TDS Under Section 194H

TDS Under Section 194H: The Complete Compliance Guide for FY 2026-27

Section 194H requires every eligible deductor to withhold TDS at 5% on commission or brokerage paid to a resident, once the aggregate payment to that payee in a financial year crosses Rs. 15,000 (as currently notified). The section covers a sweeping range of B2B arrangements — distributor margins, travel-agent commissions, referral fees, payment-gateway charges and digital-marketplace incentives. Get the classification wrong and you face not just a short-deduction demand but a disallowance of the entire expense under Section 40(a)(ia).

Who Is Required to Deduct TDS Under Section 194H

The obligation sits with every person responsible for paying commission or brokerage to a resident payee — but with one important carve-out for smaller operators:

• Companies, firms, LLPs, co-operative societies, trusts and local authorities — always required to deduct, regardless of their own turnover.
• Individuals and HUFs — required to deduct only if their total sales, gross receipts or turnover in the immediately preceding financial year exceeded the tax-audit threshold under Section 44AB. For FY 2026-27, that means an individual or HUF whose turnover crossed Rs. 1 crore (business) or Rs. 50 lakh (profession) in FY 2025-26 must deduct TDS under Section 194H this year.
• Non-resident payees — Section 194H does not apply. Commission paid to a non-resident is governed by Section 195 (TDS at applicable treaty rate or 40% plus surcharge/cess on non-treaty income).

Practical implication: A proprietary trading firm whose FY 2025-26 turnover was Rs. 80 lakh is not required to deduct under Section 194H in FY 2026-27, even if it pays Rs. 5 lakh in commission to agents. A private limited company at the same turnover is required to deduct. Structuring commission arrangements through a proprietary firm to escape TDS is a known audit trigger and will not survive scrutiny if the company is the true principal.

How "Commission or Brokerage" Is Defined — and Where It Ends

The Explanation to Section 194H defines commission or brokerage as any payment, received or receivable — directly or indirectly — by a person acting on behalf of another person for:

1. Services rendered (other than professional services within the meaning of Section 194J),
2. Any services in the course of buying or selling goods, or
3. Any transaction relating to any asset, valuable article or thing.

The phrase "on behalf of another" is the axis around which everything turns. It signals an agency or principal-agent relationship: the person receiving commission acts for someone else and does not bear the price risk of the goods or services. That is what distinguishes commission from a trade discount, where the buyer takes title to goods and bears the risk of resale.

Payments Specifically Excluded

The Grey Zone: What Courts and Circulars Have Settled

• Trade discounts on goods sold outright — not commission. If a distributor buys goods and resells on its own account, the margin is a trade discount, not commission. The test is whether title passes.
• Telecom distributor margins — the Supreme Court has repeatedly held that where a distributor buys prepaid talk-time/vouchers and resells them, it is a principal-to-principal sale, so the margin is a discount, not commission.
• Payment gateway charges — if the gateway is facilitating a transaction on behalf of the merchant (collecting money on the merchant's behalf and remitting it), the service charge is commission. If it is a pure technical-service fee unrelated to transaction value, Section 194J may apply instead.
• Travel agent commission — covered under Section 194H even when the agent adjusts its commission against amounts collected from passengers, rather than receiving a separate cheque.

Rate and Threshold: What Triggers the Deduction

Rate

No surcharge, health and education cess is loaded on the basic rate for resident payees. The rate you apply is flat 5% (or 20% without PAN).

Threshold

TDS is not required until the aggregate amount credited or paid to the payee in the financial year exceeds Rs. 15,000. This is an annual aggregate threshold — not per transaction, not per invoice.

Key point: Once the threshold is breached — even on the very first payment that crosses it — TDS must be deducted on the entire amount paid or credited to that payee in the year, not just on the excess. Many deductors apply TDS only from the transaction that causes the breach, which is incorrect.

> If a company has credited Rs. 14,000 in Q1 and Rs. 2,000 in Q2 to the same agent, TDS at 5% on the full Rs. 16,000 = Rs. 800 must be deducted at the point the Q2 credit is made.

When Exactly Must You Deduct? The Timing Rule

TDS is deductible at whichever event happens earlier:

1. Credit of commission to the payee's account — including any Suspense Account or "Commission Payable" ledger, regardless of whether cash has moved.
2. Actual payment — in cash, cheque, NEFT, RTGS or any other mode.

This matters enormously in practice. If you accrue commission in your books at year-end and clear the payable in the next financial year, TDS should have been deducted at the point of accrual — not at the point of cash payment. Failure to deduct at accrual is one of the most common 194H audit points.

Step-by-Step: How to Comply With Section 194H in FY 2026-27

1. Identify all commission/brokerage arrangements

List every vendor in your books to whom you pay an amount that might be commission. Check the agreement (or the commercial reality if there is no agreement) — does the payee act on your behalf? Is the payment linked to a percentage of transaction value?

2. Collect PAN and, if applicable, Section 197 certificates

Before the first payment, obtain the payee's PAN. Verify it on the Income Tax portal. If the payee holds a Section 197 certificate for lower or nil deduction, record the certificate number and validity period.

3. Monitor the aggregate threshold in your ERP

Set up a running total per payee. The moment the threshold is about to be crossed, ensure your payment-processing workflow triggers TDS deduction.

4. Deduct at the right time

At the earlier of credit or payment. If your accounts team books a "Commission Payable" accrual entry, that is the moment of credit — deduct then.

5. Deposit TDS with the government

• For all deductors other than government offices: 7th of the month following the month of deduction. For deductions made in March, the due date is 30th April.
• Use Challan ITNS 281. Map the deposit to the correct Section (194H) and Assessment Year (AY 2027-28 for FY 2026-27).

6. File Form 26Q quarterly

Form 26Q is the quarterly TDS return for non-salary payments. Filing due dates for FY 2026-27:

7. Issue Form 16A to the payee

Issue within 15 days from the due date for filing the quarterly statement. Payees use Form 16A to claim credit in their ITR; errors or delays cause their AIS/TIS to show a mismatch.

8. Reconcile with AIS/TIS

After each quarter's Form 26Q is processed, download the payee's ledger from TRACES and cross-check with your books. Any discrepancy between what you reported and what the payee sees in AIS (Annual Information Statement) or TIS (Taxpayer Information Summary) will generate a system-generated notice.

Worked Examples: Real Numbers, Real Situations

Example 1 — FMCG Company Paying Agent Commission

Brightpack Consumer Goods Pvt. Ltd. pays commission to 12 territory sales agents in FY 2026-27. One agent, Mr. Ramesh, earns the following commission credits:

Note: In June, the threshold is crossed. Brightpack deducts Rs. 850 (5% on the full Rs. 17,000 credited so far) in June — not just 5% on the incremental Rs. 2,000. The June TDS is deposited by 7 July 2026.

By year-end, Ramesh earns Rs. 77,000 total commission. TDS = Rs. 3,850. Net payment = Rs. 73,150. Brightpack reports this in Form 26Q for all four quarters and issues Form 16A to Ramesh by 15 June 2027.

Example 2 — Late Deduction: The Cost of Getting Timing Wrong

Swiftlink Logistics Ltd. accrues Rs. 1,20,000 in brokerage for a freight broker in its March 2027 books but incorrectly deducts TDS only when it pays the broker in May 2027 — a two-month delay.

Interest under Section 201(1A):

• TDS amount = Rs. 6,000 (5% × Rs. 1,20,000)
• Period of delay = 2 months (March to May)
• Interest rate = 1.5% per month (for late deduction-to-deposit period)
• Interest = Rs. 6,000 × 1.5% × 2 = Rs. 180

That is a small number on its own — but add a Section 40(a)(ia) disallowance of the full Rs. 1,20,000 brokerage expense in AY 2027-28 if the Assessing Officer treats the deduction as not made within the year, and the tax cost becomes Rs. 1,20,000 × 25.17% (corporate tax rate) = Rs. 30,204 of additional tax plus interest and penalty.

Example 3 — No PAN: The 20% Trap

An e-commerce aggregator pays influencer marketing commissions of Rs. 50,000 to a blogger who refuses to share PAN. Section 206AA kicks in. TDS = 20% × Rs. 50,000 = Rs. 10,000. The aggregator deposits Rs. 10,000 and remits Rs. 40,000 net. The blogger later discovers the deduction and files a revised return claiming the TDS credit — but without a PAN-linked return, the credit sits unmatched on TRACES, causing a refund delay. Always collect PAN before the first payment.

Example 4 — Late Filing of Form 26Q

Nexgen Realtors Pvt. Ltd. files Q4 Form 26Q on 25 July 2027 instead of 31 May 2027 — a delay of 55 days.

Section 234E fee: Rs. 200 per day × 55 days = Rs. 11,000 (capped at TDS amount). This is mandatory; it is not waivable.

Section 271H penalty (additional): Rs. 10,000 minimum if return is not filed within one year of due date (not applicable here, but relevant if the delay were longer).

Transactions That Look Like Commission But Are Not

Getting the classification right at the front end protects you at both ends of the chain.

Trade Discount vs. Commission

A hardware manufacturer sells goods at Rs. 100 to a dealer who resells at Rs. 120. The Rs. 20 margin is a trade discount — the dealer bought title to the goods. No TDS under Section 194H. If instead the manufacturer appoints the dealer as an agent who collects Rs. 120 from the end-customer on the manufacturer's behalf and remits Rs. 100, keeping Rs. 20 as commission — that is Section 194H territory.

The practical test: Who bears the risk of the goods not being sold? A principal bears the risk; an agent does not.

Technical Service Fee vs. Commission

A B2B platform charges a flat Rs. 5,000 per month as a "listing fee," irrespective of whether any transaction happens. That is a fee for technical services — Section 194J. If the same platform charges 2% of the GMV of every transaction processed through its marketplace, that looks like commission — Section 194H.

Bank Guarantee Commission

Banks charge a commission for issuing guarantees. This is a fee for the use of the bank's credit — not a commission for services rendered on behalf of a principal. Exempt from Section 194H, as affirmed by multiple tribunal decisions.

Common Mistakes and Pitfalls to Avoid

1. Treating the threshold as per-invoice rather than aggregate annual The Rs. 15,000 threshold is per-payee-per-year. A company that pays Rs. 3,000 per month to the same agent for five months must deduct TDS from month 5 onwards on the full cumulative amount — not from month 6 or only on the excess.

2. Ignoring accrual as the point of deduction The "credit to account" trigger fires when your accountant books the entry — not when you sign the cheque. A year-end provision for commission payable is a triggering event.

3. Not updating the ERP when a Section 197 certificate expires Certificates have an expiry date and a maximum amount. Once either limit is hit, the standard 5% rate applies. Systems that do not track certificate validity continue deducting at the certificate rate, creating a short-deduction demand.

4. Netting commission against amounts collected A travel agent collects Rs. 1,00,000 from a client, deducts its Rs. 8,000 commission, and remits Rs. 92,000 to the tour operator. The tour operator must deduct TDS on the gross Rs. 8,000 commission — it cannot treat this as "no payment made."

5. Misclassifying as Section 194J to avoid 194H Some deductors prefer to book commissions as "fees for professional services" under Section 194J (also 10%, or 2% for technical services) to avoid the "commission" label. But if the payee is not a specified professional (doctor, lawyer, architect, etc.) and the arrangement is one of agency, Section 194H applies regardless of how you label it.

6. Skipping Form 26Q filing because TDS is zero If you paid commission below the threshold and deducted no TDS, you may still need to file Form 26Q if you had other TDS transactions in the quarter. Omitting a payee from the return causes their Form 26AS not to reflect the deduction.

7. Issuing Form 16A with the wrong financial year or PAN Form 16A issued for AY 2027-28 (FY 2026-27) with a typo in the deductee's PAN creates a mismatch that cannot be corrected without filing a 26Q correction statement — which takes time and delays the payee's refund.

Documentation Playbook for Section 194H

A clean paper trail is your first line of defence in a TDS survey or assessment.

At the start of every commission arrangement:

• Signed master commission agreement specifying: percentage or formula, the principal-agent relationship, GST treatment, payment cycle and TDS applicability
• Payee's PAN photocopy or e-KYC record
• Copy of Section 197 certificate (if applicable), with calendar reminders for expiry

On every payment:

• Monthly commission statement showing gross commission, TDS deducted at source, net amount payable and the challan reference number
• Bank/NEFT advice matching the net amount in the statement
• Matching journal entry in the ERP tying the gross commission, TDS liability and cash outflow

Quarterly:

• Form 16A issued within 15 days of the Form 26Q filing deadline
• Reconciliation sheet comparing your books (total commission credited, total TDS deducted, total TDS deposited) against TRACES Form 26AS download for each payee

Multi-tier distribution networks: When a master distributor further appoints sub-distributors on your behalf, document each layer separately. The master distributor's commission from you and the sub-distributor's commission from the master distributor are two separate transactions — each to be tested against Section 194H independently. The master distributor, if a company, owes its own TDS obligation on what it pays down the chain.

Key Takeaways

• 5% is the standard rate; 20% is the penalty rate for missing PAN. Collect PAN before the first payment — there is no going back after the transaction.
• Rs. 15,000 aggregate per payee per year is the threshold, applied cumulatively. The first payment that crosses it triggers TDS on everything paid so far, not just the excess.
• Accrual = credit = TDS trigger. Booking a "Commission Payable" year-end provision is a deduction event. Do not wait for the cheque to be signed.
• Section 40(a)(ia) disallowance is the real cost of non-compliance: if TDS is not deducted, the entire commission expenditure can be disallowed in your income-tax assessment, turning a 5% obligation into an effective 25%+ cost.
• Form 26Q is the quarterly compliance anchor. Late filing attracts a mandatory Rs. 200-per-day fee under Section 234E — no waiver.
• Classification discipline matters: trade discounts, professional fees and technical-service charges each have their own TDS section. Mislabelling commission as discount or fee does not reduce the liability — it increases the risk.
• Reconcile with AIS/TIS every quarter. System-generated notices arise from mismatches between what you report and what the payee sees — catching these early is far cheaper than explaining them to an Assessing Officer.