Section 194H of the Income Tax Act deals with the deduction of taxes at the source (TDS) on commission or brokerage payments. This means that if you pay commission or brokerage to someone, you may need to deduct TDS before making the payment. Let’s delve into the details of Section 194H in simpler terms.
What is Section 194H of the Income Tax Act?
Section 194H requires entities, except individuals and Hindu Undivided Families (HUFs), to deduct TDS at a rate of 5% on commission or brokerage payments exceeding Rs. 15,000 in a year. However, during a specified period due to the COVID-19 pandemic, the TDS rate was reduced to 3.75%. This section also applies to individuals and HUFs whose accounts need auditing under section 44AB of the Income Tax Act.
Meaning of Commission and Brokerage Received
Commission or brokerage is the payment received by a person for assisting in a transaction or providing services. It includes services related to buying or selling products and deals involving valuable items or assets.
Inclusions of TDS on Commission or Brokerage
TDS is applicable on various services involving commission or brokerage, excluding professional services and transactions related to securities.
When you engage someone to facilitate a transaction, such as buying or selling goods, or providing services like advertising or consulting, you may need to pay them a commission or brokerage fee. In such cases, if the payment exceeds Rs. 15,000 in a year, you are required to deduct TDS at the rate of 5% (or 3.75% during the specified period due to the pandemic) before making the payment.
Exemptions of TDS on Commission or Brokerage
Certain payments are exempt from TDS under Section 194H, such as payments made by RBI, commissions paid to underwriters, and brokerage fees related to securities transactions.
It’s important to note that not all commission or brokerage payments are subject to TDS. Some payments are exempt from TDS under Section 194H. For example, if the payment is made by the Reserve Bank of India (RBI) or if it is a commission paid to underwriters, then TDS is not applicable. Similarly, brokerage fees related to securities transactions are also exempt from TDS under this section.
Tax Rate and Time Limit for Deduction under Section 194H
The standard TDS rate under Section 194H is 5%, or 3.75% during the specified period due to the pandemic. TDS must be deposited with the Income Tax Department by the 7th of the following month.
When you deduct TDS from commission or brokerage payments, you need to do so at the prescribed rate, which is currently 5% (or 3.75% during the specified period). After deducting the TDS amount, you are required to deposit it with the Income Tax Department by the 7th of the following month.
When TDS is Deducted under Section 194H?
TDS is deducted when commission or brokerage income is credited to the payee’s account, irrespective of whether the payment is made in cash, by cheque, or by draft.
TDS is deducted at the time when the commission or brokerage income is credited to the payee’s account, regardless of the mode of payment. Whether the payment is made in cash, by cheque, or by draft, if the income is credited to the payee’s account, TDS needs to be deducted at that time.
When TDS is Not Deductible under Section 194H?
TDS is not deductible if the total commission or brokerage income in a financial year is below Rs. 15,000 or if the deductee applies for a reduced or NIL TDS rate under section 197.
If the total commission or brokerage income in a financial year is below Rs. 15,000, then TDS is not deductible under Section 194H. Additionally, if the deductee applies for a reduced or NIL TDS rate under section 197 and obtains the necessary certification, then TDS may not be deductible.
TDS at a Lower Rate
Deductees can apply for a reduced or NIL TDS rate by submitting Form 197 to the assessing officer. The application should include details such as the assesses’ name, address, PAN, income for the current and previous years, and tax payments made.
If the deductee believes that they are eligible for a reduced or NIL TDS rate, they can apply for it by submitting Form 197 to the assessing officer. This form should contain details such as the assesses’ name, address, PAN, income for the current and previous years, and details of tax payments made. Upon verification, the assessing officer may approve the application and provide the necessary certification.
Conclusion
Understanding Section 194H is essential for both payers and recipients of commission or brokerage income. Compliance with TDS regulations, deposit deadlines, and eligibility criteria for reduced TDS rates or exemptions is crucial to avoid penalties and ensure smooth transactions. It’s advisable to seek professional guidance to ensure compliance with the provisions of the Income Tax Act.
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