Section 194H of the Income Tax Act underlines the provision for a tax deduction on earnings as the commission or brokerage by a resident individual. The section, however, excludes the commission earned through insurance sales. A resident individual or the member of Hindu Undivided Family, who is liable to pay any type of commission or brokerage (excluding the insurance commission) is liable for tax deduction under the section 194H. The TDS should be deducted at the time of payment in cash or by cheque or draft. The current TDS rate applicable under section 1194H is at 10%.
TDS on Commission /Brokerage
- TDS on commission or brokerage is to be deducted by all types of entities including individual & HUF who falls under the ambit of tax audit U/S 44AB i.e. their turnover or annual income exceeds 25 lakh and goes up to 1 crore (as applicable according to the income tax slab).
- No extra surcharge or education cess is required to be levied over & above the TDS amount at a specified rate. Hence, the TDS is deducted at a flat rate of 10%, inclusive of service (if applicable).
- The TDS amount deducted under the section 194H is required to be deposited with the government prior the due date of the payment by the entity which is responsible for deducting TDS. While depositing the TDS, the TAN and PAN number of both entities is required.
Definition of Commission /Brokerage
Commission or brokerage for the purpose of TDS deduction shall mean “any such payment received or receivable, directly or indirectly either by the person himself or on the behalf of another person for services provided (except any professional/ legal service)”. This includes any transaction pertaining to valuable goods, asset or articles. However, there are some general exceptions on few type of commission on which no TDS i.e. the provisions of section 194H is applicable.
- Commission or brokerage paid to loan/insurance underwriters.
- Brokerage / sub-brokerage paid towards the public issue of securities.
- Brokerage paid on the transaction of securities on any listed stock exchanges.
- Any resident individual earning any sort of income as commission or brokerage is liable to pay TDS @ 5%.
- Any individual or Hindu Undivided Family who is covered under the aspects of section 44AB of Income Tax Act is also covered under the scope of this section.
- The TDS deducted under Section 194H should be in the form of cash/cheque/draft at the time of payment of such income to the payee.
- The Commission or the brokerage shall include any payment received directly or indirectly by the person or someone else on the behalf of another person.
- The TDS on such commission or brokerage can be towards any of the below mentioned nature:
- Any services provided except professional services
- Towards services in terms of buying or selling any goods or articles
- Any payment in regards to the transaction pertaining to sale/purchase or transfer of any immovable asset, valuable goods or article (except securities)
- The Section 194H does not imply for insurance commission as denoted.
- The Tax has to be deducted at the time of payment disbursement or the credit into the recipient's account
- For cases where the payment is being credited to any sundry or suspense account or any other account, the same would be treated at par with income credit and the applicable TDS shall be deducted prior credit of the commission or brokerage
To have a better understanding of section 194H, it is important to have an overview of section 44AB as well. Any individual or HUF who is entitled to have their books of account audited as per the provision of section 44AB are supposed to fall under the purview of section 194H also. In other words, any individual or HUF having an annual turnover/ income of Rs.25 lakhs – 1 crore (according to the tax slab) are also liable for TDS deduction under section 194H.
Section 44AB is applicable for:
- A person who is carrying any business activity and his total sales volume is more than 1 crore (as per the revised limit w.e.f. 2012)
- A person involved in any professional or legal service on his name and his annual income exceeding Rs.50 lakhs in a financial year
- A person or entity carrying any other business activity as enlisted under section 44AD, 44ADA, 44AE, 44AF, 44BB or 44BBB and declares that their annual income for the previous financial year is lower than the deemed gain or profit.
- As per the current Union Budget, the TDS applicable under section 194H has been reduced to 5% for the financial year 2016-17. The erstwhile rate was 10%.
- The rate is applicable as flat structure, which means no surcharge or education cess or secondary & higher education cess is applicable over & above the TDS rate.
- However if the PAN is not provided by the deductee, the TDS would be applicable @ 20% of the commission amount.
- No tax will be deducted under the section, in case the one-time amount or the sum of amounts towards such commission or brokerage doesn’t exceed Rs 5,000 in a financial year.
- The person or organization has already obtained Nil TDS or Lower TDS certificate under the section 197 to the assessing officer.
- As per the provisions for nil TDS or lower rate under the section 197 of the Income Tax Act, the notified organization can apply either to the evaluating officer or income tax assessment officer.
There could a case where the TDS deducted is higher than the overall income tax liability at the end of financial year. Earlier, the TDS was first deducted and then the taxpayer was required to claim a refund of the TDS while filing his tax return. However, as per the latest amendment to ease out the process, the government has introduced section 197 through which a person can obtain nil or lower TDS certificate.
- The person or any other eligible entity is required to file an application to the income tax officer in Form 13. Once the assessing officer is satisfied with the justification of lower/nil TDS, a certificate stating the same is issued.
- Lower TDS or nil TDS can be availed only if the certificate stating the same has been issued in response to the application made in form 13.This certificate has to be furnished to the person who is deducting TDS while making payment.
- The said certificate is mandatory for all cases where the TDS has been deducted at a lower rate or no TDS has been deducted at all. This, however, excludes any payment done as interest on securities or fixed deposit under section 197A. For interest on securities or fixed deposit, form 15 G/H is required to be submitted.
- Details required to obtain Nil /Lower TDS: In order to file an application U/S 197, the person has to submit form 13 with below mentioned details.
- Name & Address of the assessee
- PAN of assessee
- Details of the purpose for which payment has been received
- Details of income in the last 3 years
- Detail of projected income in the current financial year.
- Details of tax payment done in the previous 3 year
- Detail of tax payment done for the current financial year.
- The certificate is valid only for the assessment year as mentioned in the certificate unless canceled by the competent authorities before the expiry date.
- No tax is deducted under the section, in case the one-time amount or the sum of amount towards such commission or brokerage doesn’t exceed Rs 5,000 in a financial year.
- The person or organization has already obtained nil TDS or lower TDS certificate under the section 197 to the assessing officer.
- No TDS is applicable on commission or brokerage being paid by BSNL or MTNL towards their public call franchisees.
- In case, the commission is paid by the organization to their worker, then the TDS would be applicable as per provisions of section 192 rather than section 194H.
- No TDS shall be implied on any Insurance Commission under section 192. However, such commission falls under the ambit of Section 194D.
- No TDS deduction is not applicable towards the Service Tax Payment. In case, the service tax is obligatory as a part of such payment, then the TDS amount should ideally be reduced only from the principal amount as brokerage or commission.
Other General TDS Exemptions on Commission and Brokerage
Apart from the types of payment stated above, the following types of payments are also exempted from any TDS deduction:
- Payment done by RBI to associate banking companies or NBFC.
- Any payment towards Financial Corporations duly formed under the central finance bill
- Payment received as income tax refund.
- Payments done towards LIC policy, UTI units and other investments in any co-operative societies.
- Payment of direct taxes
- Income in the form of interest from recurring deposit
- Income in the form of interest from savings bank account
- Income in the form of interest from Indira Vikas Patra, NSC or Kisan Vikas Patra.
- Income in the form of interest from NRE account.
- Payment being done to any other public or private institutions, which have been duly notified as a Nil TDS organization. (subject to producing NIL TDS certificate)
Apart from the above mentioned, TDS is also not applicable another type of income such as Interest earned for the compensation amount granted in respect to Motor Vehicles Claims Tribunal.
- The TDS can only be deducted at a rate prescribed by the union government through its annual budget.
- TDS has to be deposited with the government by the person/firm who has deducted the same under section 194H.
- While depositing the TDS amount, the person of the firm needs to furnish the PAN & TAN number of the person from which the TDS has been deducted.
- In case the deduction is by or on the behalf of the government of India, the same needs to be deposited on the same date on which it has been collected. This is contrary to other sections wherein the TDS amount has to be deposited with a week by the start of the next month.
Other Subsections of Section 194
- Section 194 - @ 10% on the proceeds from deemed dividends
- Section 194A - @ 10% on the income earned as interests on the investments (other than stock & securities)
- Section 194B- @ 30%, in case of the prize money won from lottery or gaming
- Section 194BB - @ 30% on any income as the prize money won from horse racing
- Section 194C - @ 1% for individuals & HUF and 2% for corporate / non individual on any income from contracts / sub contracts
- Section 194D - @ 10% on the earning as insurance commissions
- Section 194EE33- @ 20% on income from NSS deposits
- Section 194F - @ 20% on income from investment done in Mutual funds or UTI
- Section 194G - @ 10% on the commission earned from selling Lottery ticket.
- Section 194I - @ 2% on the rental income earned from plant & machinery and 10% on rental from land or building
- Section 194J - @ 10% on income earned by rendering any technical or professional services
- Section 194L - @ 10% on payment is done to transfer money to a resident individual on acquisition of an immovable property.