Reducing TDS (Tax Deducted at Source) rates can significantly impact an assessee's financial situation. This article explores the process and considerations for effectively reducing TDS rates.

Introduction

In a significant announcement made during a press conference, the Honourable Finance Minister outlined the implementation of new Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) rates, effective from May 14, 2020, until March 31, 2021. This period aligns with the conclusion of the 2020-21 fiscal year, marking a noteworthy development in the taxation landscape.

One of the key aspects discussed in the press conference pertains to Section 194H, specifically addressing TDS on commission and brokerage. According to this section, the prescribed rate for tax deduction stands at 5%, unless the payee has secured a lower withholding tax certificate from the relevant department.

This insight into Section 194H sheds light on the specific conditions and individuals covered by this TDS provision, emphasizing the importance of understanding its nuances within the broader framework of taxation laws in India.

Section 194H primarily applies to individuals or assesses responsible for payments to residents. It extends its purview to individuals and Hindu Undivided Families covered under Section 44AB, empowering them to deduct TDS for income tax from any income related to commission or brokerage. However, it’s crucial to note that the scope of this section is confined, excluding the insurance commission as specified in Section 194D from its provisions.

Rate of TDS

• The commission or brokerage TDS rate is 5%
• There is no extra fee levied upon the person being charged
• If the payee did not provide PAN, then TDS will be deducted at a higher rate of tax
• Assessee may apply to the Assessing officer for no TDS or TDS at a lower rate as set out in Section 197 of the Income Tax Act, 1961

Key Insights

1. Section 194H and Exclusions

• Under Section 194H of the Income Tax Act, TDS deductions are mandatory for payments related to commissions or brokerages.
• Notably, the provision does not cover commissions payable on insurance commissions, as this specific aspect is addressed under Section 194D of the Income Tax Act.

Discover how to calculate TDS on salary using our easy TDS calculator and get your TDS calculation formula correct.

2. Applicability to Individuals and HUF under Audit

The provisions of Section 194H apply to individuals and Hindu Undivided Families (HUF) who are subject to audit under Section 44AB (a), (b). This inclusion ensures comprehensive coverage under the TDS framework.

3. Tax Deductions for Various Payments

Section 194H encompasses a broad spectrum of payments, including brokerages and commissions. This ensures that tax deductions are applicable across diverse financial transactions.4. Criteria for Taxation Attraction:

Entities become subject to taxation under Section 194H based on their turnover or receipts exceeding specified limits. For instance, entities with turnovers or receipts exceeding 1 crore or 25 lakh fall within the purview of this section.

Deduction of TDS under Section 194H

TDS (Tax Deducted at Source) is not a universal requirement, but it becomes applicable under Section 194H of the Income Tax Act. This deduction comes into play when the income in the form of commission or brokerage is credited to the payee’s account or any other designated account, be it a suspense account or otherwise. Importantly, TDS should be deducted at the time of crediting the income or at the time of making payment in cash, cheque, draft, or any other form, depending on which event occurs earlier.

Key Dates for TDS Deduction under Section 194H

According to Section 194H, TDS is to be deducted on the following dates:

1. When the commission or brokerage is credited to the payee’s account.
2. During payments in cash, cheque, drafts, or any other form of commission or brokerage.

Cases Exempted from TDS Deduction under Section 194H

However, there are specific cases exempted from TDS deduction under Section 194H. These include:

1. When the cumulative amount of commission or brokerage credited to the payee’s account is less than or equal to ₹15,000.
2. Commission payable by Mahanagar Telephone Nigam Limited (MTNL) or Bharat Sanchar Nigam Limited (BSNL) to their public call office franchisees.
3. Commission guaranteed by the bank.
4. Service charges for cash management.
5. TDS is not applicable under Section 194H on insurance commission; Section 194D explicitly addresses this.

Furthermore, TDS is not deductible if the payee has obtained a certificate for NIL or lower deduction of TDS from the Assessing Officer under Section 197. Additionally, TDS on the fee paid to employees by the employer falls under Section 192 and not Section 194H.

Understanding these exemptions is crucial for businesses and individuals to ensure compliance with TDS regulations and avoid unnecessary deductions.

Important Notes on TDS Deduction under Section 194H

• The Deductor would have to deduct TDS on the basic value of the commission/mail paid and not on the GST levied on the commission/brokerage.
• If the brokerage or commission exceeds ₹15 000 exemption limit, the total amount payable during this fiscal year shall be deducted from the TDS. The government deducts this amount rather than just the amount exceeding the exemption limit,
• If, while returning the sale consideration, a commission is retained by the agent, the TDS is to be deposited by the principal in respect of such commission.

What is the Scope of Commission or Brokerage?

Commission or brokerage includes any payment received or receivable, directly or indirectly, or by a person acting on behalf of another person

TDS on commission or brokerage has the following ingredients:

1. Applicable on services rendered (not being professional services), or
2. Applicable on any services rendered in the course of buying or selling of goods, or
3. Applicable on any transaction relating to any asset, valuable article or thing, except securities.

Under what circumstances TDS u/s 194H is not deductible?

Under Section 194H there shall be no deduction if:

1. The person must pay the total or combined amounts of this revenue in the financial year. It shall not exceed  ₹ 15,000.
2. The Person or Assessee makes an application to the assessing officer under section 197 for deduction of tax at the NIL rate or a lower rate.

Is There Any Time Limit on Depositing TDS?

There are two time frames, one must generally look for while depositing TDS.

1. One must deposit the tax deducted from April to February, on or before the 7th of next month.
2. One must deposit, the tax deducted in March on or before 30th April.

How to Reduce TDS Rates

The assessee can make an application to the assessing officer under section 197. This is for the deduction of tax at the NIL rate or a lower rate.

• Deductor measures: Validate the PAN from 197 certificates submitted by a deductee.
• The certificate should be valid for the PAN, Section, Rate, and relevant financial year. We need to mention these details in the statement filed.
• One must verify that the threshold limit for the certificate has not been exceeded in previous quarters.
• The declaration should include the appropriate certificate number. Example of Correct Certificate Number – 3XXXAH7X.

Conclusion

In conclusion, reducing TDS rates is a strategic move that requires careful consideration and adherence to specific procedures. By applying section 197, individuals and entities can seek a lower NIL TDS rate. 

For additional assistance or clarifications, readers are encouraged to leave comments below. And if further guidance is needed, don’t hesitate to reach out for comprehensive support. Understanding the intricacies of TDS reduction can significantly benefit taxpayers, ensuring a more optimized financial landscape.

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