Section 194H - TDS on Commission and Brokerage

What Is Section 194H?

Under section 194H, income tax is levied on any income earned by an individual through brokerage or commission. In other words, as per section 194h of the income tax act, an individual is responsible for paying tax on any income earned by him in the form of commission or brokerage.

Individuals and Hindu Undivided Families are also required to deduct under section 44AB. Individuals and HUFs with a business turnover of more than Rs 1 crore or gross receipts from professions over Rs 50 lakh are also required to deduct TDS from FY 2020-21.

The insurance commission referred to in section 194D is not included in section 194h.

What Do You Mean By Commision & Brokerage?

Commission or brokerage includes any payment received directly or indirectly by a person acting on behalf of another person. TDS on commission & brokerage includes –

• Any services in the course of buying & selling of goods
• Any services rendered excluding professional services. Professional services include legal services, technical services, accountancy services, interior design services etc.
• Any transaction related to an asset, valuable article or thing excluding securities.

 

Also Read: Section-194h TDS on Commission Income Rates

Exceptions to commission or brokerage

The people are under the impression that Presumptive Taxation applies to commission income. However, this is technically incorrect.

Who is liable for deducting tax under section 194h?

Any person (other than an individual or an Hindu undivided family) who is responsible for paying any income to a resident in the form of commission (other than insurance commission as defined in section 194D) or brokerage shall deduct income tax on that income.

However, Individuals and HUFs are required to deduct TDS under section 194H if their total sales, gross receipts, or turnover exceed one crore rupees in the case of business or fifty lakh rupees in the case of the profession during the financial year immediately preceding the financial year in which the commission is credited or paid.

When Does TDS U/S 194H Needs To Be Deducted?

TDS under section 194H needs to be deducted in the following cases –

• Under section 194H, TDS needs to be deducted at the time when income credited in the account of an individual or any other given account.
• When an income is known by the name of “Suspense account” or some other account at the time of disbursement through any mode of payment i.e. cash, cheque or DD or any other mode.

 

The Rate Of TDS under Section 194H

TDS is deducted at a rate of 5%. However, from 14 May 2020 until 31 March 2021, the rate was reduced to 3.75%. There shall be no surcharge, education cess, or SHEC added to the aforementioned rates. As a result, the tax will be deducted at the source at the basic rate. TDS shall be applied at a rate of 20% in all circumstances where the deductee does not quote PAN.

Rate Of TDS & Threhold Limits Under Section 194H

	From 1st April 2016	Before 1st April 2016
Threshold limit	Rs.15000	Rs.5000
If PAN is furnished	5%	10%
If PAN is not furnished	20%	20%

Note –

• No surcharge or education cess is levied on tax payments.
• Taxpayer can apply to the accessing officer for no TDS or TDS at lower rate.

Under What Circumstances TDS U/S 194H Is Not Deductible?

Under section 194H of the income tax act, TDS is not deductible in the following circumstances –

1. TDS is not deducted in case, if the amount of income credited or paid does not exceed Rs.15000 during the financial year.
2. Under section 197, a person can write an application to the accessing officer for deduction of tax at nil or lower rate.
3. The individual may apply to the assessing officer under section 197 for a tax deduction at zero rates or a lesser rate.
4. BSNL/MTNL gave any brokerage or commission to their public call office franchisees.

Exclusions of TDS on brokerage or commission

There are a few exceptions to this rule for certain types of commissions or brokerage fees that do not qualify for a tax deduction at the source under this provision. They are as follows:

• Commissions were given to underwriters of insurance or loans.
• Any brokerage fee paid in connection with the public offering of securities.
• Any type of brokerage fee paid on transactions involving securities listed on a stock exchange.
• Payment in the form of a tax refund
• Payments made by the RBI to banking institutions
• Payments towards Financial Corporations under central finance bill
• Any payments made in support of life insurance policies or other investments in cooperative societies
• Direct tax payment
• Interest Income from savings bank accounts, recurring deposits, Indra Vikas Patra, National Savings Certificates (NSC), or Kisan Vikas Patra
• Interest earned on the NRE account
• Any income received from a public or private institution that has been classified as a NIL TD's organisation.
• Any interest income earned for the compensation for Motor Vehicles Claims Tribunal

When Is It Not Required To Deduct TDS U/S 194H?

TDS is not required to be deducted in the following cases –

1. TDS on insurance commission
2. Commission paid by the employer to an employee will be covered under section 192.
3. Commission or brokerage payable by Mahanagar telephone Nigam limited or Bharat Sanchar Nigam limited to their public call office franchisees.
4. Brokerage on securities of stock exchange transactions
5. In relation to public issue of securities, brokerage or commission paid to underwriters.
6. Bank guarantee commission.
7. Cash management service charges
8. Commodity warehousing service charges

What Is The Time Limit Of Depositing TDS?

Time limit for depositing TDS is as follows –

1. Tax deducted from April to February should be deposited on or before the 7th of the next month.
2. Tax deducted in the month of March should be deposited on or before 30th April.

 

For ex –tax deducted on 25 April must be deposited by 7 May, whereas tax deducted on 15 March must be deposited by 30 April.

TDS at a Lower Rate

The deductee (the person whose tax is deducted) may apply to the assessing officer under section 197 for a tax deduction at the zero/nil rate or a lower rate.

• Validate the deductee's PAN by submitting a 197 certificate.
• The certificate should be valid for the PAN, Section, Rate, and relevant financial year specified in the filed statement.
• Verify that the threshold limit for the certificate has not been exceeded in previous quarters.
• The statement should include the correct certificate number. Correct Certificate Number Example – 3XXXAH7X

Penalties of Failing To pay the tax under section 194h

You may have to face the following consequences of not paying the tax –

• Disallowance of expenditure – If an individual fails to deduct the TDS amount or deducts it but fails to pay the same, 30% of the expenditure will be disallowed u/s 40(a)(ia) for aim of computing income under the head “Profit & gains from business/profession”.
• Prosecution – As per section 276B of the income tax act, if any individual deducted the tax but fails to pay the same within the time limit prescribed by the government, he may get severe punishment for a term –
  • Not to be less than 3 months.
  • May extend to 7 years including the fine.

What Is To Be Done After Deducting & Depositing TDS?

After deducting & depositing TDS, certificates are issued to the deductee’s on the following dates given below –

Quarter	Time limit for depositing TDS
April-June	30th July
July-September	30th October
October-December	30th January
January-March	30th May