Section 194H of the Income Tax Act, 1961, mandates the deduction of Tax Deducted at Source (TDS) on commission and brokerage payments. This section ensures that tax is collected at the point of income generation, which in this case is commission or brokerage, making it a crucial part of tax compliance for both individuals and businesses.
In this blog, we’ll break down Section 194H, explain its applicability, and help you understand how to comply with it efficiently.
What is Section 194H?
Section 194H of the Income Tax Act requires the deductor (payer) to deduct TDS at the time of making a payment to a resident person in the form of commission or brokerage. The tax is deducted at a prescribed rate when the total commission or brokerage paid during a financial year exceeds ₹15,000.
Who is Liable to Deduct TDS Under Section 194H?
Any individual or entity that makes a payment of commission or brokerage to another person is required to deduct TDS if the following conditions are met:
The payment is made to a resident (Indian citizen or entity).
The payment is made for commission or brokerage related to business or profession.
The total payment exceeds ₹15,000 in a financial year (threshold limit).
For example, if a company pays a commission to a sales agent for securing business, or a brokerage to an intermediary for arranging a transaction, it is liable to deduct TDS under Section 194H.
TDS Rate Under Section 194H
As per Section 194H, TDS must be deducted at the rate of 5% on the amount of commission or brokerage paid to the recipient, provided the recipient has furnished their Permanent Account Number (PAN).
TDS Rate Based on PAN Status:
If PAN is provided: The TDS rate is 5%.
If PAN is not provided: The TDS rate is 20%.
Example:
If you pay ₹50,000 as commission to a broker:
With PAN: TDS at 5% would be ₹2,500 (i.e., 5% of ₹50,000).
Without PAN: TDS at 20% would be ₹10,000 (i.e., 20% of ₹50,000).
When is TDS Deducted Under Section 194H?
TDS is required to be deducted at the time of crediting the amount to the payee’s account or at the time of payment, whichever is earlier. This means if you pay commission/brokerage to someone, the TDS needs to be deducted when the payment is made or when the amount is credited to the recipient's account.
Example:
If a company credits ₹50,000 as commission in the broker’s account on March 31, TDS needs to be deducted on the same day.
If the payment is made later (say in April), TDS should be deducted on the actual date of payment.
Threshold Limit for TDS Deduction
No TDS is required to be deducted if the total commission or brokerage paid to a person does not exceed ₹15,000 in a financial year. If the commission/brokerage exceeds ₹15,000, TDS will be applicable on the entire amount, not just the amount exceeding ₹15,000.
Example:
If you pay ₹10,000 as commission to an agent in January and ₹6,000 in July, the total commission paid is ₹16,000.
TDS will be applicable on the entire ₹16,000, not just the ₹1,000 exceeding ₹15,000.
How to Calculate TDS on Commission/Brokerage?
The calculation of TDS is simple.
Step 1: Determine the amount of commission or brokerage paid.
Step 2: Check if the total commission/brokerage exceeds ₹15,000.
Step 3: Deduct TDS at 5% if the PAN is provided, or 20% if the PAN is not provided.
Step 4: Deposit the TDS to the government within the due date (usually within 7 days of the end of the month in which TDS was deducted).
Example Calculation:
Commission paid to a broker = ₹50,000.
TDS rate = 5% (PAN available).
TDS to be deducted = ₹50,000 * 5% = ₹2,500.
TDS Return Filing for Section 194H
The TDS deducted under Section 194H should be deposited with the government and reported through a TDS return. The following forms are used to file the TDS return for commission and brokerage payments:
Form 24Q: For quarterly filing of TDS returns related to salaries.
Form 26Q: For quarterly filing of TDS returns for non-salary payments, including commission and brokerage.
TDS returns must be filed within the due dates specified by the Income Tax Department. After filing the return, a TDS certificate (Form 16A) should be issued to the person from whom the tax was deducted, confirming the TDS amount deducted and deposited.
Penalties for Non-Compliance
Failure to deduct or deposit TDS can result in penalties and interest. The penalties include:
Late Payment Penalty: Interest is charged at 1.5% per month (or part of a month) from the date the tax was deducted until the date it is deposited.
Late Filing Penalty: Failure to file TDS returns can attract a penalty of ₹200 per day of delay, up to the amount of TDS due.
Exemptions and Special Cases
Government Institutions: No TDS is required for commission or brokerage paid to government departments or specified institutions.
Section 194H Exemption for Specific Payments: Certain payments under Section 194H may be exempt, such as if the recipient is a small trader or has income that is already subject to another deduction or tax scheme.
Conclusion
Section 194H plays a critical role in ensuring that tax on commission and brokerage payments is deducted at the source. As a payer, it's important to comply with the provisions of this section to avoid penalties and ensure that the correct amount of TDS is deducted and deposited with the government. If you're unsure about how to apply Section 194H, consider consulting with a tax professional who can help you navigate the complexities and maintain proper compliance.
Always ensure that you meet the threshold limits, deduct TDS on time, and file your returns to avoid any discrepancies or penalties.
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