Section 194H of Income Tax Act

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Section 194H

Ever earned a commission or brokerage payment and noticed a chunk missing? That's due to Section 194H of the Income Tax Act. This Section plays a crucial role in tax collection for commission and brokerage income. It mandates that any entity responsible for such payments exceeding a specific threshold must withhold a portion of the amount as tax at source (TDS) before disbursing the funds. Let's learn about Section 194H in detail.

What is Section 194H?

Section 194H pertains to the income tax on income earned through brokerage or commission, requiring those responsible for these payments to a resident to deduct TDS. Individuals and Hindu Undivided Families (HUFs) covered under section 44AB must also deduct TDS under this section. Insurance commissions specified in section 194D are excluded. TDS under Section 194H is deducted when the income is credited to the payee's account or any specified account, whether it is labeled as a suspense account or paid in cash, cheque, or demand draft.

Section 194H: Key Points

  • Section 194H ensures a portion of commission/brokerage income is withheld upfront for taxes.
  • The TDS rate is 5%.

What is the Meaning of Commission and Brokerage?

Any payment for services rendered, except for fees charged by professionals like doctors or lawyers is commission or brokerage. It also applies to income earned from acting on someone else's behalf during the purchase or sale of goods, or in transactions involving high-value assets or valuables.

TDS on Commission/Brokerage Under Section 194H

Activities Where TDS Applies

  1. Selling Goods/Services (Excluding Professionals): This includes commissions earned by agents or brokers for selling goods or services on someone else's behalf, except for fees charged by professionals like doctors or lawyers.
  2. High-Value Asset Transactions (Excluding Stocks): Commissions earned from facilitating transactions involving high-value assets like real estate, precious metals, or artwork (excluding securities) are subject to TDS.

Exemptions: When TDS is not deducted on commissions and brokerages

  1. If the total brokerage or commission paid in a financial year is less than or equal to ₹15,000, no TDS is deducted.
  2. Commissions paid by employers to their employees are covered under a different section (192) of the Income Tax Act and are exempt from TDS under Section 194H.
  3. Commissions on insurance and loan underwriting are not subject to TDS.
  4. Individuals with a valid "NIL TDS" certificate issued by an authorized body are exempt from TDS on all services.
  5. Payments made by the Reserve Bank of India (RBI) to banks.
  6. Payments to specific financial corporations under the central government's finance bill.
  7. Interest income from Non-Resident (External) accounts (NRE accounts).
  8. Brokerage or commission for public issue of securities.
  9. Interest income from various saving schemes with banks and post offices.
  10. Charges incurred for warehouse services.
  11. Commissions paid by public sector telecom companies (BSNL/MTNL) to their public call office franchisees.
  12. Commissions imposed on transactions using credit cards or debit cards between acquiring banks and merchant organizations are not subject to TDS under Section 194H (may be covered under other sections).

When is TDS Deducted under Section 194H?

The Income Tax Act mandates Tax Deducted at Source (TDS) whenever income related to brokerage or commission is credited to a payee's account (including suspense accounts) or paid out in cash, cheque, or demand draft.

TDS Deposit Deadlines

Generally, the deducted TDS amount must be deposited with the Income Tax Department by the 7th of the following month. For example, June's TDS needs to be deposited by July 7th. However, for March, the deadline is the 30th of April.

TDS Rate

The current rate for TDS under Section 194H is 5%. Important: If the payee fails to provide their PAN (Permanent Account Number), the TDS rate jumps to 20%. This prescribed rate is inclusive of all taxes, so no additional health and education cess is required.

How to get Lower/NIL TDS Rate for Commission/Brokerage?

Individuals earning commission or brokerage can seek a lower or NIL TDS rate from the assessing officer by filing Form 197. The form requires validation of:

  1. Valid PAN details on the certificate (Form 197),
  2. Correct financial year, sections, and applicable rate mentioned,
  3. Quarterly income stays within the certified limit;
  4. Accurate certificate number

Information Required in Form 197

  1. Assessee (applicant) details: name, address, PAN
  2. Income details: Past three years' income, current year's projected income
  3. Tax payments: Past 3 years' tax payments, current year's tax payments (if any)

Important Points to Consider in Section 194H

  1. Applicable To: Individuals, firms, companies, or entities making commission or brokerage payments to residents.
  2. Payment Type: TDS applies to commission or brokerage payments.
  3. Threshold: TDS is required if the annual payment exceeds ₹15,000. Below this threshold, no TDS is needed.
  4. Rate: TDS is deducted at 5%, subject to current tax laws.
  5. Deduction Timing: TDS must be deducted when the payment is credited or paid, whichever is earlier. The deducted amount must be deposited by the specified deadlines.
  6. TDS Certificate: Issuance of Form 16A is required, providing details of the TDS deduction for the payee's tax filings.
  7. TDS Return: A quarterly TDS return (Form 26Q) must be filed, detailing deductions and deposits.
  8. Form 15G/15H: Payees with income below the taxable limit can submit Form 15G or Form 15H to avoid TDS, subject to conditions.
  9. PAN Requirement: The payee's PAN must be correctly quoted; failure to do so results in higher TDS deductions.
  10. Compliance: Timely TDS deduction and deposit are essential to avoid penalties and interest charges.