Introduction:

Section 194H of the Income Tax Act includes tax deduction at source  on commission or brokerage payments. This provision applies to any person or entity paying a commission or brokerage fee to a resident. It outlines the prescribed rate for TDS deduction and delineates the procedures for filing returns and obtaining refunds.

The category applies to a wide range of businesses and individuals who make payments to others for sales or other services. This includes commission or brokerage fees paid to agents, brokers, dealers or other intermediaries involved in  sale or purchase of goods or services.

Section 194H:

Section 194H applies to deduction of income tax on any income received by way of commission or brokerage from any entity responsible for making payments to a resident. Individuals and Hindu Undivided Families (HUFs) covered under Section 44AB are also required to deduct TDS. Further, from FY 2020-21, TDS deduction is required for individuals and HUFs whose business income exceeds Rs 1 crore from income or business exceeds Rs 50 lakh. It is to be noted that section 194H does not include the insurance commission set out in section 194D.

Applicability of Section 194H:

The section encompasses a diverse array of businesses and individuals who remunerate others for sales or services rendered. This encompasses the disbursement of commission or brokerage to agents, brokers, dealers, or other intermediaries engaged in facilitating the sale or purchase of goods or services.

Meaning of the commission and brokerage:

To have a detailed understanding of section 194H, it is important to know what is a commission or brokerage. Commission or brokerage includes any income earned directly or indirectly as a result of acting on behalf of another. This includes premiums for valuable assets.

• The following transactions are included in the tax deduction for commissions or brokerage.
• Any services are covered except professional services.
• Services received during transactions related to valuable assets, excluding securities, are included.
• Services obtained regarding the purchase or sale of goods are included.

Who Qualifies for TDS Deduction under Section 194H:

• The brokerage or persons responsible for paying commission to a resident are entitled to deduct TDS when the commission is credited to the account of the payee.
• However, Hindu Undivided Family (HUF) and individuals also have to pay TDS if their tax returns are audited under Section 44AB. According to this provision if any HUF or individual receiving more than Rs. 50 lakhs or their business income exceeds Rs. 1 crore, TDS is required to be deducted.
• The management agencies cannot include education cess or surcharge in computing TDS for commission limit and brokerage. It is important to note that the Insurance Commission has not followed section 194H but has dealt with it in section 194D.
• Tax can be deducted under Section 194H when the amount is credited to the payee’s account or any other designated account. These payments qualify for tax deduction even when commission is disbursed into a suspense account.

Rate of TDS under 194H:

The TDS rate is 5%, excluding transactions between May 14, 2020 and March 31, 2021, where it was 3.75%. No additional fees, education cess or SHEC will be applied to this rate, resulting in a tax deduction on the basic rate. However, if the deductor does not furnish PAN, the TDS rate will be 20% in all cases.

Exemption on TDS deduction:

• The employer pays the employee by way of commission, a matter governed by Section 192 of the Income Tax Act.
• Individuals holding NIL TDS certificate from an authorized body are exempt from TDS in all transactions.
• Paying financial corporations under the purview of central finance.
• When the brokerage or commission amount is less than Rs. 15,000 in a financial year.
• The Reserve Bank of India (RBI) makes payments to any bank.
• Brokerage or commission fees for securities offered to the public.
• Commissions received on credit or debit card transactions between the receiving bank and the business organization.
• Any commission or brokerage fee paid by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to its public call center franchisee.

Time limit:

Tax deductions between April and February must be filed by the 7th of the following month. Tax deductions for March must be filed by April 30.

Things to Remember :

• Organizations should pay attention to the following key points regarding Section 194H of the Income Tax Act.
• If  commission or brokerage comes under the purview of GST, TDS is deducted from the basic price excluding the GST component.
• Tax is deducted at source if the aggregate earnings exceed Rs. 15,000.
• Even if the agent retains the commission amount when determining the amount to be paid, the tax withheld at source will be credited to the government.
• If TDS is deducted on behalf of or by the government, it is deposited on the same day.

Final Conclusion:

In conclusion, section 194H stands as an important provision in the Income Tax Act, where tax is levied at the time of payment of commission and brokerage payments to payers it is important to understand and comply with the provisions of this section TDS deduction and filing responsibly to avoid possible penalty or interest.