TDS on Brokerage and Commission | Section 194H

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TDS on Brokerage is a crucial part of the Indian tax system and a place where traders, brokers, and investors must all pay special attention. Understanding this subject is crucial since Section 194H of the Income Tax Act of 1961 requires the deduction of tax at source (TDS) on brokerage. The relevance of TDS in Brokerage has only grown as a result of the Indian financial market's rapid expansion, making it essential for all players to keep up with the most recent changes and rules.

In this blog, we aim to take a comprehensive look at TDS on Brokerage as per Section 194H and provide you with a clear and concise guide to this complex topic. From the basics of Section 194H  to the rates, and limits, this blog will provide you with all the information you need to stay compliant and make informed investment decisions. So, let's dive in and explore the world of TDS on Brokerage!

TDS on Brokerage- Overview 

The tax that is withheld at source by the broker or intermediary on behalf of the investor or trader is referred to as TDS on Brokerage. The Indian Income Tax Act, of 1961 regulates and governs the TDS on Brokerage arrangements under Section 194H. This clause mandates that all brokers, intermediaries, and agents who receive brokerage or TDS commission income over a certain threshold deduct tax at the source prior to paying the beneficiary

Its purpose is to ensure that the tax owed on brokerage or commission income is collected at the time of payment rather than at the time of Income tax filing returns. The TDS deducted on brokerage is then credited to the government, and the investor or trader is entitled to claim a credit for the same while filing their tax returns.

What is Section 194H?

The regulations of TDS on Brokerage and Commission are governed by Section 194H of the Income Tax Act of 1961. According to this clause, everyone who is in charge of giving a resident brokerage or commission income must deduct tax at source and pay it to the government. The beneficiary of the brokerage or commission income can subsequently claim a credit for the TDS that was deducted under Section 194H when completing their tax returns.

It is important to note that individuals and Hindu Undivided Families who are covered under Section 44AB are also required to deduct TDS on commission or brokerage income. Additionally, from the financial year 2020-21, individuals and Hindu Undivided Families with a turnover from business exceeding Rs. 1 crore or gross receipts from a profession exceeding Rs. 50 lakh are also required to deduct TDS on brokerage or commission income.

194h TDS Rate 

The normal rate of TDS under Section 194H is 5% of the brokerage or commission income paid. However, during the period from 14 May 2020 to 31 March 2021, the rate of TDS was reduced to 3.75%.

It is important to note that no surcharge, education cess, or SHEC (Secondary and Higher Education Cess) shall be added to the TDS rate mentioned above. Therefore, the tax cost will be deducted at the source at the normal rate.

In case the deductee does not quote their PAN (Permanent Account Number) at the time of receiving the brokerage or commission income, the rate of TDS will be 20% in all cases.

194h TDS Limit

As per Section 194H of the Income Tax Act, the person responsible for deducting TDS on commission or brokerage income is required to deposit the same with the government within a specified time period. The TDS deducted from April to February must be deposited on or before the 7th of the following month.

For example, if TDS is deducted on 25 April, it must be deposited on or before 7th May. However, for March, the TDS must be deposited on or before 30th April. For example, if TDS is deducted on 15 March, it must be deposited on or before 30 April.

It is important to comply with these deadlines to avoid any interest or penalty for a late deposit of TDS.

Final Thoughts

In accordance with Section 194H, the standard TDS rate is 5% of the brokerage or commission income received. However, the rate of TDS was decreased to 3.75% for the time frame of 14 May 2020 to 31 March 2021.

Notably, the aforementioned TDS rate shall not be increased by a surcharge, education cess, or SHEC (Secondary and Higher Education Cess). As a result, the tax expense will be subtracted from the source at the standard rate.

The rate of TDS will always be 20% if the deductee fails to provide their PAN (Permanent Account Number) when receiving brokerage or commission income. Get in touch with us, at J.R. Compliance today to learn more!