Section 194H of Income Tax Act: A Section You Can’t Afford to Ignore
Did you know tax authorities catch TDS violations on commission using AI? Skip the 5% deduction under Section 194H of Income Tax Act, and you’ll face penalties under Section 271C equal to the entire TDS amount, plus 1% monthly interest under Section 201(1A).
Your business will lose expense deduction rights while penalties accumulate. Most business owners discover this painful truth only after opening their tax notice.
With our straightforward TDS compliance guidance, you’ll not only avoid costly penalties but also protect your hard-earned reputation in the market. Let us show you how this simple 5% deduction becomes your financial shield.
Commission and Brokerage: Fundamental of Section 194H of Income Tax Act
The 194H TDS Section applies to payments classified as either “commission” or “brokerage.” But what exactly qualifies?
Commission typically refers to payment for services rendered in a transaction between two parties, where the recipient facilitates the deal but isn’t a principal party.
Think of real estate agents, insurance agents, or sales representatives who earn a percentage of the transaction value.
Brokerage generally covers fees paid to intermediaries who connect buyers with sellers, like stock brokers or property brokers. TDS on brokerage follows the same principles as commission under this section.
However, not all percentage-based payments qualify. The Income Tax Department looks at the substance of the relationship, not just what you call the payment.
Key Exclusions from Section 194H of Income Tax Act
Several payments that might seem like commission are covered under different 194H TDS sections:
- Insurance commission (covered under Section 194D)
- Fees for professional/technical services (Section 194J)
- E-commerce commissions (Section 194O)
- Payments to contractors (Section 194C)
Remember, the substance of the payment matters more than the label you give it. Calling something “marketing support” when it’s functionally a commission won’t exempt you from 194H obligations.
Who Must Deduct TDS Under Section 194H of Income Tax Act?
TDS under Section 194H of Income Tax Act must be deducted by:
- Companies & Firms: Every company and partnership firm must deduct TDS under Section 194H on all commission and brokerage payments, regardless of their turnover.
- Audited Individuals: Individuals whose accounts underwent audit under Section 44AB or 44AD of the Income Tax in the previous financial year must deduct TDS.
- Audited HUFs: HUFs with audited books under Section 44AB or 44AD in the preceding financial year must deduct TDS.
- Other Persons: Any other person (i.e., non-audit-exempt entities) must deduct TDS payments under Section 194H of Income Tax.
If you’re an individual or HUF who didn’t require a tax audit last year, you’re exempt from the 194H deduction requirement.
Threshold for Deduction Under Section 194H of Income Tax
You must deduct TDS when:
- The payment exceeds Rs 15,000 in a financial year to a single recipient
- This is a cumulative threshold—if you pay someone Rs 5,000 monthly for commission, you’ll cross the Rs 15,000 threshold after the third payment.
This 194H commission limit of Rs 15,000 is applied on an aggregate basis per recipient per financial year. This means you need to track ongoing payments to each payee throughout the year.
Section 194H TDS Rate, Deposit & Return Filing
Keep your TDS deductions, deposits, and returns on schedule to avoid penalties.
TDS Rate and Calculation
The current TDS rate under Section 194H of Income Tax Act is 5% of the gross commission amount. The section 194H TDS rate limit remains steady at 5% with no surcharge or education cess added to this rate.
For example:
- Commission payment: Rs 20,000
- TDS to deduct: Rs 1,000 (5% of Rs 20,000)
- Net payment to commission agent: Rs 19,000
Exception: When a payee does not provide a valid PAN, you must deduct TDS at 20% on any commission or brokerage payment under Section 194H.
Deposit Process and Timelines
Once deducted, you must deposit the TDS with the government:
- By the 7th of the next month for most months
- By the 30th of April for March deductions
Use:
- Form 26QB for online payment
- Challan ITNS 281 if paying offline
Remember to quote your TAN (Tax Deduction and Collection Account Number) when making the deposit.
Return Filing Requirements
You must file a quarterly TDS return using Form 26Q (the appropriate 194H ITR Form):
- Q1 (Apr-Jun): Due by July 31
- Q2 (Jul-Sep): Due by October 31
- Q3 (Oct-Dec): Due by January 31
- Q4 (Jan-Mar): Due by May 31
After filing, issue Form 16A to each recipient, showing the amount paid and tax deducted.
Note: Q” stands for a financial quarter—each one covers three months of the year.
Late Fee, Interest & Penalties Under Section 194H of Income Tax Act
Ensure proper compliance with your TDS obligations to prevent substantial penalties and interest charges.
Late Filing Fee (Section 234E)
If you miss the return filing deadline, you’ll face:
- Rs 200 per day until you file
- Capped at the total TDS amount
This means a 30-day delay on even a small TDS amount can result in a Rs 6,000 fine!
Interest for Delayed Deposit (Section 201(1A))
If you deduct but don’t deposit TDS on time:
- 1.5% interest per month or part thereof
- Calculated from the date of deduction to the date of actual deposit
For example, a three-month delay on Rs.10,000 TDS means Rs.450 in interest (1.5% × 3 × Rs.10,000).
Penalty for Not Paying TDS
Failing to deduct TDS when required can result in:
- Being treated as “assessee in default”
- Liability to pay the entire TDS amount plus interest
- Potential disallowance of the commission expense under Section 40(a)(ia)
That last point is especially painful—you could lose the tax benefit of the entire commission expense, not just the TDS portion!
Real-Life Cases on Section 194H of Income Tax
See how businesses apply TDS on commission and brokerage in everyday scenarios.
Case 1: Modern Electronics Pvt. Ltd. (2024)
Rahul’s Mumbai shop hired Priya as a sales agent and paid her Rs.30,000 in commission for bulk orders. He treated her payment as commission and followed TDS rules without fail.
- He withheld Rs.1,500 (5%) before releasing Rs.28,500 and deposited it via Form 26QB on time.
- He filed the quarterly TDS return (Form 26Q) and issued Priya her Form 16A certificate, avoiding any penalties.
Case 2: Life Insurance Corporation of India (2023)
LIC credited agent Vikram with Rs 300,000 in annual insurance commissions and classified it under Section 194H of Income Tax Act. They set up a monthly process to handle TDS on each payout.
- LIC deducted Rs 15,000 (5%) in tax before each transfer and deposited the total every quarter.
- They generated and sent Vikram his TDS certificates promptly, ensuring he could claim the credit at filing.
Practical Checklist for Compliance
Stay on top of your Section 194H of Income Tax Act obligations with this step-by-step approach:
- ✔️ Identify commission/brokerage payees in your accounting system.
- ✔️ Set up a tracking mechanism for cumulative payments to each recipient
- ✔️ Configure automatic alerts when you approach the Rs 15,000 threshold
- ✔️ Deduct 5% TDS when making qualifying payments
- ✔️ Deposit deducted TDS by the 7th of the following month
- ✔️ File your quarterly TDS returns by each deadline
- ✔️ Issue Form 16A to all recipients within 15 days of filing your quarterly return.
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Conclusion
Remember, compliance with Section 194H of Income Tax Act isn’t just about avoiding penalties—it’s about maintaining a clean tax record that keeps your business relationship with the tax department smooth and trouble-free.
Frequently Asked Questions (FAQs)
Q: Is GST included when calculating TDS?
A: TDS is calculated on the commission amount, excluding GST.
Q: Can the recipient claim credit for TDS deducted?
A: Yes, recipients can claim credit on their income tax returns based on Form 26AS.
Q: What if my payment includes both commission and other services?
A: You should segregate the commission component and apply TDS only to that portion.
Q: Are online marketplaces exempt from Section 194H?
A: Many e-commerce commissions now fall under the specialized Section 194O, which has different rules.
Q: Can the commission recipient request a lower TDS rate?
A: Yes, they can apply for a certificate under Section 197 for lower/nil deduction if their total income justifies it.
Q: What threshold triggers TDS under Section 194H?
A: You must deduct TDS once your total commission or brokerage payments to a recipient exceed Rs. 15,000 in a financial year.
Q: Which form do I use to deposit TDS for commission or brokerage?
A: Use Form 26QB to deposit the TDS you’ve deducted under Section 194H.
Q: What if the recipient doesn’t provide a PAN?
A: You must deduct TDS at 20% instead of 5% and still deposit it via Form 26QB.
