Introduction

Under the Income Tax Act, TDS (Tax Deducted at Source) ensures that tax is collected at the time of income generation. One such important provision is Section 194H, which deals with TDS on commission or brokerage income.

This section is widely applicable in business transactions where commission is paid to agents, brokers, or intermediaries. Understanding Section 194H is important for businesses to avoid penalties and ensure proper tax compliance. In this guide, we will explain its applicability, rate, limit, and rules in simple language.

What is Section 194H?

Section 194H of the Income Tax Act requires any person (other than an individual or HUF not under audit) to deduct TDS when paying commission or brokerage to a resident.

In simple terms, if you are paying commission to someone for services like sales, marketing, or brokerage, you must deduct TDS before making the payment.

Section 194H

This provision ensures that tax is collected on commission income at the source itself.

What is a commission or brokerage?

Commission or brokerage includes payments made to a person for:

  • Selling goods or services
  • Acting as an intermediary or agent
  • Facilitating transactions between parties
  • Generating business leads or sales

It does not include professional fees, which are covered under different sections of the Income Tax Act.

Applicability of Section 194H

Section 194H applies when certain conditions are met.

It is applicable to businesses, companies, partnership firms, and individuals/HUFs whose accounts are subject to tax audit. Whenever such entities pay commission to a resident, they must deduct TDS.

However, individuals and HUFs not covered under tax audit are not required to deduct TDS under this section.

TDS Rate Under Section 194H

The TDS rate under Section 194H is:

  • 5% on commission or brokerage

If the recipient does not provide PAN, the TDS rate may increase to 20%, as per income tax rules.

Threshold Limit for TDS Deduction

TDS under Section 194H is applicable only when the total commission paid exceeds a certain limit.

Current Threshold (2026):

  • ₹15,000 per year

If commission payments exceed ₹15,000 in a financial year, TDS must be deducted on the entire amount.

When to Deduct TDS Under Section 194H

TDS must be deducted at the earlier of the following:

  • At the time of credit of commission to the account of the payee
  • At the time of actual payment (cash, check, or online transfer)

This ensures that tax is deducted even if the payment is not immediately made.

Important Rules to Follow

While dealing with Section 194H, businesses should follow some important rules:

  • Ensure correct PAN of the recipient
  • Deduct TDS at the correct rate
  • Deposit TDS within due dates
  • File TDS returns regularly
  • Issue TDS certificate (Form 16A)

Proper compliance helps avoid penalties and maintains clean financial records.

Penalty for Non-Compliance

Failure to comply with Section 194H can result in penalties and interest.

If TDS is not deducted or deposited on time, interest is charged on the amount. In serious cases, penalties may also be imposed by the Income Tax Department.

Additionally, the expense may be disallowed while calculating taxable income, increasing the tax burden.

Benefits of Section 194H Compliance

Following Section 194H properly provides several benefits:

  • Ensures legal tax compliance
  • Avoids penalties and notices
  • Maintains transparency in financial transactions
  • Helps in proper income reporting
  • Builds credibility for businesses

Common Mistakes to Avoid

Many businesses make errors while applying TDS on commission:

  • Not deducting TDS on eligible payments
  • Applying incorrect TDS rate
  • Ignoring threshold limit
  • Delayed TDS deposit
  • Missing TDS return filing

Avoiding these mistakes can save both time and money.

Conclusion

Section 194H of the Income Tax Act plays an important role in ensuring tax compliance on commission and brokerage payments. Businesses must understand its applicability, rate, and rules to avoid penalties and maintain proper financial records.

By following the correct TDS procedures, businesses can ensure smooth operations and stay compliant with income tax regulations in 2026 and beyond.You can contact us at +91 8989977769 for any query or if you require our services to prepare a project report or a bank loan

Frequently Asked Questions

Q1: What is Section 194H in simple words?
 Section 194H requires businesses to deduct TDS when paying commission or brokerage to a resident. It ensures tax is collected at the source of income, reducing tax evasion and improving compliance in business transactions involving agents or intermediaries.

Q2: What is the TDS rate under Section 194H?
 The TDS rate under Section 194H is 5% on commission or brokerage payments. If the recipient does not provide PAN, the rate increases to 20%, which can significantly increase the tax deduction amount.

Q3: When is TDS deducted under Section 194H?
 TDS is deducted at the time of credit or payment of commission, whichever is earlier. This ensures tax is collected even if the payment is not made immediately to the recipient.

Q4: Is there any exemption limit under Section 194H?
 Yes, TDS is applicable only if the total commission paid exceeds ₹15,000 in a financial year. Below this limit, no TDS deduction is required under Section 194H.

Q5: Who is responsible for deducting TDS under Section 194H?
 The person or business paying the commission is responsible for deducting TDS. This includes companies, firms, and individuals subject to tax audit under income tax laws.