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What is Income Tax Act?

Income Tax Act was enacted in the year 1961 and is the statue under which everything related to taxation is listed. It includes recovery of income tax, levy, collection and administration of income tax. Income Tax Act contains a long list of sections and its sub-sections, each of which deal with different aspects of taxation in the country.

Section 194H – TDS ON Commission Income & Current Rates

What is Commission Income?

Commission income is the income or the fees earned by the real estate brokers or agents in making a sale or closing a deal. It is the primary revenue account of real estate brokers, stock brokers, insurance agencies etc and falls under income or revenues in the income statement. In other words, it is the primary revenue account of businesses that primarily making money from making sales or closing deals for third parties.In a simple or layman language, commission or brokerage is nothing but payment received, either directly or indirectly, by a person acting on other’s behalf. In other words, a commission or brokerage includes any payment,

  • Received or receivable;
  • Directly or indirectly, OR
  • By a person acting on behalf of another person.

What is Section 194-H in the Indian Income Tax Act?

Section 194-H is for income tax deducted on any income by way of commission or brokerage, by any person responsible for paying to a resident, if the income is more than Rs 15,000. In other words, anyone who is responsible to pay any amount in the form of commission or brokerage to a resident, has to deduct tax on behalf of the other and remit the amount to the government on his behalf and where commission is in picture, TDS i.e. tax deducted at source automatically comes into the picture, which includes the following:

  • Services rendered, it doesn’t includes professional services. The professional services on which section 194H doesn’t apply includes the following:
    • Medical
    • Legal
    • Technical consultancy
    • Engineering
    • Architectural profession
    • Interior decoration
    • Accountancy
    • Any such profession, notified or informed by the Board.
  • Services rendered in buying and selling of goods.
  • Transaction related to any asset, valuable article or thing, other than securities and since TDS on Commission is not liable to be deducted in relation to transactions related to securities, provisions of 194-H is not applicable on the following:
    • Any commission or brokerage paid to underwriters.
    • Any brokerage or sub-brokerage on public issue of securities.
    • Any brokerage on stock exchange transactions of securities.

Apart from the above, TDS on commission or brokerage is not applicable on the following:

  1. The amount paid or payment in a particular financial year is equal to or less than INR 15,000. Prior to Budget 2016, the limit was INR 5,000.
  2. The payment is being made by BSNL or MTNL to their public call center franchises.
  3. Commission is being paid by the employer to his employee.
  4. Insurance Commission because TDS on Insurance Commission has been covered under Section 194D.
  5. Commission paid by the RBI to other banks for collection of tax on behalf of the government.
  6. Clearing charges.
  7. Cash management service charges.
  8. Charges for warehousing services for commodities.

Deductor and Deductee:

As per the Income Tax Act, a deductor is an individual who is making the payment in the form of commission or brokerage to the other person and he or she is responsible to pay the TDS once deducted from the payment received in the form of commission or brokerage and a deductee is the person who is providing the services, other than those listed in the exemption list.

As per Section 194H of the Income Tax Act, TDS on the commission or brokerage is required to be deducted at the rate of 10% at the time of either making any such payment or when any such amount is deducted in the account of the person deducting such TDS. As per Section 194-H:

  1. It focuses on income tax levied on any income by means of brokerage or commission, by an individual who is accountable for paying to a resident.
  2. Persona and Hindu Undivided Family (HUF) covered under Section 44-AB has to deduct TDS as a mandate.
  3. When such income like commission or brokerage is deposited in either the payee’s account or in any other given account, then TDS under Section 194-H will be deducted.

As per Section 194H of the Income Tax Act, TDS on the commission has to be deducted:

  1. At the time of credit of income such as commission or brokerage to the payee’s account or to any other account, or
  2. At the time of the payment of such income (i.e. commission or brokerage) in form of cash, cheque, demand draft or by any other mode; whichever is earlier.

Rate of TDS on the Commission Income:

TDS on commission income is deducted at the rate of 5%, however, prior to Budget 2016, the rate was 10%. However, the deductee must register his Permanent Account Number (PAN Card) to avail the rate of 5%. In any other case, his TDS on any such income is deducted at the rate of 20%. Also, the surcharge education chess or SHEC is not added to the TDS rate and thus the same on the commission income will be deducted at the source rate itself i.e. 5% or 20% in case PAN Card Number is not provided

Once TDS is deducted, need to be deposited within one week from the end of the month during which it has been deducted. For example, if 7th February is the due date for the month of January, for the month of march, TDS should be deposited by or before 30th April. Also, at the time of payment of TDS with the government, the TAN No of the person who has deducted the TDS and the PAN Card No of the person whose TDS has been deducted should also be mentioned

Considering the strict rules of the income tax and its implication if proved defaulter, all deductors should ensure that they provide certificates to their concerned deductee on a timely basis. The timeline to issue the certificates is as below:

Ouarter Timeline
April-June 30Th July
July-September 30th October
October-December 30th January
January – March 30th May

Failing to submit the deducted tax or non-deduction has severe consequences such as:

  • Disallowance of Expenditure: In case you have missed to deduct the amount of TDS or have deducted the same but failed to submit the same, 30% of the expenditure will be disallowed u/s 40(a) (ia) for the purpose of conducting income under the head of “Profits and Gains from Business/Profession”.
  • Prosecution: As mentioned in the Section 267 (B) of the Income Tax Act, in case you have failed to pay the deducted TDS in the account of government within pre-specified timeline, you may be punishable in terms of:
    • Imprisonment, minimum for three years
    • It can extend up to 7 years, including the fine.

The provision of TDS is getting stringent day by day and it is always better to be on the right side of the law and make the due payment well before the deadline.

As per the TDS provision of Section 194H of the Income Tax Act, TDS has to be deducted on payment or credit whichever comes earlier.

For example, if your due bill date is 15th August 2018 amounting to Rs 20,000, but you have made advance payment of Rs 80,000 on 5th Aug 2018, then the TDS will be deducted on Rs 80,000 on the date it was paid i.e. 5th Aug 2018. Also, the due date for the payment of TDS is 7th of next month, however it should not be considered that way and TDS should be paid as soon as it is deducted.

Even if you have paid the TDS on 7th of the next month i.e. well on its due date, the bank will take 2-3 working days to process the same and thus, as per the income tax department, your payment came on 8th or 9th of the month and hence they will be impose late payment interest for 2 months from the date of deduction to the date of payment. And in this case, interest charged will be 1.5% per month which equals to 18% per annum from the date of deduction to the date to payment.

The income tax department has made it compulsory to pay the online TDS for all corporate entities and for those who are covered under compulsory tax audit i.e. Section 44AB and in case you, as a corporate entity does not have online facility, it is very important for you to get one at the earliest in order to fall under defaulter category.

However, in case you have paid extra tax, Section 194-H of the Income Tax Act gives you an option to get the refund of excess TDS paid by you. You can place request to refund the extra TDS paid, you need to have no pending demand against the TAN because the refund request can only be processed once all outstanding demands have been closed. In order to do the same, all you need to do is to register your digital signature.