In this article, we’re going to explore Section 194H of the Income Tax Act in India. We will understand what it means, when you should deduct TDS under Section 194H, the rate for this deduction, and how the Act classifies commission and brokerage.
What is Section 194H of the Income Tax Act?
Section 194H of the Income Tax Act, 1961, deals with Tax Deducted at Source (TDS) on payments made for commission or brokerage. This provision ensures that the recipient of this commission pays some tax upfront on their earnings, reducing the burden of paying a large sum later.
Any taxpayer who pays these commissions or brokerages must deduct TDS on the amount being paid. This is only done if the value of the entire amount exceeds ₹15,000.
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Defining commissions and brokerages
Under Section 194H, commission refers to any payment, direct or indirect, received by a resident for acting as an intermediary in a transaction.
This includes situations where the resident facilitates a sale, purchase, or other deal and earns compensation for their role in bringing the parties together and completing the agreement.
Brokerage is similar to commissions. It encompasses any payment received by a resident for acting as a middleman in a transaction. The resident facilitates the deal but doesn’t take ownership of the goods or services involved. Their primary function is to connect both parties and ensure a smooth transaction.
The focus of Section 194H lies on resident intermediaries who receive income for facilitating transactions. The nature of these transactions can vary, including sales and purchases of goods, services, or securities.
Professional service fees, such as those charged by lawyers or chartered accountants, typically fall outside the scope of this section.
When do such deductions take place?
Here are the situations in which these deductions can be made under Section 194H:
- The amount exceeds ₹15,000 in a financial year.
- These deductions do not take place for an individual or an HUF.
- However, section 194H does cover individuals or HUFs covered under presumptive taxation under Section 44AB. If such an entity is covered under 44AB during the financial year immediately before the financial year in which such commissions or brokerages are paid, then Section 194H is applicable.
- This section does not include commissions paid for insurance. These should be deducted as per rules laid out under Section 194D.
TDS rate for deductions under Section 194H
The general rate of TDS deduction under Section 194H is 5%. However, if the payee (recipient) fails to provide their Permanent Account Number (PAN), the TDS rate is increased to 20% as a penalty.
The corresponding TDS needs to be deducted at the time of crediting the commission or brokerage amount to the payee’s account.
The deductor, which in this case is you, has to issue a TDS certificate (which is Form 16A) to the payee. The certificate reflects the details of the TDS deducted, including the amount, PAN details, and challan number for tax deposit.
Frequently Asked Questions
What happens if I forget to deduct TDS on commission or brokerage payments?
If you, as the payer, neglect to deduct TDS under Section 194H, you’ll be liable to pay the tax yourself. This can be financially disadvantageous compared to deducting it at source. You might also face penalties for non-compliance with tax regulations.
Can I claim any credit for TDS deducted on commission or brokerage income?
Yes, the recipient of the commission or brokerage income (payee) can claim credit for the TDS deducted while filing their income tax return. The TDS certificate (Form 16A) issued by the deductor plays a crucial role in claiming this credit.
Are there any specific record-keeping requirements for TDS deducted under Section 194H?
The deductor is required to maintain certain records for TDS deducted under Section 194H. These records should include details of the payee (name, PAN), amount of commission or brokerage paid, TDS deducted, and challan number for tax deposit. These records are essential for future reference and potential audits by the Income Tax Department.
What if the payee disputes the applicability of TDS under Section 194H?
If the payee believes TDS shouldn’t have been deducted on their commission or brokerage income, they can approach the deductor to discuss the situation. In some cases, the deductor can rectify the mistake by issuing a revised TDS certificate reflecting no TDS deduction. However, if the dispute persists, the payee can seek resolution through appropriate channels as outlined by the Income Tax Department.
I’m a small business owner and occasionally pay commissions to salespeople. Do I need to register for TDS?
There’s no specific registration requirement solely for deducting TDS under Section 194H. However, if your business is liable to deduct TDS on various payments throughout the year (including salaries, rent, etc.), you’ll need to register for TDS with the Income Tax Department. This registration process typically involves obtaining a TAN (Tax Deduction and Collection Account Number).
