Understanding TDS Section 194H: Commission and Brokerage

Understanding TDS Section 194H: Commission and Brokerage

Tax Deducted at Source (TDS) plays a crucial role in India's tax framework, ensuring timely tax collection at the source of income generation. One such provision, Section 194H, specifically deals with TDS on commission and brokerage. If you're involved in business transactions where commissions are paid, understanding this section is essential to ensure compliance and avoid penalties.

What is Section 194H?

Section 194H of the Income Tax Act, 1961 mandates tax deduction at source (TDS) on payments of commission or brokerage exceeding a specified limit. This provision ensures that the government receives tax revenue at the time of transaction rather than at the end of the financial year.

Key Provisions of Section 194H:

1. Applicable Payments: Any commission or brokerage exceeding Rs. 15,000 in a financial year is subject to TDS.
2. Rate of TDS: The applicable TDS rate is 5%. However, if the recipient does not furnish their PAN, the tax deduction rate increases to 20%.
3. Threshold Limit: TDS is applicable only when the total commission or brokerage paid exceeds Rs. 15,000 in a financial year.
4. Time of Deduction: TDS must be deducted at the time of crediting the commission/brokerage to the recipient’s account or at the time of payment, whichever is earlier.
5. TDS Return Filing: Deductors must deposit the deducted amount with the government and file a TDS return in Form 26Q.

Exemptions & Exceptions

Certain commissions and brokerage payments are not covered under Section 194H, including:

• Insurance commissions covered under Section 194D.
• Payments made by banks for credit card transactions.
• Commission on securities transactions (covered under different provisions).
• Brokerage on transactions related to mutual funds.

Calculation Example

Suppose a company pays a commission of Rs. 50,000 to an agent. Since this exceeds the Rs. 15,000 threshold, TDS will be deducted as follows:

• Commission Paid: Rs. 50,000
• TDS Rate: 5%
• TDS Deducted: Rs. 2,500
• Net Payment to Agent: Rs. 47,500
• The company will then deposit Rs. 2,500 with the government.

Compliance & Penalties

Failure to deduct or deposit TDS under Section 194H may result in:

• Interest Charges: If TDS is not deducted or deposited on time, interest is charged at 1% per month for non-deduction and 1.5% per month for non-deposit.
• Disallowance of Expenses: If TDS is not deducted, the expense may be disallowed under Section 40(a)(ia), leading to a higher taxable income.
• Penalty & Prosecution: Under Section 271C, failure to comply can attract penalties equal to the TDS amount not deducted.

Conclusion

Understanding TDS under Section 194H is essential for businesses and individuals making commission or brokerage payments. Ensuring proper deduction, deposit, and compliance with TDS rules helps avoid penalties and maintains financial discipline.

If you have transactions involving commissions, always check for applicability, deduct the correct amount, and file returns timely to stay tax-compliant.