Income Tax Act 1961 Section 194H

Section 194H of the Income Tax Act 1961 is legal and mandatory in India. It requires you to deduct tax at source (TDS) when you pay commission or brokerage to another person or entity. This helps the government track income and collect tax efficiently.

If you make payments like commission or brokerage, you must deduct TDS at the prescribed rate. Failure to comply can lead to penalties and interest.

Understanding Section 194H of Income Tax Act 1961

This section applies when you pay commission or brokerage. It ensures tax is deducted before the amount reaches the payee. The law aims to prevent tax evasion and improve compliance.

Commission or brokerage includes fees paid to agents, brokers, or intermediaries for services rendered in business or profession.

• Section 194H mandates TDS on commission or brokerage payments exceeding Rs. 15,000 in a financial year to a single payee.

• The current TDS rate under Section 194H is 5% on the gross amount of commission or brokerage paid.

• It applies to all payers, whether individuals, companies, or firms, who make such payments in India.

• Payments to government entities or specified institutions may be exempt under certain conditions.

Understanding these basics helps you comply with the law and avoid legal issues.

Who Should Deduct TDS Under Section 194H?

If you are a person or entity making commission or brokerage payments, you must deduct TDS. This includes businesses, professionals, and individuals involved in commercial transactions.

The law covers a wide range of payers to ensure broad compliance across sectors.

• Any person responsible for paying commission or brokerage exceeding Rs. 15,000 to a single payee must deduct TDS.

• Businesses paying commission to agents, brokers, or intermediaries fall under this provision.

• Individuals or firms making such payments in the course of business or profession are also liable.

• Failure to deduct TDS can lead to disallowance of expenses and penalties under the Income Tax Act.

It is important to identify if you fall under this category to comply with Section 194H.

How to Deduct and Deposit TDS Under Section 194H

You must deduct TDS at the time of credit or payment of commission or brokerage, whichever is earlier. The deducted amount must be deposited with the government within the prescribed time.

Proper documentation and timely compliance are essential to avoid penalties.

• Deduct TDS at 5% on the commission or brokerage amount exceeding Rs. 15,000 paid to a single payee in a financial year.

• Deposit the deducted TDS to the government account using the prescribed challan or online portal within the due date.

• File TDS returns quarterly to report the deducted amounts and payee details to the Income Tax Department.

• Issue Form 16B or TDS certificate to the payee as proof of tax deducted and deposited.

Following these steps ensures you meet your legal obligations under Section 194H.

Exemptions and Thresholds Under Section 194H

Not all commission or brokerage payments attract TDS under Section 194H. The law provides certain exemptions and thresholds to reduce compliance burden.

Knowing these helps you avoid unnecessary deductions and legal complications.

• No TDS is required if total commission or brokerage paid to a payee does not exceed Rs. 15,000 in a financial year.

• Payments made to government entities, banks, or specified institutions may be exempt from TDS under certain notifications.

• Commission paid in connection with life insurance policies or certain specified transactions may have separate provisions.

• It is important to verify the status of the payee and nature of payment before deducting TDS.

Always check the latest government notifications and circulars for updated exemptions.

Consequences of Non-Compliance with Section 194H

Failure to deduct or deposit TDS under Section 194H can lead to serious legal and financial consequences. The Income Tax Department actively enforces compliance.

Understanding these consequences helps you avoid penalties and legal troubles.

• If you fail to deduct TDS, you may be liable to pay the amount along with interest and penalties under Section 201 of the Income Tax Act.

• Delay in depositing TDS attracts interest under Section 201(1A) at prescribed rates until payment is made.

• Non-filing or incorrect filing of TDS returns can lead to penalties and scrutiny by tax authorities.

• Disallowance of commission or brokerage expenses may occur if TDS compliance is not met, increasing taxable income.

Timely and accurate compliance is the best way to avoid these issues.

Practical Tips for Compliance with Section 194H

Complying with Section 194H can be straightforward if you follow some practical steps. This helps you avoid mistakes and legal problems.

Good record-keeping and awareness of deadlines are key.

• Maintain detailed records of all commission or brokerage payments and payee details to track TDS applicability.

• Verify the payee’s PAN to ensure proper TDS deduction and avoid higher deduction rates.

• Deduct TDS at the correct rate and deposit it within the due dates to avoid interest and penalties.

• File TDS returns accurately and issue TDS certificates promptly to payees for their tax records.

Following these tips will help you stay compliant and avoid common pitfalls under Section 194H.

Interaction of Section 194H with Other Tax Provisions

Section 194H works alongside other TDS provisions and tax laws. Understanding these interactions helps you apply the law correctly.

Sometimes, multiple TDS sections may apply to a single payment or transaction.

• Section 194H specifically covers commission and brokerage, while other sections cover salaries, interest, rent, and professional fees.

• If commission payments are part of a larger contract, ensure correct TDS sections are applied to each component.

• Section 194H does not apply to commission income received by individuals or HUFs not engaged in business or profession.

• Consult tax professionals or official guidance to resolve conflicts or doubts about TDS applicability.

Proper understanding prevents errors and ensures full compliance with tax laws.

Conclusion

Section 194H of the Income Tax Act 1961 is a legal requirement for deducting tax at source on commission or brokerage payments in India. It helps the government track income and collect tax efficiently.

If you make such payments, you must deduct TDS at 5% when payments exceed Rs. 15,000 in a financial year. Timely deposit and filing of TDS returns are essential to avoid penalties. Understanding exemptions, compliance steps, and consequences of non-compliance will help you meet your legal obligations smoothly.

FAQs

Who is liable to deduct TDS under Section 194H?

Any person or entity paying commission or brokerage exceeding Rs. 15,000 to a single payee in a financial year must deduct TDS under Section 194H.

What is the current TDS rate under Section 194H?

The TDS rate under Section 194H is 5% on the gross amount of commission or brokerage paid to the payee.

Are there any exemptions under Section 194H?

Yes, payments below Rs. 15,000 in a financial year or payments to government entities may be exempt from TDS under Section 194H.

What happens if TDS is not deducted under Section 194H?

Failure to deduct TDS can lead to payment of tax by the deductor, along with interest and penalties under the Income Tax Act.

When should TDS be deducted under Section 194H?

TDS must be deducted at the time of credit or payment of commission or brokerage, whichever is earlier, to the payee.