194h TDS

Introduction

Commission or brokerage refers to the payment received by an agent or individual acting on behalf of another entity. It is a form of payment for providing non-professional services or facilitating the sale or purchase of goods, including transactions related to valuable items, articles, or assets that are not securities.

As a source of income, it is subject to TDS (Tax Deducted at Source) under Section 194H of the Income Tax Act in India. To ensure compliance with tax laws and simplify the filing process, individuals who pay or receive income through commission or brokerage must familiarise themselves with the details of TDS on commission. 

This blog helps you understand more about section 194H TDS of the income tax act in India.
 

What is Section 194H?

Under Section 194H of the Income Tax Act, individuals and Hindu Undivided Families (HUFs) must pay commission or brokerage earnings tax. Authorised entities, not individuals or HUFs, must deduct TDS at a rate of 5% when total earnings exceed Rs. 15000 in a given year. 

TDS collected is deposited with the government, and entities involved in the deduction must provide the TAN of the deductor and the PAN of the deductee.
 

Who can Deduct TDS under Section 194H?

Other than individuals and HUFs, authorised entities can deduct TDS (Tax Deducted at Source) under Section 194H of the Income Tax Act. These entities must deduct TDS at a rate of 5% when paying commission or brokerage exceeding Rs. 15,000 in a given year. 

The deductor must have a valid Tax Deduction Account Number (TAN) and furnish the payee's Permanent Account Number (PAN) while paying. The TDS amount collected must be deposited with the government, and the deductor must issue a TDS certificate to the payee.

Failure to comply with TDS provisions may result in penalties and legal action.

TDS Rate on Commission and Brokerage

The TDS rate on brokerage and commission under Section 194H is 5%, but it increases to 20% if the payee fails to furnish PAN. 

No additional surcharge or education cess is imposed on the TDS rate. The government sets the TDS rate on commission and brokerage annually in the budget. 

In addition to knowing the current Section 194H TDS limit, it is important to know the due date for deduction to ensure compliance with tax regulations.
 

When is TDS Deducted under Section 194H?

The following circumstances allow entities to deduct TDS under Section 194.

●    When commissions or brokerage fees are credited to the payee's account
●    When a brokerage or commission payment is made to the payee's account by cash, demand draft, or check

Generally, TDS is deposited on or before the 7th of the following month when deducted from April to February. Let's say TDS is deducted from the brokerage on 15th April. In such a case, you must deposit the amount before or on 7th May.

Provisions for Nil Tax or Lower TDS under Section 194H

The Income Tax Department allows entities to claim a lower rate or a NIL TDS certificate under Section 197 of ITA. You can obtain the certificate if the amount of TDS deducted exceeds the total income tax liability for the fiscal year.

Entities must submit Form 13 manually or online to the Assessing Officer to claim nil tax or lower TDS. The application will be processed after the Assessing Officer's approval, and the certificate will be issued.

To obtain the certificate, one must submit these documents along with Form 13 -
1.    The last three years' assessment orders (copies)
2.    PAN card
3.    The last three fiscal years' financial statements and audit reports
4.    Earnings projection for the current fiscal year and income statements for the last three fiscal years
5.    Last three years' income tax returns (copies), acknowledgements, and enclosures.
6.    Details of the paying parties' TDS accounts
7.    The last two years' E-TDS returns

Additionally, individuals should learn about the exemptions available under Section 194H that lower TDS rates and take advantage of them accordingly.

Exemption on TDS on Brokerage

Below are some pointers on Section 194H exemptions.

●    A fiscal year when brokerage or commission amounts are at most Rs. 15000.
●    As per Section 192, employers must deduct TDS from commissions paid to employees.
●    Section 194H does not include service tax deducted at source.
●    The commissions earned on insurance income are exempt from TDS. In addition, commissions paid to loan underwriters are not subject to TDS.
●    Those individuals who have obtained a certificate for a lower TDS or a Nil TDS
●    Payments made under the central finance bill to Financial Corporation
●    TDS is also not charged on warehouse service charges.
●    An interest accrued on the NRE account
●    Reserve Bank of India payments to banking institutions.
●    Interest generated on savings accounts, recurring deposits, NSCs, Kisan Vikas Patras, Indra Vikas Patras, etc. 
●    The brokerage fee paid for the public issuance of securities

In addition, Section 194H of the Income Tax Act does not apply to commissions levied on debit or credit cards between an acquirer bank and a merchant establishment.
 

Things to Remember about TDS on Commission and Brokerage

These are the things to remember about TDS on commissions and brokerages.

●    TDS is deducted on the primary value of commission or brokerage, exclusive of GST, if applicable.
●    Tax is deducted at source if the aggregate earnings exceed Rs. 15,000.
●    Even if the agent retains the commission amount, TDS is deposited to the government.
●    Deductions made on behalf of or by the government are deposited on the same day.