Section 194H of the Income Tax Act

Tax Deducted at Source (TDS) is a major component of the indirect taxation system in India. Since TDS allows the government to deduct tax at the source, or at the time of payout, it has helped in checking tax evasion. 

 

TDS is deducted from various sources of income as mandated by Section 194 of the Income Tax Act of 1961. Section 194H of the Act, in particular, lays guidelines about the tax deductions that need to be paid on brokerage and commission earnings.  

 

Read on to know more about the TDS you have to pay on brokerages and commissions under Section 194H of the Income Tax Act.

How are Brokerage and Commission Defined Under the Income Tax Act?

To have a clear understanding of Section 194H of the Income Tax Act, 1961, you must be aware of what constitutes brokerages and commissions. Under this section, the following payments are considered as brokerage and commission:

  • Payment made for services to buy or sell goods

  • A transaction for valuable assets, items, or articles other than securities

 

A payment is considered commission and brokerage when it is: 

  • Received or receivable

  • Directly or indirectly

  • By a person on behalf of another person

 

Section 194H also provides that the services received do not include professional services, like:

  • Legal services

  • Accountancy services

  • Technical support

What is Section 194H of the Income Tax Act of 1961?

Section 194H of the Income Tax Act outlines provisions related to TDS that you need to pay on earnings from brokerage and commission. 

 

This section is applicable to individuals and Hindu Undivided Families (HUFs) who are required to get their accounts audited under Section 44AB. However, the provisions under this section are restricted to certain conditions. 

 

For instance, the commission earned on insurance cover is not included in the TDS deduction.

What is the Rate of TDS Under Section 194H?

Under Section 194H, TDS has to be paid only by individuals and HUFs whose annual income exceeds the amount of ₹15,000. Moreover, under 194H, the rate of TDS has been pegged at 5%. This rate includes no surcharges, educational cess, or SHEC. It is important to note that if you fail to furnish PAN, the 194H TDS rate will be 20%.

What are the Exemptions Available Under Section 194H?

You enjoy TDS exemption on certain cases under Section 194H of the Income Tax Act. The exemptions are listed below:

  • When the brokerage or commission is less than ₹15,000

  • 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 the NRE account

When Should You Pay TDS Under Section 194H of the Income Tax Act?

The deposit window for TDS deductions is open from April to February every financial year. If you wish to deposit the TDS amount for the previous month, you can do so on the 7th day of the month.   

 

Considering that the TDS on commission is deducted on May 15, you may need to deposit the amount before June 7. However, if the government deducts TDS, that amount has to be deposited on the same day.

How Can You Claim Nil or Lower TDS on Brokerages and Commissions?

You can claim lower or nil tax deductions if the deducted amount is higher than the income tax that you are liable to pay. Under Section 194H, you can claim a lower deduction in such a case for that financial year.

 

However, to apply for the same, you will have to file Form 13 on the Income Tax portal. When filing Form 13 to claim lower deductions on brokerage and commission, you will be required to submit the following documents:

  • Your name and address 

  • PAN card details

  • The purpose for which you received the brokerage or commission

  • Income-related details for the past three years

  • Expected income in the current fiscal year

  • Tax payments completed in the past three years

  • Tax payments completed in the current fiscal year

What Should You Consider Before Paying for TDS on Brokerage and Commission?

You must consider the following before filing TDS on brokerage and commission under Section 194H:

  • The TDS is deducted at a rate fixed by the central government in the Union Budget. So, this rate is liable to change if the government amends the Finance Bill. 

  • You must have PAN and TAN-related details in order to deposit TDS on the Income Tax portal.

 

In conclusion, Section 194H of the Income Tax Act provides guidelines for the tax deduction at source (TDS) on brokerage and commission. TDS is payable by the individuals and HUFs on their earnings from brokerage and commission to the resident.

 

To deposit TDS, they are required to make payments at the Income Tax portal before the 7th of every month. Moreover, if you want to claim lower deductions, you can do so by filing Form 13 on the same portal.

Frequently Asked Questions on Section 194H of the Income Tax Act

Section 194H mandates individuals and Hindu Undivided Families (HUFs) to pay the tax deduction at source (TDS) on commission and brokerage.

The rate of TDS on brokerage and commission is 5% without any surcharge, educational or health cess. However, if you cannot furnish PAN, the TDS rate will be 20% of the amount of the transaction.

Under Section 194H, the TDS limit for deduction is ₹15,000 for individuals and Hindu Undivided Families (HUFs).

To make TDS payment for brokerage and commission under Section 194H, you need to file ITR-4.

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