TDS Under Section 194H: Commission and Brokerage Payments by Businesses
TL;DR
- Section 194H mandates TDS at 5 percent on commission and brokerage payments by businesses to agents and intermediaries.
- The threshold for triggering TDS is aggregate annual payment of Rs. 15,000 to the same payee.
- Insurance commission is excluded - it is covered separately under Section 194D at 5 percent for individuals.
- Discounts on prepaid mobile recharges, freight, and trade discounts are not commission and not covered.
- Non-deduction disallows the entire commission expense under Section 40(a)(ia) when computing business income.
What this means in plain terms
Many businesses use agents, brokers, distributors, and referral partners to generate sales. The payment made to these intermediaries - whether called commission, brokerage, or referral fee - falls within the scope of Section 194H. The Income Tax Act requires the paying business to withhold 5 percent and deposit it on behalf of the agent.
For the agent, this TDS appears in Form 26AS and reduces their final tax liability. For the business, deducting and depositing correctly preserves the expense as a deductible cost and avoids penalties. The threshold of Rs. 15,000 is modest, so most regular commission arrangements get pulled into the net quickly.
Defining commission and brokerage
Statutory definition
Section 194H defines commission or brokerage as any payment received or receivable, directly or indirectly, by a person acting on behalf of another for services rendered, other than professional services. It also includes payments for any services in the course of buying or selling goods.
What's included
Sales commission to dealers and distributors, brokerage to property agents, commission to LIC agents (covered by 194D, not 194H), referral fees, finder's fees, and stockist commission paid to retailers are common examples. Commission to del-credere agents who guarantee debt collection is also covered.
What's excluded
Insurance commission under 194D, brokerage on securities transactions through stock exchanges, and pure trade discounts where the discount is given before the sale is concluded are excluded. Commission paid by airlines or tour operators to travel agents has also been a frequent source of dispute.
Rate, threshold, and compliance for AY 2026-27
The rate
A flat 5 percent applies on the gross commission amount. If PAN is not furnished, the rate doubles to 20 percent under Section 206AA. The 5 percent applies whether the agent is an individual, firm, or company.
Threshold
TDS is required if commission to a single payee exceeds Rs. 15,000 in a financial year. Once crossed, TDS applies to all payments made that year, including the ones before the threshold was breached.
Time of deduction
Deduct at the earlier of credit in your books or actual payment. Many businesses book commission monthly based on sales targets - the booking date triggers TDS even if payment is delayed.
Deposit and reporting workflow
Monthly deposit
Deposit by the 7th of the following month using challan ITNS 281. For March deductions, the deadline is 30th April. Use the deductor's TAN, not PAN, on the challan.
Quarterly return
File Form 26Q on TRACES for each quarter, showing every commission payee, their PAN, the amount paid, and the TDS deducted. Due dates are 31st July, 31st October, 31st January, and 31st May of the following year for Q4.
Form 16A certificate
Issue Form 16A to each commission agent within 15 days of the Form 26Q due date. Agents need this to claim TDS credit in their ITR.
A real example
Vikram, 39, runs a real estate firm in Bengaluru with Rs. 6 crore annual revenue. In August 2026, he pays Anjali, a commission agent, Rs. 80,000 for facilitating an apartment sale. In December, he pays Suresh, another agent, Rs. 12,000 for a smaller lead.
Step 1: Anjali's Rs. 80,000 commission exceeds the Rs. 15,000 threshold. Vikram deducts 5 percent = Rs. 4,000 and pays her Rs. 76,000.
Step 2: He deposits Rs. 4,000 by 7th September via challan ITNS 281.
Step 3: Suresh's Rs. 12,000 payment is below the threshold and stays below it through the year. No TDS on this.
Step 4: In Q2, Vikram files Form 26Q by 31st October showing Anjali's TDS.
Step 5: He issues Form 16A to Anjali by 15th November.
Step 6: Anjali files her ITR-3 in July 2027, claims the Rs. 4,000 TDS credit, and pays only the remaining tax due.
Total TDS deducted: Rs. 4,000. The commission expense of Rs. 80,000 stays fully deductible from Vikram's business income.
What to do this week
- List every commission, referral, or brokerage payment in your books and verify the cumulative amount per agent.
- Ensure PAN is collected from every agent before the first payment to avoid the 20 percent rate.
- Reconcile commission booked vs commission deposited to identify missed deductions.
- Set up a quarterly compliance reminder for Form 26Q filing and Form 16A issuance.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
FAQ
Are trade discounts taxable under 194H?
No. A discount given before or at the time of sale that reduces the invoice value is not commission. Only payments made for services rendered as an intermediary fall under 194H. The Supreme Court ruling in CIT vs Ahmedabad Stamp Vendors Association clarified this.
Does turnover-based incentive paid to dealers qualify as commission?
Yes, if the dealer is acting as an agent rather than a buyer. If the dealer purchases goods outright and resells them, any post-sale incentive is a discount, not commission. The distinction lies in whether title passes.
How is commission paid in kind treated?
Commission paid in goods or services is still subject to TDS based on the fair market value. The deductor must arrange for separate cash deposit of the TDS amount since you can't deduct from a non-cash payment.
Are franchise fees covered under 194H?
Pure franchise fees that allow use of brand and processes are typically royalty under 194J, not commission. However, if part of the franchise agreement is structured as commission for sourcing customers, that portion attracts 194H.
What if I forget to deduct in one quarter?
You can deduct in the next month from any pending payment and deposit with interest at 1.5 percent per month for the delay period. Also file a revised Form 26Q to reflect the correction.
Does Section 194H apply to credit card commission paid to banks?
No. Credit card processing fees are bank charges, not commission to an agent. They are typically excluded from 194H. Some payment gateway fees may attract 194H depending on the structure.
Can an agent get a lower deduction certificate?
Yes. Under Section 197, the agent can approach their assessing officer for a lower or nil deduction certificate if their estimated tax liability is lower than the TDS being deducted.
Sources
- Income Tax Department, Section 194H: https://incometaxindia.gov.in/
- TRACES portal for TDS deductors: https://www.tdscpc.gov.in/
- Finance Ministry on TDS rates: https://finmin.nic.in/
- Supreme Court ruling on commission vs discount: https://incometaxindia.gov.in/
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
