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Understanding taxes can be tricky, especially when it comes to rules about Tax Deducted at Source (TDS). One important rule is Section 194H – TDS on Commission and Brokerage. This guide will explain everything you need to know about this section in simple and easy language. Whether you own a business, work in finance, or just want to know more about your taxes, this article will help you.
Taxes are a part of our lives, and knowing how they work can save us from a lot of trouble. TDS, or Tax Deducted at Source, is a method by which the government collects taxes from the very source of income. When it comes to commission and brokerage, Section 194H of the Income Tax Act comes into play. This article aims to make the complex rules of Section 194H understandable, so you can manage your taxes better.
Understanding Section 194H
Section 194H is about TDS on income from commission or brokerage paid to a resident person. Let’s break down what this means:
- Who it applies to: Anyone paying commission or brokerage to a resident, except for individuals and Hindu Undivided Families (HUFs) with small turnovers.
- When it started: Since the financial year 2020-21, even individuals and HUFs with business turnover above ₹1 crore or professional receipts above ₹50 lakh must deduct TDS.
- What it excludes: Insurance commission is not included (that’s covered under Section 194D).
What is Section 194H?
Section 194H requires any person who is responsible for paying a resident any income by way of commission or brokerage to deduct TDS. The deduction must be made when the payment is made or credited to the recipient’s account, whichever is earlier.
Why is Section 194H Important?
This section ensures that the government gets its share of taxes from commissions and brokerages. By making the payer deduct TDS, it reduces the chances of tax evasion. It’s crucial for businesses that deal with intermediaries to be aware of this section to comply with tax laws.
When Does TDS Under Section 194H Need to be Deducted?
TDS under Section 194H must be deducted when the income is credited to the payee’s account or when it is paid, whichever comes first. This means if you pay in cash, by cheque, or any other way, you must deduct TDS at the time of credit or payment.
Timing of TDS Deduction
TDS must be deducted at the time of crediting the commission or brokerage to the recipient’s account, or at the time of payment, whichever is earlier. This ensures that the tax is collected as soon as the income is earned.
Example Scenario
Imagine you run a business and pay a commission to an agent on April 15. You credit this amount to the agent’s account on April 20. In this case, you must deduct TDS on April 15, the earlier of the two dates.
Meaning of Commission and Brokerage
Commission and brokerage under Section 194H include payments received or receivable directly or indirectly for:
- Services provided (but not professional services).
- Buying or selling goods.
- Any transaction involving any asset, valuable article, or thing, except securities.
This broad definition ensures various types of intermediary payments fall under this section.
Detailed Explanation
- Commission: This refers to payments made for services rendered by an agent on behalf of another party. It includes situations where an agent helps in selling goods or providing services.
- Brokerage: This typically involves arranging deals between buyers and sellers, or facilitating transactions.
Examples of Commission and Brokerage
- Sales Commission: If a salesperson helps in selling products and earns a commission on each sale.
- Brokerage Fees: If a real estate broker helps in buying or selling property and earns a fee for their services.
Exemptions Under Section 194H
Certain situations do not require TDS deduction under Section 194H:
- Payments below ₹15,000 in a financial year.
- Commission paid to employees (covered under Section 192).
- Commission on insurance and loan underwriting.
- Payments to holders of NIL TDS certificates from authorized bodies.
- Payments by TV channels/newspapers to advertising agencies.
- Turnover commission by RBI to Agency Banks.
- Payments to public call office franchisees by BSNL/MTNL.
- Payments by mobile service providers to their franchisees/distributors (as per Supreme Court ruling).
Detailed List of Exemptions
- Small Payments: No TDS if the total commission or brokerage does not exceed ₹15,000 in a financial year.
- Employee Commission: Commission paid to employees is taxed under Section 192, not 194H.
- Insurance and Loan Underwriting: These specific commissions are not covered under Section 194H.
- NIL TDS Certificate: If the recipient has a certificate authorizing NIL TDS deduction.
- Advertising Agencies: Payments by media houses to advertising agencies.
- RBI Turnover Commission: Commissions paid by RBI to its agency banks.
- Public Call Office Franchisees: Payments made by telecom companies to their franchisees.
- Mobile Service Providers: As per a Supreme Court ruling, payments to mobile service franchisees are exempt.
Example Scenarios
- Payment Below ₹15,000: If a commission of ₹10,000 is paid to an agent, no TDS is required.
- Employee Commission: If an employee earns a commission as part of their salary, it’s covered under Section 192, not 194H.
Rate of TDS
The current rate of TDS under Section 194H is 5%. However, if the person receiving the payment does not provide their PAN, the rate goes up to 20%. No additional surcharges or education cess is added to these rates.
Detailed Breakdown of Rates
- Standard Rate: 5% of the commission or brokerage amount.
- No PAN Rate: 20% if the recipient does not provide their PAN.
Example Calculation
If you pay a commission of ₹50,000 to an agent:
- With PAN: 5% of ₹50,000 = ₹2,500 TDS.
- Without PAN: 20% of ₹50,000 = ₹10,000 TDS.
When TDS Under Section 194H is Not Deductible
TDS is not required if:
- The total commission or brokerage in a financial year is less than ₹15,000.
- The person receiving the payment has a certificate from the assessing officer for NIL or lower TDS deduction.
Detailed Explanations
- Small Payments: TDS is not required if the total payment in a financial year does not exceed ₹15,000.
- NIL TDS Certificate: If the recipient has a certificate from the assessing officer allowing NIL or reduced TDS, you must comply with that certificate.
Example Scenarios
- Small Payments: If you pay an agent ₹14,000 in a year, no TDS is required.
- NIL TDS Certificate: If an agent provides a valid NIL TDS certificate, you don’t deduct TDS.
Time Limit for Depositing TDS
It’s important to deposit TDS on time. Here are the deadlines:
- For TDS deducted from April to February: On or before the 7th of the next month.
- For TDS deducted in March: On or before the 30th of April.
Detailed Timeline
- Monthly Deposits: TDS deducted from April to February must be deposited by the 7th of the next month.
- March Deposits: TDS deducted in March must be deposited by the 30th of April.
Example Timeline
- April TDS: Deducted on April 25, must be deposited by May 7.
- March TDS: Deducted on March 15, must be deposited by April 30.
TDS at a Lower Rate
If you want a lower TDS rate, you can apply under Section 197. Here’s what you need to do:
- Check the PAN of the person receiving the payment.
- Make sure the certificate is valid for the correct financial year and section.
- Ensure the certificate’s limit hasn’t been exceeded in previous quarters.
- Use the correct certificate number in your statement.
Steps to Apply for Lower TDS Rate
- Application: The recipient must apply to the assessing officer using Form 13.
- Approval: If approved, the assessing officer will issue a certificate specifying the lower TDS rate.
- Verification: The payer must verify the certificate’s validity and ensure it covers the payment.
Example Scenario
An agent applies for a lower TDS rate and gets approval for a 2% rate instead of 5%. You must verify the certificate and deduct TDS at 2% for payments to this agent.
Important Points to Remember
- TDS is deducted on the main value of commission or brokerage, not including GST.
- TDS is applicable if total earnings are more than ₹15,000.
- Even if the agent keeps the commission amount, TDS must be deposited.
- TDS deductions by the government are deposited on the same day.
Key Details
- Main Value: TDS is deducted on the commission amount excluding GST.
- Threshold: TDS applies if total payments exceed ₹15,000 in a financial year.
- Agent’s Responsibility: Even if the agent retains the commission, you must deduct and deposit TDS.
- Government Deposits: For government payments, TDS is deposited the same day.
Example Scenarios
- GST Exclusion: If you pay ₹1,00,000 commission plus 18% GST, TDS is deducted on ₹1,00,000, not ₹1,18,000.
- Threshold: If you pay an agent ₹16,000 in total commissions in a year, TDS must be deducted.
Frequently Asked Questions (FAQ)
Is TDS under Section 194H applicable to discounted airline tickets issued to travel agents?
No, such transactions are treated as discounts, not commissions.
Are trade incentives given to dealers subject to TDS under Section 194H?
Yes, if the incentives are like commissions.
Is TDS deductible on turnover commission payable by RBI to Agency Banks?
No, TDS under Section 194H does not apply to turnover commission by RBI to Agency Banks.
When should TDS be deducted under Section 194H?
TDS should be deducted when the income is credited to the payee’s account or when it is paid, whichever comes first.
What is the rate of TDS under Section 194H?
The standard rate is 5%, but if PAN is not provided, the rate is 20%.
What happens if TDS is deducted but not deposited?
Interest at 1.5% per month (or part thereof) is payable from the date the tax was deductible until it is deposited.
Can expenses be deducted from commission income?
Yes, you can deduct all expenses from your commission income when filing your income tax return.
How to get a lower TDS rate under Section 194H?
Apply to the assessing officer with Form 13, get approval, and verify the certificate before deducting TDS at the lower rate.
What if the agent does not provide a PAN?
You must deduct TDS at 20% if the agent does not provide a PAN.
Are there any exceptions to the rule?
Yes, certain payments like insurance commissions and those covered by specific certificates are exempt.
Summary and Call to Action
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