Indian Income Tax Act, a person can make an application to the Assessing Officer (AO) for deduction of tax at NIL rate or at a lower rate than the prescribed rate under Section 194H. The application can be made in cases where the person considers that the total income of the recipient of the commission or brokerage, after considering all the other sources of income and the reliefs under the Income Tax Act, is likely to be below the taxable limit.
• If a company pays commission to its employees, TDS (Tax Deducted at Source) would be applicable under Section 192 of the Indian Income Tax Act and not under Section 194H. The commission paid to employees is considered as a part of their salary and is subject to TDS under the provisions of Section 192, which governs the taxation of salaries. 

Conditions for tax deduction at source (TDS) at a lower rate or nil rate

If person (deductee) require for deduction of tax at NIL rate or at a lower rate, can apply by providing an application to the assessing officer under section 197. The conditions and details required for tax deduction at source (TDS) at a lower rate or nil rate are :

Conditions for Lower Rate of TDS:

• The deductor must validate the PAN of the individual by submitting Form 197 certificates.
• The certificate which is submitted should have a valid rate, financial year, PAN, relevant sections, etc.
• The threshold limit which is specified in the certificate should not be exceeded in previous quarter.
• The certificate number should be correctly quoted.

Details Required for Filing Application:

The individual applying for lower TDS rate must provide the name and address of the assessee.

• Furnish PAN details of the assessee.
• Specify the purpose for which payment has been received, indicating the nature of income.
• Provide details of income earned in the last three years and projected income for the present financial year.
• Also have to include any tax payments made in the last three years and for the present financial year.

Exemptions on TDS deduction for commissions and brokerages

Exemptions on TDS deduction for various types of commissions and brokerages are :

• No TDS deduction if the brokerage or commission is less than Rs.15,000 in a financial year.
• Commission paid by an employer to an employee, covered under Section 192 of the Income Tax Act, not under section 194H.
• Commission earned on insurance and loan underwriting are exempted.
• Individuals holding a NIL TDS certificate from an authorized body are exempt from TDS deduction for all services.
• Interest from Savings with Bank or Post Office
• Credit/Debit Card Transaction Commissions
• Interest earned from an Non-Resident Indian account is exempt from TDS deduction.
• Payments made by the Reserve Bank of India (RBI) to other banks are exempt from TDS deduction.
• Commission for providing securities to the public is exempt from TDS deduction.
• Commission from BSNL or MTNL
• Interest accrued from an Non-Resident External account is exempt from TDS deduction.
• Charges imposed for warehouse services are exempt from TDS deduction.
• Payments to financial corporations under the central finance are exempt from TDS deduction.