TDS on commission or brokerage under Income Tax
What is Section 194H?
Section 194H of the Income Tax Act, 1961 provides the provisions for deduction of TDS on commission or brokerage income. TDS u/s 194H shall be deducted by the person (other than individual or HUF) who is paying the commission or brokerage to any person. Individual or HUF shall be liable to deduct TDS u/s 194H if their turnover exceeds prescribed limit. In this article, we shall discuss the TDS provisions u/s 194H along with definition of commission or brokerage, manner of deduction of TDS & rate of TDS etc. Further, we will also discuss the cases where TDS is not deductible under section 194H.
What is Commission or Brokerage for section 194H?
Under section 194H, TDS is required to be deducted on payment of commission or brokerage. So, it is very important to understand the meaning of commission or brokerage. For the purpose of section 194H, ‘Commission’ or ‘Brokerage’ includes: -
- any payment received directly or indirectly by a person acting on behalf of other person
- for services rendered (other than professional services); or
- for any services in the course of buying and selling of goods; or
- in relation to any transaction relating to any asset; valuable article or thing, not being securities
In simple terms, commission or brokerage means the payment received by a person who acts as an agent on behalf of any other entity. Further, the services rendered by such agent should be of non-professional nature.
Who is liable to deduct TDS u/s 194H?
TDS on commission or brokerage shall be deducted by: -
- Any person (other than individual or HUF) who is liable to make payment of commission or brokerage to a resident
- Individual or HUF shall be liable to deduct TDS on payment of commission on brokerage only when their turnover or total sales is more than Rs. 1 crore in case of business or gross receipts is more than Rs. 50 Lakhs in case of profession in the immediately preceding financial year.
It means that if the payer is a partnership firm/ LLP/ company/ AOP etc., it shall always be liable to deduct TDS on payment of commission or brokerage on an amount in excess of Rs. 15,000. There is no turnover limit for these entities. But, if the payer is individual or HUF, they shall be liable for TDS deduction if their turnover exceeds the threshold prescribed under section 44AB i.e. Rs. 1 crore/ 50 Lakhs.
When is TDS deducted under section 194H?
TDS u/s 194H shall be deducted at the time of credit of such income to the account of the payee or at the time of payment (in any mode), whichever is earlier.
For example: X credits Rs. 25,000 to the account of Y on 10-01-2021 as commission. Against this, the payment to Y is made Rs. 15,000 on 25-01-2021 & balance on 17-02-2021. In this example, the date of credit in the Y’s account is before date of actual payment. So, X shall deduct TDS on 10-01-2021 and deposit the same by 7th day of next month i.e. 07-02-2021.
It should also be noted that even where commission is credited to any account whether “Suspense account” or any other account, TDS should be deducted.
What is the rate of TDS under section 194H?
- Rate of TDS under section 194H is 5%.
- No surcharge or cess is to be added on the rate of 5%.
- But please note that if PAN number of payee is not available, TDS shall be deducted at 20%.
Owing to Covid-19 pandemic, the government has allowed relaxation in the rates of TDS. Hence, TDS u/s 194H will be deducted @ 3.75% till 31st March, 2021.
When is TDS u/s 194H not required to be deducted?
In the following cases, TDS is not required to be deducted u/s 194H: -
- If the aggregate amount of commission or brokerage during the year does not exceed Rs. 15,000.
- Commission against bank guarantee
- Insurance commission (discussed separately below)
- Commission to employees or employee directors (TDS in this case deductible u/s 192 as salary)
- Commission or brokerage payable by BSNL or MTNL to their public call office franchisees
- The payee has applied for and obtained a certificate from Assessing Officer for deduction of TDS at lower or nil rate u/s 197.
What is the time limit of depositing TDS u/s 194H?
- TDS deducted in the month of April to February is to be deposited on or before 7th day of next month
- However, TDS deducted in the month of March can be deposited by 30th April.
- For example, if TDS is deducted on 28th Feb., it should be deposited by 7th March. But if TDS is deducted on 28th March, it can be deposited till 30th April.
How can the payee obtain certificate for deduction of TDS at nil or lower rate?
If the payee has obtained certificate for deduction of TDS at nil or lower rate, then the payer shall deduct TDS according to such certificate. Section 197 of the Income Tax Act provides the provision for the same. The application for obtaining the certificate shall be made by the payee in Form-13 along with the necessary documents to the jurisdictional Assessing Officer.
The deductor/ payer should validate the certificate for lower or nil deduction given to him by the payee. For this purpose, the deductor will have to login to TRACES portal and verify the certificate by entering 10-digit certificate no., PAN and the financial year.
What is the rate of interest on non-deduction of TDS u/s 194H?
If the deductor/ payer fails to deduct TDS u/s 194H, he shall be liable to pay interest @ 1% per month from the date on which TDS was to be deducted till the date of actual deduction of TDS.
Is TDS u/s 194H applicable on transactions related to securities?
From the definition of commission or brokerage, it is clear that the transactions related to securities are not covered u/s 194H. Thus, Section 194H will not be applicable on the following transactions: -
(a) Brokerage on stock exchange transactions of securities (shares/ debentures)
(b) Brokerage or sub-brokerage on public issue of securities (including underwriting commission)
It should also be noted that securities do not include commodities. Therefore, TDS shall be deducted u/s 194H on brokerage or commission paid for commodities transactions on exchange platform.
Is TDS deduction u/s 194H compulsory for insurance commission?
Section 194H is not applicable to insurance commission. Separate provisions are given u/s 194D for insurance commission. Therefore, TDS on insurance commission shall be deducted u/s 194D instead of section 194H.
Will TDS be deducted u/s 194H on commission paid to employees or directors?
If commission is paid to employees or employee directors, then, TDS will be deducted u/s 192 as salary and not u/s 194H.
Will TDS be deducted on GST component of commission?
In case the payee has raised an invoice for commission and charged GST thereon, TDS shall be deducted only on the basic value of commission or brokerage. No TDS is liable on GST component.
I have paid commission of Rs. 15,500 to Y during the financial year. What is the amount of TDS liable to be deducted?
Since, the amount of commission is more than Rs. 15,500, TDS should be deducted at the applicable rate on the whole amount Rs. 15,500 (15,500 * 5% = 775).
