Section 194H Explained: TDS on Commission and Brokerage in India

 

Commission and brokerage arrangements run through almost every layer of Indian business, from the local real estate agent closing a property deal to the distributor earning a margin on every unit sold, to the freelance sales agent bringing in new clients on a percentage basis. Because this income is earned by intermediaries rather than direct employees, it historically slipped through the cracks of regular salary-based tax withholding. Section 194H was introduced to bring this category of income under the TDS net, requiring the person making the payment to withhold tax before the commission or brokerage reaches the recipient.

 

This post walks through what Section 194H actually covers, who is required to deduct, the current TDS rate and threshold after the recent Budget changes, the exemptions built into the section, and the compliance steps involved.

 

What is Section 194H?

 

Section 194H was inserted into the Income Tax Act, 1961 and came into effect from 1 June 2001. It requires any person responsible for paying commission or brokerage to a resident to deduct tax at source at the time of credit or payment, whichever occurs earlier. The section is deliberately broad in how it defines commission or brokerage: it covers any payment, received directly or indirectly, by a person acting on behalf of another person, whether for services rendered or for transactions involving the buying and selling of goods, assets, or other valuable items. It does not, however, extend to transactions in securities.

 

In practice, this section touches a wide range of relationships: a manufacturer paying a distributor, a company paying a sales agent, a builder paying a property broker, or a business paying a referral fee to an intermediary who brought in a deal.

 

Who is liable to deduct TDS under Section 194H?

 

The obligation applies to any person making the payment, which in practice includes companies, firms, and other entities by default. Individuals and Hindu Undivided Families (HUFs) are treated a little differently. They are required to deduct TDS under this section only if their total sales, gross receipts, or turnover from a business or profession exceeded the monetary limits specified for a tax audit under Section 44AB in the financial year immediately preceding the year in which the commission is paid. Those limits currently stand at Rs.1 crore for a business and Rs.50 lakh for a profession. An individual or HUF below these thresholds is not required to deduct TDS on commission payments, even if the amount paid is substantial.

 

TDS rate under Section 194H

 

Like several other TDS provisions, the rate under this section has been revised more than once since it was introduced, and getting the applicable rate right depends on the date of payment.

 

Period	TDS rate	Note
1 June 2001 to 31 May 2007	10%	Original rate at introduction
1 June 2007 to 13 May 2020	5%	Standard rate for over a decade
14 May 2020 to 31 March 2021	3.75%	Temporary Covid-19 relief rate
1 April 2021 to 30 September 2024	5%	Standard rate restored
From 1 October 2024 onward	2%	Reduced rate per Budget 2024
Throughout, if PAN is not furnished	20%	Under Section 206AA

 

 

The most recent and most relevant change for current compliance is the reduction from 5% to 2%, effective 1 October 2024. This was introduced as part of the government's broader push to ease the compliance and cash flow burden on small agents, distributors, and brokers, for whom a TDS deduction can represent a meaningful chunk of their income being withheld upfront. No surcharge or cess is added on top of the prescribed rate in any case.

 

The threshold limit for deduction

 

TDS under Section 194H is not triggered on every rupee of commission paid. A threshold exists below which no deduction is required at all.

 

Until 31 March 2025, this threshold stood at Rs.15,000 in a financial year. From 1 April 2025 onward, it has been raised to Rs.20,000. If the aggregate commission or brokerage paid or credited to a person during the financial year does not exceed this limit, the payer is not required to deduct any TDS. Once the cumulative payments to that person cross the threshold during the year, TDS becomes applicable, and in practice this typically means deducting tax on the entire amount paid in that year once the limit is breached, not merely on the excess over the threshold.

 

What falls outside Section 194H?

 

A handful of payment types and relationships are specifically carved out of this section, and missing these exclusions is a common source of confusion.

 

Insurance commission is the most significant exclusion. Payments to insurance agents are governed by their own dedicated provision, Section 194D, and do not attract TDS under 194H. Commission paid by an employer to an employee is also excluded, since that payment is part of the employment relationship and is taxed as salary income under Section 192 instead, with TDS deducted accordingly through the payroll process. Payments made by individuals or HUFs who fall below the tax audit turnover thresholds described earlier are similarly outside the scope of this section. Certain other specific categories, such as commission paid by BSNL or MTNL to their public call office franchisees, and brokerage on the public issue of securities, are also excluded under the section's provisos.

 

When does the deduction actually happen?

 

TDS is deducted at the time the commission or brokerage is credited to the payee's account, or at the time of actual payment, whichever happens earlier. This mirrors the structure used in most other TDS provisions and means that bookkeeping entries crediting a commission as payable can trigger the deduction obligation even before any cash or bank transfer actually takes place.

 

A worked example

 

Suppose a company pays Rs.50,000 as brokerage to a sales agent in December 2024, after the rate change has come into effect. Since the payment date falls after 1 October 2024 and the agent's PAN is on file, the applicable rate is 2%. The TDS works out to Rs.1,000, leaving a net payment of Rs.49,000 to the agent. That Rs.1,000 needs to be deposited with the government by the 7th of the following month, in this case by 7 January 2025.

 

Had the agent not furnished a valid PAN, the company would instead have been required to deduct at 20%, amounting to Rs.10,000, a stark difference that illustrates why furnishing PAN promptly matters for anyone earning commission income.

 

Compliance obligations for the payer

 

The person deducting TDS under this section needs to deposit the tax with the government, generally by the 7th of the month following the month of deduction, except for deductions made in March, which can be deposited by 30 April. TDS returns are filed quarterly in Form 26Q, and a TDS certificate in Form 16A must be issued to each payee, enabling them to claim credit for the tax deducted against their final tax liability. For businesses dealing with a large network of agents or distributors, this means commission TDS needs to be tracked and reconciled systematically rather than handled as a one-off calculation at payment time.

 

Agents or brokers expecting a low overall tax liability for the year also have the option of applying for a certificate of nil or lower deduction under Section 197, or filing a declaration under Section 197A where applicable, to avoid TDS being withheld on income that would not ultimately be taxable.

 

Consequences of non-compliance

 

Failing to deduct TDS, deducting it at the wrong rate, or depositing it late carries real costs. Interest is charged on the shortfall or delay, calculated on a monthly basis. Under Section 40(a)(ia), the expense corresponding to the commission payment can be disallowed while computing the payer's own taxable income if the TDS provisions were not properly complied with, effectively increasing the payer's tax liability as a consequence. Section 271C additionally permits a penalty equal to the amount of tax that should have been deducted but wasn't. For businesses that route a large volume of payments through commission agents, even minor lapses in TDS compliance can compound into a significant exposure over a financial year.

 

Why this section matters?

 

Section 194H plays a similar role to other TDS provisions covering professional fees, rent, and contractor payments: it ensures that income earned outside the conventional employer-employee relationship is taxed progressively through the year rather than relying entirely on the recipient's self-reported return at year end. For agents and brokers, the deducted amount shows up as credit in Form 26AS and can be reconciled against their final tax liability. For businesses making these payments, accurate and timely TDS deduction under this section has become a standard part of vendor and agent payment processing.

 

Frequently asked questions

 

Does Section 194H apply to brokerage paid on the sale of securities?

No. Brokerage related to transactions in securities is specifically excluded from this section and is governed separately.

 

Is GST included while calculating the commission amount for TDS purposes?

No. Where GST is charged separately and shown distinctly in the invoice, TDS under Section 194H is computed on the amount excluding GST.

 

Can a small business avoid TDS deduction on commission it pays?

If the business is run as an individual or HUF and its turnover or gross receipts in the preceding financial year stayed below the Section 44AB tax audit thresholds, it is not required to deduct TDS under this section at all, regardless of the commission amount paid.

 

What happens if the threshold is crossed midway through the financial year?

Once the cumulative commission or brokerage paid to a person during the financial year exceeds the prescribed threshold, TDS becomes applicable, and in practice the deductor typically needs to account for tax on the full amount paid during the year, not just the portion above the threshold.

 

Does this section apply to discounts given to dealers or distributors?

This is a frequently litigated area. Where the relationship is genuinely a principal-to-principal sale with a price discount, rather than an agency arrangement, courts and tax authorities have generally held that Section 194H does not apply, since there is no commission being paid for acting on behalf of another person. Each arrangement needs to be assessed on its specific facts and contractual terms.

 

 

 

This article is intended for general informational purposes and reflects the law as understood at the time of writing, including the rate reduction effective 1 October 2024 and the threshold increase effective 1 April 2025. Tax provisions and rates are subject to periodic amendment.