TDS on Commission and Brokerage Under Section 194H

Short answer: Section 194H of the Income-tax Act, 1961 mandates tax deduction at source (TDS) on payments of commission or brokerage. Any person (other than an individual or HUF not liable for tax audit) paying over ₹15,000 in a financial year to a resident must deduct TDS at 5%. This includes payments for services in buying or selling goods, or in relation to any service, but excludes insurance commission covered under Section 194D.

Who is required to deduct TDS under Section 194H?

Any person responsible for paying commission or brokerage to a resident is required to deduct TDS. This includes companies, partnership firms, LLPs, and other corporate bodies. However, there is a specific exemption for individuals and Hindu Undivided Families (HUFs). An individual or HUF is only required to deduct TDS under this section if their total sales, gross receipts, or turnover from business or profession exceeded the monetary limits specified under Section 44AB during the immediately preceding financial year. For most businesses, this audit threshold is ₹1 crore, and for professions, it is ₹50 lakh.

What is the rate of TDS under Section 194H?

The prescribed rate of TDS on commission or brokerage under Section 194H is 5%. This rate applies if the recipient (payee) has furnished their Permanent Account Number (PAN). If the payee does not provide a valid PAN, or provides an inoperative one, the TDS must be deducted at a higher rate of 20%, as per Section 206AA of the Act. No surcharge or health and education cess is added to this rate.

What is the threshold limit for TDS on commission?

TDS is not required if the aggregate amount of commission or brokerage credited or paid to a single payee during a financial year does not exceed ₹15,000. It is crucial to note that this is an annual aggregate limit per payee, not a per-transaction limit. Once the total payments in a financial year to a particular person cross ₹15,000, TDS must be deducted on the entire amount (including the initial ₹15,000) and on all subsequent payments to that person during that year.

What payments are covered under 'commission or brokerage'?

The Act defines 'commission or brokerage' broadly. It includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered. This is not limited to just agency for buying or selling goods. It also covers services in relation to any transaction involving an asset, valuable article, or thing, excluding securities. The core element is a principal-agent relationship.

Common examples include:

• Real estate agent's brokerage on property sale or rent.
• Commission paid to freelance sales agents.
• Brokerage on loans or other financial products.
• Commission paid to travel agents.

Are there any exceptions to Section 194H?

Yes, certain payments are specifically excluded from the purview of TDS under Section 194H. Understanding these exceptions is key to correct compliance.

Scenario	Is TDS under Section 194H Applicable?	Reason
A company pays ₹50,000 to a freelance sales agent.	Yes	Payment exceeds the ₹15,000 threshold and is for services rendered based on a principal-agent relationship.
You sell a flat and pay ₹1 Lakh brokerage to a real estate agent (and you are not subject to a tax audit).	No	An individual not liable for a tax audit is exempt from deducting TDS under Section 194H.
A partnership firm (audited last year) pays ₹10,000 as commission for the entire year.	No	The total payment in the financial year is below the ₹15,000 threshold.
A company pays commission to its insurance provider (e.g., LIC).	No	Insurance commission is specifically covered under Section 194D and is exempt from 194H.
A company pays its employee a 'sales commission' as part of their CTC.	No	This is considered part of the employee's salary and is subject to TDS under Section 192.
Brokerage paid on transactions relating to securities on a recognised stock exchange.	No	This is specifically excluded from the definition of brokerage for Section 194H.
Payments made by the Reserve Bank of India (RBI).	No	The RBI is exempt from the requirement to deduct TDS under this section.

Worked example

Scenario: "Innovate Solutions Pvt. Ltd.", a Bengaluru-based software company, engages a sales consultant, Ms. Priya, to bring in new clients. Her commission is 10% of the contract value she sources.

Payments during FY 2025-26:

• Q1 (15 June 2025): ₹10,000
• Q2 (20 September 2025): ₹12,000
• Q3 (10 December 2025): ₹20,000
• Q4 (05 March 2026): ₹15,000

TDS Calculation:

1. First Payment (Q1): Innovate Solutions pays ₹10,000. The cumulative amount is ₹10,000, which is below the ₹15,000 threshold. No TDS is deducted.

2. Second Payment (Q2): The company pays another ₹12,000. The cumulative payment to Ms. Priya becomes ₹10,000 + ₹12,000 = ₹22,000. This has now crossed the ₹15,000 limit.

   • TDS must be deducted on the entire cumulative amount.
   • TDS = 5% of ₹22,000 = ₹1,100.
   • Amount paid to Ms. Priya = ₹12,000 - ₹1,100 = ₹10,900.

3. Third Payment (Q3): The company pays ₹20,000. Since the threshold is already crossed, TDS is deducted on the full amount of this payment.

   • TDS = 5% of ₹20,000 = ₹1,000.

4. Fourth Payment (Q4): The company pays ₹15,000.

   • TDS = 5% of ₹15,000 = ₹750.

Total Compliance: Innovate Solutions must deposit a total TDS of ₹1,100 + ₹1,000 + ₹750 = ₹2,850 to the government account by the respective due dates and file its quarterly TDS return (Form 26Q).

Common mistakes

1. Applying the threshold per invoice: Many businesses mistakenly apply the ₹15,000 limit to each bill instead of the aggregate payment to the person during the financial year.
2. Incorrect calculation after crossing the threshold: A frequent error is to only deduct TDS on the amount exceeding ₹15,000. The correct procedure is to deduct tax on the entire amount once the limit is breached.
3. Confusing with other TDS sections: Payments for commission (Section 194H, 5%) are often confused with payments for professional services (Section 194J, 10%) or contractual work (Section 194C, 1%/2%). The nature of the service determines the correct section.
4. Forgetting the 20% rule: Failing to deduct TDS at the higher rate of 20% when the recipient's PAN is not available or is inoperative can lead to notices and penalties.
5. Including GST in TDS calculation: As per CBDT circulars, if the GST component is indicated separately on the invoice, TDS should be calculated only on the basic value of the commission, not the gross amount including GST.

How SP & SC helps

Navigating TDS provisions can be complex, and non-compliance can lead to interest, penalties, and disallowance of business expenses. SP & SC Legal and Taxation Services provides end-to-end TDS compliance support. We assist businesses in correctly identifying applicable TDS sections, calculating the tax, depositing it on time, and filing quarterly TDS returns like Form 26Q. We also help in issuing TDS certificates (Form 16A) to your vendors and responding to any departmental queries or notices you may receive. Our goal is to ensure your business remains fully compliant, allowing you to focus on your core operations. Check our TDS Return Filing services.

Frequently asked questions

H3: Is GST included for calculating TDS on commission?

No. If the GST amount is shown separately in the invoice provided by the agent or broker, TDS under Section 194H should be calculated on the basic value of the commission, excluding the GST component.

H3: What is the due date for depositing TDS under 194H?

The TDS deducted must be deposited to the government treasury by the 7th of the following month. For TDS deducted in the month of March, the due date is extended to the 30th of April.

H3: What happens if I fail to deduct or deposit TDS under 194H?

Failure to deduct TDS attracts interest at 1% per month from the date tax was deductible to the date it is deducted. Failure to deposit the deducted TDS attracts interest at 1.5% per month from the date of deduction to the date of deposit. Furthermore, 30% of the commission expense on which TDS was not deducted or deposited can be disallowed under Section 40(a)(ia), increasing your taxable income.

H3: Do I need to deduct TDS on commission paid to an employee?

No. Any commission, bonus, or incentive paid to an employee is considered part of their salary. Such payments are subject to TDS under Section 192 (TDS on Salary), not Section 194H.

H3: Is TDS applicable on bank commission or charges?

Yes, Section 194H generally applies to commission charged by banks for various services, as it does not fall under the category of 'interest'. However, payments between banks, or specific transactions as notified by the government, may be exempt. For most businesses paying commission to banks, TDS is applicable if the annual amount exceeds ₹15,000.

Get a fixed-fee quote

If you are unsure about your TDS obligations or need assistance with filing returns, penalties, or responding to notices, our team is here to help. Share your documents with us for a confidential review, and we will provide a written fixed-fee quote for our services. We handle all TDS-related matters from start to finish. You can Contact SP & SC or WhatsApp us at +91 90356 74566.