What is Section 194H of the Income Tax Act? When is TDS Under 194H Deducted?

Section 194H of the Income Tax Act provides details on TDS deduction for commission and brokerage by a resident Indian. A resident individual who pays any type of brokerage or commission is responsible for tax deduction under Section 194H.

 

Let's understand what is Section 194H, when to deduct TDS under this section, exceptions, and more in detail.

What is Section 194H?

Section 194H focuses on income tax deductions on any income in the form of commission or brokerage by an individual liable to pay to a resident. Individuals and HUFs who were covered under Section 44AB must also deduct TDS. From FY 2020-21, an individual or HUF whose turnover exceeds Rs. 1 crore or gross receipts from profession crosses the threshold of Rs. 50 lakh is mandated to deduct TDS.

 

Note: Section 194H does not include the insurance commission mentioned in Section 194D.

When is TDS Under Section 194H Deducted?

According to Section 194H, TDS on commission and brokerage shall be deducted when the payer credits the money to the payee. Irrespective of the payment mode and the type of account, tax deduction at source is done under Section 194H.

What does Commission and Brokerage Mean Under Section 194H?

Commission or brokerage is any payment,

 

• Received or receivable

• Directly or indirectly received

• By a person who is acting on behalf of another person

 

TDS on commission or brokerage under Section 194H includes:

 

• Payment for services rendered (not professional services)

• Payment for any services in the course of buying or selling goods

• Relates to any transaction concerning assets except securities

Exceptions to Commission and Brokerage

Let's explore a few exceptions of commissions and brokerage on which TDS is not deducted under Section 194H.

 

• Commission paid to insurance or loan underwriters

• Payments made by RBI to banking companies

• Any type of brokerage paid on transactions relating to securities listed in the stock exchange

• Payments as an income tax refund

• Any brokerage paid towards the public issue of securities

• Any payment towards financial corporations under the central finance bill

• Payment of Direct Taxes

• Payment towards LIC policies and other investments in cooperative societies

• Interest from NRE account

What is the Rate of TDS?

The Section 194H TDS rate is 5% and no surcharge, education cess, or SHEC shall be included in the said rate. However, if the payee does not provide his PAN, Section 194H TDS shall be deducted at a 20% rate.

When Must TDS Not be Deducted Under Section 194H?

Section 194H of the Income Tax Act provides tax exemptions if the payment amount or aggregate amounts do not exceed Rs. 15,000. They can submit an application to the Assessing Officer under Section 197 for a NIL or lower tax deduction.

What is the Time Limit on Depositing TDS?

If the tax is deducted any time between April to February, the payer must deposit it on or before March 7. However, if the tax is deducted in the month of March, it must be deposited before April 30.

TDS at a Lower Rate

The payee can submit an application to the Assessing Officer under Section 197 for a lower or zero tax deduction. The PAN of the payee can be validated by submitting the 197 certificate. The payee must confirm the stipulated limit for the certificate and ensure his/her income doesn't exceed it. Additionally, they must ascertain that the right certificate number is quoted in the statement while applying for no or lower tax deductions.