Understanding Section 194H: Tax Deduction at Source (TDS) on Commission and Brokerage in India

Understanding Section 194H: Tax Deduction at Source (TDS) on Commission and Brokerage in India

The Indian tax landscape can be intricate, especially when dealing with income earned through commissions or brokerage fees. Section 194H of the Income Tax Act serves as a key provision that mandates the deduction of tax at source (TDS) on such earnings. This article delves deeper into Section 194H, explaining who is responsible for deducting TDS, the applicable rates, exemptions, and essential considerations for both payers and recipients.

What is Section 194H?

Section 194H mandates authorized entities (other than individuals and Hindu Undivided Families or HUFs) to deduct TDS on commission or brokerage payments exceeding a specific threshold made to resident individuals. This deduction acts as an advance payment towards the recipient's income tax liability.

Who Deducts TDS under Section 194H?

Not everyone making commission or brokerage payments needs to worry about TDS under Section 194H. The responsibility for deducting TDS falls solely on authorized entities, excluding individuals and Hindu Undivided Families (HUFs). Here's a breakdown of the entities that must comply with Section 194H:

• Companies
• Partnerships
• Limited Liability Partnerships (LLPs)
• Trusts (other than charitable or religious trusts)
• Societies (other than charitable or religious societies)

Threshold for TDS Deduction

TDS is only deducted when the total commission or brokerage paid to a resident individual in a financial year surpasses Rs. 15,000.

The TDS Rate

Section 194H establishes a two-tiered system for determining the commission and brokerage payments.

• 5% for PAN provided
• 20% for missing PAN (incentivizes sharing PAN for accurate tax collection)

When is TDS Deducted?

TDS must be deducted at the earliest of these two instances:

• When the commission or brokerage amount is credited to the recipient's account.
• When the payment is made through cash, cheque, or demand draft.

Depositing Deducted TDS

The deducted TDS needs to be deposited with the government by a specific due date. Generally, for deductions made between April and February, the deposit deadline falls on the 7th of the following month. For instance, if TDS is deducted on April 15th, it must be deposited by May 7th.

Exemptions under Section 194H

Several scenarios are exempt from TDS deduction under Section 194H:

• Payments below Rs. 15,000: If the total commission or brokerage paid in a financial year is less than Rs. 15,000, no TDS deduction is required.
• Employer-Employee Commissions: When employers pay commission to their employees, TDS is deducted under a different provision, Section 192.
• Service Tax and Specific Commissions: Service tax deducted at source and commissions earned on insurance income, loan underwriting, and specific government financial corporations are not subject to TDS under Section 194H.
• TDS Certificates: Individuals possessing valid lower TDS or nil TDS certificates issued by authorized bodies are exempt from TDS deduction.
• Other Exempt Payments: Charges for warehousing services, interest on NRE accounts, payouts by the Reserve Bank of India to banks, income from specified savings schemes, and brokerage fees for public issuance of securities are also exempt.
• GST and Commission: If the commission or brokerage payment falls under the ambit of Goods and Services Tax (GST), TDS is deducted on the base value excluding the GST component.

Important Reminders

• Even if an agent chooses to withhold the commission amount when settling a payment with the recipient, the TDS deducted on that amount still needs to be deposited with the government.
• When the deduction is made by or on behalf of a government entity, the deposited TDS reaches the government's coffers on the very same day.

Conclusion

By adhering to the TDS guidelines outlined here, individuals and entities can ensure proper tax compliance and avoid potential penalties.