TDS on Commission: Rules, Rates, and Compliance Section 194H of Income Tax Act

Section 194H of the Income Tax Act, 1961, deals with the TDS on income earned through commission or brokerage. It tells how much tax must be withheld when such payments are made.

For those unaware, Tax Deducted at Source (TDS) is a mechanism used by the Indian government to collect taxes at the source of income. It ensures that taxes are deducted when income is generated rather than at a later date. One of the specific areas where TDS is applicable is on commission. This comprehensive guide will help you understand TDS on commission, its implications, and how you can navigate this aspect of your financial planning effectively.

What is Section 194H?

Section 194H of the Income Tax Act, 1961 deals with the deduction of TDS on income earned by a resident through commission or brokerage. It gives rules regarding:

• Who is responsible for deducting the tax

and

• Under what conditions should the deduction be made

Let’s check out some key points of this section:

Applicability

This section applies when a person is paying commission or brokerage to a resident. The person making the payment is required to deduct TDS before making the payment.

Who must deduct TDS

Individuals and Hindu Undivided Families (HUFs) are required to deduct TDS under this section only if they were subject to tax audit under Section 44AB in the previous financial year.

Other entities like firms, companies, or partnership firms are also required to deduct TDS if they make such payments.

Type of income covered

The section covers payments made as commission or brokerage. For those unaware, these are payments:

• For services rendered in the course of buying or selling goods

or

• Related to any transaction involving assets or services.

Exclusion

Payments related to insurance commission are not covered under Section 194H. Such payments are governed by Section 194D.

Timing of deduction

TDS must be deducted at the time of credit to the payee’s account or at the time of payment, whichever is earlier.

Mode of payment

It does not matter how the payment is made, whether by cash, cheque, demand draft (DD), or any other mode. Please note that even if the amount is credited to a suspense account or any other account name, TDS must still be deducted.

What is TDS on commission?

TDS on commission is a tax deducted by the payer when a commission is paid to the payee. According to Section 194H of the Income Tax Act, any person, excluding individuals and Hindu Undivided Families (HUF) not liable to audit, responsible for paying commission or brokerage to a resident, is required to deduct TDS.

Definition of commission

For the purpose of TDS, commission or brokerage includes any payment received or receivable, directly or indirectly, for services rendered (excluding professional services) or for any services in the course of buying or selling goods. This can include commission payments made to agents, brokers, or any other person acting on behalf of someone else.

TDS on purchase of property

When it comes to real estate transactions, TDS on purchase of property is also applicable. Under Section 194-IA of the Income Tax Act, TDS at 1% is required to be deducted by the buyer on the sale consideration if the property value exceeds Rs. 50 lakh. This ensures that the transaction is reported to the tax authorities, thereby increasing transparency and compliance in real estate deals.

Threshold limit for TDS on commission

TDS on commission is applicable only if the total amount of commission or brokerage paid or credited exceeds Rs. 15,000 in a financial year. If the amount is below this threshold, TDS is not required to be deducted.

Calculation and deduction of TDS on commission

When calculating TDS on commission, the payer should consider the total amount of commission paid or credited during the financial year. Here is a step-by-step process to calculate and deduct TDS on commission:

1. Identify the total commission payable: Determine the total commission or brokerage amount payable to the recipient.
2. Apply the threshold limit: Check if the total commission exceeds Rs. 15,000 in a financial year.
3. Calculate TDS: If the commission exceeds Rs. 15,000, apply the TDS rate of 5% to the total commission amount.
4. Deduct TDS: Deduct the calculated TDS amount from the commission payable and pay the net amount to the recipient.
5. Deposit TDS: Deposit the deducted TDS amount with the government by the 7th of the following month in which the TDS was deducted.

Procedure for TDS deduction and payment

1. Calculate the total commission: Determine the total commission payable to the recipient.
2. Apply the threshold limit: Ensure the total commission exceeds Rs. 15,000 in the financial year.
3. Calculate TDS: Apply the TDS rate of 5% (or 20% if PAN is not provided) on the commission amount.
4. Deduct TDS: Deduct the calculated TDS amount from the commission payable.
5. Deposit TDS: Deposit the TDS amount with the government by the 7th of the following month.
6. Issue TDS certificate: Provide a TDS certificate (Form 16A) to the recipient, showing the amount deducted and deposited.

When does TDS under Section 194H need to be deducted?

Section 194H of the Income Tax Act, 1961, applies to payments made as commission or brokerage. Any person [except an individual or a Hindu Undivided Family (HUF)] must deduct TDS when making such payments.

However, individuals or HUFs must also deduct TDS if they were required to get a tax audit under Section 44AB in the previous financial year.

Now, if we talk about the timing, such TDS should be deducted at the time of credit to the payee’s account or at the time of payment, whichever comes first.

Cases in which TDS is not deducted

Section 194H normally requires the deduction of TDS on commission or brokerage payments. However, in the following cases, TDS is not required:

1. Low payment amount

If the total commission or brokerage paid to a person during a financial year is Rs. 15,000 or less, then no TDS needs to be deducted. This limit applies per person, per year.

2. Certificate for lower or no TDS (Section 197)

The standard TDS rate mentioned under Section 194H is 2%. However, a person receiving commission or brokerage can request the Income Tax Assessing Officer (AO) to allow:

• TDS at a lower rate

or

• No TDS
  

If approved, the payer must follow the rate given by AO, instead of the standard 2%.

TDS at a Lower Rate

As mentioned above, under Section 197, a person receiving commission or brokerage (the deductee) can request the AO to deduct TDS at a lower rate or no TDS.

However, before allowing this relief, the AO needs to follow these steps:

• The officer checks and verifies the PAN of the deductee before issuing the certificate.
• The certificate must clearly mention the applicable:
  • TDS rate
  • PAN
  • Relevant sections
  • Financial year
  • Other required details
• The deductee must not cross the threshold limit mentioned in the certificate during any quarter.
• The certificate number must be correctly quoted in all communications.

Only after verifying all the above can the officer approve the application. Additionally, you are required to submit the following details along with your application:

• Full name and address of the deductee
• PAN (Permanent Account Number)
• Income details for the last three financial years
• Tax paid during the last three financial years
• Purpose of the payment (why commission or brokerage is being received)
• Estimated income for the current financial year
• Tax already paid in the current financial year

TDS not needed to be subtracted in the cases mentioned below

Be aware that there are specific situations when TDS deduction on commission or brokerage under Section 194H is not required. Let’s check them out:

1. Threshold limit for deduction

TDS is not required if the total commission or brokerage paid during the financial year is Rs. 15,000 or less. Earlier, this limit was Rs. 5,000, but it was increased to Rs. 15,000 starting from the financial year 2016–17.

2. Payments by BSNL or MTNL

If BSNL or MTNL pays commission to their Public Call Office (PCO) franchisees, no TDS needs to be deducted.

3. Commission paid to employees

When an employer pays commission to its own employee, TDS is deducted under Section 192 (as part of salary) and not under Section 194H.

4. Insurance commission

TDS on insurance commission is not covered under Section 194H. It falls under Section 194D.

5. GST

TDS should be calculated only on the commission or brokerage amount and not on the GST component. Please note that when GST is shown separately, TDS is deducted only from the base commission.

Key points about Section 194H

Section 194H of the Income Tax Act, 1961, applies to individuals, businesses, and entities paying commission or brokerage to a resident. To remain compliant, you must check out the main points under this section:

• Section 194H applies to all persons or entities who pay commission or brokerage to a resident.
• TDS under this section is applicable only if the total payment exceeds Rs. 15,000 in a financial year.
• The standard rate of TDS under Section 194H is 2%.
• The payer must issue Form 16A to the payee. This certificate proves that TDS has been deducted and is needed when the payee files their income tax return.
• If the payee's total income is below the taxable limit, they can submit Form 15G (for individuals) or Form 15H (for senior citizens) to avoid TDS deduction.
• TDS must be deducted either at the time of payment or when the amount is credited to the payee’s account, whichever is earlier.
• The deducted TDS must be deposited with the government within the specified due dates to avoid penalties or interest.
• The payer must file Form 26Q every quarter to report the TDS deducted and deposited.
• The payee's PAN must be correctly obtained and quoted. If PAN is not provided or is incorrect, a higher TDS rate of 20% applies.

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Benefits of understanding TDS on commission

1. Ensures compliance: Understanding TDS on commission ensures that you comply with tax regulations and avoid penalties or legal issues related to non-compliance.
2. Streamlines financial planning: Knowing the implications of TDS on commission helps in better financial planning. It allows you to anticipate the tax deductions and manage your cash flow effectively.
3. Facilitates tax filing: Proper knowledge of TDS on commission simplifies the process of filing income tax returns. You can accurately report the TDS deducted and claim the appropriate credit, reducing your overall tax liability.

Understanding TDS on commission is crucial for ensuring compliance with tax regulations and optimising your financial planning. By knowing the TDS rate, threshold limits, and the process for calculating and deducting TDS, you can effectively manage your finances and avoid any legal issues related to non-compliance.

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