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Tax Deducted at Source (TDS) is an essential component of the Indian taxation system that ensures timely tax collection at the source of income. Section 194H of the Income Tax Act, 1961, specifically deals with TDS on commission and brokerage.
For businesses, agents, and financial institutions involved in commission-based earnings, understanding Section 194H is essential to ensure tax compliance and avoid penalties. In this article, we will explain everything you need to know about Section 194H, including its applicability, rates, exemptions, and compliance requirements.
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What is Section 194H?
Section 194H of the Income Tax Act, 1961, governs TDS deduction on commission or brokerage payments made to residents. Any individual or entity paying commission or brokerage exceeding ₹15,000 in a financial year is required to deduct TDS at the rate of 5% (except in special cases).
This provision ensures that taxes are deducted at the source, preventing tax evasion and ensuring fair taxation for intermediaries, agents, and brokers.
Applicability of Section 194H
Who is Required to Deduct TDS Under 194H?
Any individual or entity making commission or brokerage payments to a resident in India is required to deduct TDS under Section 194H. This includes:
- Companies and Businesses – Retailers, wholesalers, service providers, and manufacturers paying commissions.
- Banks and Financial Institutions – Paying brokerage on loans, deposits, or services.
- E-commerce Companies – Paying commissions to online sellers or affiliates.
- Insurance Companies – Paying agent commissions for selling policies.
- Stockbrokers and Real Estate Agents – Earning brokerage on transactions.
Who is Exempt from Deducting TDS Under 194H?
- Individuals and HUFs (Hindu Undivided Families) who are not required to get tax audits under Section 44AB.
- Commissions paid to non-residents (covered under different TDS sections).
- Payments below ₹15,000 per year, as TDS applies only if commission exceeds this limit.
Definition of Commission and Brokerage Under Section 194H
According to Section 194H, the terms "commission" and "brokerage" include any payment received for:
- Services rendered in buying or selling of goods or services.
- Acting as an agent or intermediary in financial transactions.
TDS Rate Under Section 194H
The TDS rate applicable under Section 194H is:
- 5% on the commission or brokerage amount.
- 20% if the recipient does not provide PAN details.
Example Calculation of TDS Under 194H
Suppose ABC Ltd. pays a commission of ₹50,000 to a marketing agent. The TDS deduction will be:
- TDS at 5% = ₹50,000 × 5% = ₹2,500
- The agent will receive ₹47,500 (after TDS deduction).
- ABC Ltd. will deposit ₹2,500 as TDS with the Income Tax Department.
Exemptions from TDS Under Section 194H
Some payments are not covered under Section 194H and do not require TDS deduction. These include:
- Commission for selling lottery tickets (covered under Section 194G).
- Insurance commission to agents (covered under Section 194D).
- Payments to non-residents (covered under Section 195).
If a recipient earns a total commission below ₹15,000 in a financial year, no TDS is applicable.
How to File TDS Under Section 194H?
To ensure compliance with TDS under Section 194H, businesses and individuals must:
- Deduct TDS at the time of payment (or credit, whichever is earlier).
- Deposit the deducted amount to the government within the due date.
- File TDS returns (Form 26Q) on a quarterly basis.
- Issue TDS certificates (Form 16A) to the recipient.
TDS Return Filing Due Dates for Section 194H
| Quarter |
TDS Return Filing Due Date |
| April - June |
31st July |
| July - September |
31st October |
| October - December |
31st January |
| January - March |
31st May |
Consequences of Non-Compliance with Section 194H
Failure to comply with Section 194H can lead to penalties and interest under the Income Tax Act:
- Late Deduction of TDS – Interest at 1% per month from the date the tax was required to be deducted until the date it was deducted.
- Late Deposit of TDS – Interest at 1.5% per month from the date of deduction to the date of deposit.
- Failure to File TDS Returns – Penalty of ₹200 per day until the return is filed (maximum penalty is the TDS amount).
- Wrong Deduction or Non-Deduction – Expenses on which TDS was not deducted may be disallowed as business expenses under Section 40(a)(ia).
Conclusion
Section 194H of the Income Tax Act is crucial for businesses and entities making commission and brokerage payments. TDS at 5% must be deducted on payments exceeding ₹15,000 in a financial year. Proper compliance, timely deposits, and accurate return filing can help businesses avoid penalties and legal issues.
Understanding TDS under Section 194H ensures smooth financial transactions, tax transparency, and compliance with Indian tax laws. If you regularly make commission or brokerage payments, staying informed about TDS rules will help you avoid unnecessary tax complications.
