Fundamentally, commission or brokerage can be described as the payment received by an individual/agent who acts on behalf of another entity. In other words, it is a payment that is meted out for rendering non-professional services or during the sale or purchase of any goods. It also includes transactions related to any valuable things, articles or assets other than securities.
Since commission or brokerage serves as a source of income, it is liable for TDS under Section 194H of Income Tax Act in India. To account for the tax deduction and streamline the filing process, individuals who pay or generate income in the form of commission or brokerage must find out about TDS on commission in detail. This will be immensely useful and help to track and streamline the process of TDS deductions.
What is Section 194H?
Section 194H of Income Tax Act deals with the taxes that are imposed on the earnings generated through commission or brokerage. Ideally, individuals and HUFs are deemed liable to pay taxes on such earnings.
The said Act makes it mandatory for authorised entities, who are neither an individual nor a HUF, to deduct TDS while paying brokerage or commission at the rate of 5%. However, such a provision comes into force when the total earnings are more than Rs. 15000 in a given year.
Notably, from 14th May 2020, the rate of TDS on commission has been lowered to 3.75% until 31st March 2021. Ideally, the amount collected as TDS is deposited with the government. Also, entities involved with the deduction have to furnish the TAN of the deductor and PAN of the deductee.
Who can Deduct TDS under Section 194H?
Individuals who are responsible for paying brokerage or commission to a resident individual are required to deduct TDS while crediting commission to the account of the payee.
Nevertheless, HUFs and individuals are also liable to pay TDS in case they audit their tax accounts as per Section 44AB. Such a provision states that if HUFs and individual’s receipt is more than Rs. 50 lakh or business turnover exceeds Rs. 1 crore, they are liable to deduct TDS.
When it comes to calculating TDS on commission and brokerage, entities entrusted with the task cannot deduct educational cess or surcharge. Notably, insurance commission does not come under Section 194H and is referred to under Section 194D.
TDS Rate on Commission and Brokerage
In the fiscal year 2020-2021, the 194H TDS rate is 3.5%. However, in case the payee fails to furnish PAN, the rate of TDS on brokerage and commission is 20%.
Notably, neither additional surcharge nor education cess is imposed on the actual TDS rate. Entities can deduct TDS on commission and brokerage at a rate that is fixed by the government in an annual budget.
Besides having an idea about the current Section 194H TDS limit, it is essential to be alert about the due date of deduction at all times.
When is TDS Deducted under Section 194H?
Entities can deduct TDS under Section 194 in these following circumstances –
- When the amount of commission or brokerage is credited to the payee’s account.
- When brokerage or commission is paid to the payee’s account through cash, demand draft or cheque.
Generally, when TDS is deducted from April to February, it is deposited either on or before the 7th of the following month. For instance, suppose TDS on brokerage is deducted on 15th April. In such a case, it has to be deposited either before or on 7th May.
Provisions for Nil Tax or Lower TDS under Section 194H
As per Section 197 of ITA, entities can claim a lower rate or a NIL tax of TDS certificate from Income Tax Department. However, one can avail such a certificate if the amount of TDS deducted is more than the total income tax liability in a given fiscal year.
One must note that to claim nil tax or lower TDS rate, entities need to file Form 13 and submit it to the Assessing Officer either manually or online. Once the Assessing Officer is satisfied with the form, the application is processed, and the required certificate is issued.
Nonetheless, one has to submit these documents along with Form 13 to avail the certificate –
- Assessment orders (copies) of the last 3 financial years.
- PAN card.
- Financial statement and audit report of the last 3 fiscal years.
- Income statement for the last 3 fiscal years and projection of earnings of the current fiscal year.
- Income tax returns (copies), acknowledgement and enclosures of the last 3 fiscal years.
- TDS account number of the paying parties.
- E-TDS returns of the last 2 fiscal years.
Besides lower TDS rate, individuals should find out about the exemptions that are available on TDS under Section 194H, to make the most of them accordingly.
Exemption on TDS on Brokerage
These pointers below highlight the exemptions under Section 194H –
- When the amount of brokerage or commission is less than Rs. 15000 in a given fiscal year.
- In a situation, where employers pay commissions to employees, TDS is deducted under the provision of Section 192.
- Service tax deducted at source is not included in Section 194H.
- Commission accrued on insurance income is exempt from TDS. Also, commission paid to loan underwriters is excluded from TDS on commission.
- Individuals who have obtained lower TDS or Nil TDS certificate from an authorised body.
- Payments made towards Financial Corporation under the purview of the central finance bill.
- Charges levied for providing warehouse services are also exempt from TDS.
- Interest accrued from NRE account.
- Payouts made by the Reserve Bank of India to banking institutions.
- Income generated on interest accrued on a savings account, recurring deposits, NSC, Kisan Vikas Patra, Indra Vikas Patra, etc.
- Brokerage paid for the issuance of securities to the public.
Other than these, the commission levied on debit or credit card for a transaction between an acquirer bank, and a merchant establishment does not come under Section 194H of Income Tax Act.
Things to Remember about TDS on Commission and Brokerage
Entities must keep these pointers about Section 194H of Income Tax Act –
- If the commission or brokerage comes under the purview of GST, TDS is deducted on its primary value and is exclusive of the GST component.
- Tax is deducted at source if the aggregate earnings are more than Rs. 15000.
- Even when the agent manages to retain commission amount while setting payment, the tax deducted at sources will be deposited to the government.
- When a deduction is made either on behalf or by the government, it is deposited on the same day itself.
In a nutshell, entities who generate income from commission or brokerage have to pay TDS under Section 194H of Income Tax Act. Since there are several provisions under this section that emphasise on the accompanying exemptions and tax limitations, entities must become aware of them. It will help them track the deductions better and further allow them to make necessary arrangements to lower the TDS rate in general.