TDS on Commission and Brokerage: Section 194H / 393 Guide for FY 2026-27

TDS on Commission and Brokerage: Section 194H / 393 Guide for FY 2026-27

If your business pays commission to agents, brokers, distributors, or intermediaries, you are likely required to deduct TDS before releasing the payment. Section 194H of the Income Tax Act 1961 (now consolidated into Section 393 of the Income Tax Act 2025, payment code 1014) governs this obligation.

Commission payments are common across industries: FMCG companies paying distributors, real estate firms paying brokers, advertisers paying agencies, businesses paying payment gateway fees, and companies paying sales agents. Getting the TDS wrong does not just create a compliance notice. It disallows 30% of the entire commission as a business expense.

This guide covers the rates, thresholds, definitions, exemptions, and filing requirements as they apply from FY 2026-27 onward.

Who Must Deduct TDS Under Section 194H

Any person responsible for paying commission or brokerage to a resident must deduct TDS, provided they meet the applicability criteria. Specifically:

• Any company (private or public)
• Any partnership firm (including LLPs)
• Any co-operative society
• Central Government or State Government (or any local authority)
• Any body established under a Central or State Act
• Any trust, university, or educational institution
• Any individual or HUF whose total sales, gross receipts, or turnover exceeded Rs 1 crore (business) or Rs 50 lakh (profession) in the immediately preceding financial year

The individual/HUF threshold is identical to Section 194C. If your business turnover crossed Rs 1 crore in FY 2025-26, you must deduct TDS on commission payments starting FY 2026-27. Below this limit (and not subject to tax audit), the obligation does not apply.

What Qualifies as "Commission or Brokerage"

The definition in the Act is specific. Commission or brokerage means any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for:

What Is Excluded

The definition explicitly excludes:

1. Insurance commission - Covered under Section 194D (now also within Section 393 but with a different payment code and rate).
2. Professional services - If the payment is for professional or technical services, it falls under Section 194J (10% for professional fees, 2% for technical services), not 194H.
3. Securities transactions - Commission on securities transactions is outside the scope of 194H.

TDS Rate

The rate was reduced from 5% to 2% by the Finance (No. 2) Act, 2024, effective October 1, 2024. This 2% rate continues into the Income Tax Act 2025 framework.

Threshold Limit: When TDS Is Not Required

TDS is not required if the total of all commission or brokerage payments to one person during the financial year does not exceed Rs 20,000.

This threshold was increased from Rs 15,000 to Rs 20,000 effective April 1, 2025. For FY 2026-27, the Rs 20,000 limit applies.

Once the aggregate crosses Rs 20,000, TDS must be deducted on the amount exceeding the threshold, not on the full amount from the beginning. However, best practice is to deduct TDS on the entire payment that pushes the aggregate past Rs 20,000 and on all subsequent payments.

Worked Example

Your business pays commission to a sales agent during FY 2026-27:

The Principal-Agent Test: Commission vs. Trade Discount

This is the single most litigated issue under Section 194H. The distinction determines whether a payment attracts TDS or not.

When TDS Applies (Principal-Agent)

TDS under Section 194H applies when:

• The person receiving the payment acts on behalf of the payer
• The relationship is that of a principal and agent (as defined in Section 182 of the Indian Contract Act, 1872)
• The agent does not assume ownership of the goods
• The principal controls the terms of the transaction (pricing, delivery, customer relationship)

Examples: A company appoints a sales agent who earns 5% commission on each sale closed. The agent acts on the company's behalf, does not buy the goods, and the company invoices the end customer directly. This is clearly commission under 194H.

When TDS Does Not Apply (Principal-to-Principal)

TDS under Section 194H does not apply when:

• The transaction is a sale at a discount (buyer-seller relationship)
• The distributor or retailer purchases goods outright from the supplier
• The distributor sells at their own risk and on their own account
• The difference between the buy price and the sell price is a trade margin, not a commission

Supreme Court Ruling: Bharti Airtel (2024)

The Supreme Court in Bharti Cellular Limited v. ACIT (2024 INSC 148) settled this long-standing dispute for telecom companies. The court held:

• When a telecom company sells prepaid SIM cards or recharge vouchers to a distributor at a discounted price, and the distributor sells onward at MRP, the difference is a trade margin on outright purchase, not commission.
• The distributor buys the product. Ownership transfers at the point of sale. The distributor assumes risk. There is no fiduciary relationship.
• Section 194H does not apply to such arrangements.

This principle extends beyond telecom. Any industry where a manufacturer sells goods to a distributor at a trade discount (FMCG, pharma, electronics) and the distributor resells on their own account is a principal-to-principal transaction. No TDS under 194H applies on the discount component.

Practical Test for Your Business

Ask these questions about your payment arrangement:

1. Does the recipient buy goods from you and resell on their own account? If yes, it is likely a trade discount (no 194H TDS).
2. Does the recipient act on your behalf to close sales, collect payments, or find buyers? If yes, it is likely commission (194H TDS applies).
3. Who bears the risk of non-payment from the end customer? If the intermediary bears the risk, it suggests a principal-to-principal relationship. If you bear the risk, it suggests agency.
4. Who sets the final selling price? If the intermediary sets the price, it is more likely a purchase-resale. If you set the price and the intermediary earns a percentage, it suggests agency commission.

Common Payment Types and Their Treatment

Timing of Deduction and Deposit

TDS must be deducted at the earlier of:

• The date of credit of the commission to the payee's account (including a "suspense account" or any account by whatever name), or
• The date of actual payment (by cash, cheque, draft, or any other mode).

After deduction, the TDS must be deposited with the government by:

Late deposit attracts interest at 1.5% per month (or part of a month) from the date of deduction to the date of actual deposit.

Section 393 Under the Income Tax Act 2025: What Changed

From April 1, 2026, the Income Tax Act 2025 is in force. Section 194H (along with all other 194-series sections) is now consolidated into the table-driven Section 393 framework.

The CPC will reject TDS returns that reference old section "194H" for payments made on or after April 1, 2026. Use payment code 1014 in Form 140.

For the full section mapping, see our Income Tax Act 2025 section mapping guide.

Consequences of Non-Deduction or Non-Deposit

30% Disallowance Under Section 40(a)(ia)

If TDS is not deducted on a commission payment where it was required, 30% of the expenditure is disallowed while computing business income. For Rs 5,00,000 in annual commission where TDS was not deducted, Rs 1,50,000 is added back to your taxable income.

The disallowance applies if:

• TDS was not deducted at all, or
• TDS was deducted but not deposited with the government before the due date of filing the income tax return under Section 139(1).

Interest on Late Deduction/Deposit

Interest is per month or part of a month. A one-day delay into a new month counts as a full month.

Penalty Under Section 271C

The Assessing Officer can impose a penalty equal to the TDS amount that should have been deducted.

Filing Requirements

Quarterly Due Dates for Form 140

After filing Form 140, the deductor must issue Form 16A (TDS certificate) to each commission recipient within 15 days of the due date for filing the quarterly return.

TDS on Commission Retained by Agent (Net Payment Situations)

A common scenario: You owe Rs 1,00,000 to a customer, but your collection agent retains Rs 5,000 as commission and remits Rs 95,000 to you. Or conversely, an agent collects Rs 1,00,000 from customers on your behalf and remits Rs 92,000 after retaining Rs 8,000 commission.

In both cases, TDS applies on the commission amount. When the agent retains the commission directly (never transfers it to you), TDS is still due. You must:

1. Recognize the full commission amount (Rs 5,000 or Rs 8,000) as an expense.
2. Deduct TDS at 2% on the commission amount at the time of credit.
3. Pay the TDS from your own funds since the agent already retained the net amount.

This is a common source of errors. The commission is "paid" at the moment the agent retains it. TDS is triggered at that point.

Common Mistakes to Avoid

1. Treating trade discounts as commission. If you sell goods to a distributor at a discounted price and the distributor resells on their own account, this is a trade discount, not commission. No TDS under 194H. But if the distributor earns a percentage on sales made on your behalf without purchasing the goods, TDS applies.

2. Not tracking aggregate payments. The Rs 20,000 threshold is on the aggregate of all commission payments to one person in the financial year. If you pay Rs 5,000 per month to an agent (Rs 60,000 per year), TDS applies from the month the aggregate crosses Rs 20,000 (typically October in this example, when the total hits Rs 25,000 after the April-August payments).

3. Missing TDS on retained commission. When an agent deducts their commission from collections before remitting the balance to you, TDS is still your responsibility. Many businesses overlook this because no separate payment is made to the agent.

4. Confusing 194H with 194J. If you pay a CA or lawyer a "success fee" or "referral commission," it is still professional services under 194J (10%), not commission under 194H (2%). The test is whether the payment is for professional services as defined in the Act.

5. Using the old section code after April 1, 2026. Payment code 1014 under Section 393 replaces the old "194H" code. Using the old code in Q1 FY 2026-27 Form 140 will trigger rejection.

6. Applying the old 5% rate. The rate has been 2% since October 1, 2024. If your accounting software still uses 5%, update it immediately. Over-deduction creates cash-flow issues for the payee.

Practical Checklist for SME Owners

• Confirm whether your FY 2025-26 turnover exceeds Rs 1 crore (business) or Rs 50 lakh (profession). If yes, you must deduct TDS on commission payments in FY 2026-27.
• Identify all persons to whom you pay commission, brokerage, or agency fees. Maintain a payee-wise register with running aggregates.
• For each payment arrangement, apply the principal-agent test. Document whether it is commission (194H) or a trade discount.
• Collect PAN from every commission recipient before the first payment. Without PAN, deduct at 20%.
• Update your TDS software to use Section 393, payment code 1014, and the 2% rate.
• Track the Rs 20,000 aggregate threshold per payee per year. Start deducting TDS from the payment that pushes the total past Rs 20,000.
• Deposit TDS by the 7th of the following month. Set a recurring calendar reminder.
• File Form 140 quarterly and issue Form 16A within 15 days of the filing due date.
• For agents who retain commission from collections, separately calculate and deposit TDS on the retained amount.

Tax Garden Handles Your TDS Compliance

Tax Garden's TDS compliance plans track every commission payment, apply the correct TDS rate and threshold, deposit TDS before the monthly deadline, and file Form 140 on time every quarter. No disallowances, no interest, no penalty notices.

For related topics, see our guides on TDS rate chart for FY 2026-27, TDS on contractor payments (Section 194C), TDS on professional fees (Section 194J), TDS on rent (Section 194I), TDS return filing with Form 24Q and 26Q, and the new TDS payment codes under the Income Tax Act 2025.

Frequently Asked Questions

Is TDS under Section 194H applicable on payments to non-residents?

No. Section 194H applies only to payments made to residents. Commission or brokerage payments to non-residents are covered under Section 195 (now part of the Section 393 framework for non-resident payments), with rates determined by the applicable DTAA or the rates specified in the Act, whichever is lower.

Does Section 194H apply to bank charges or credit card processing fees?

The issue has been litigated. Multiple tribunals have held that bank charges and credit card processing fees do not attract TDS under Section 194H because the relationship between the business and the bank is a contractual service relationship, not a principal-agent relationship for buying or selling goods. However, payment gateway fees (merchant discount rate or MDR) where the gateway collects on your behalf may attract 194H. Document your position carefully.

My distributor earns a 10% margin. Do I deduct TDS?

It depends on the relationship. If your distributor purchases goods from you at a 10% discount and resells on their own account at MRP, bearing the risk of non-sale and setting their own terms, this is a principal-to-principal transaction. No 194H TDS applies. If your distributor sells your goods on your behalf at prices you set and earns 10% commission on sales, TDS at 2% applies.

What if TDS is deducted under the wrong section (194H instead of 194J)?

If TDS has been deducted and deposited, a wrong section code does not trigger the 30% disallowance. The disallowance provision targets non-deduction or non-deposit, not wrong-code deduction. However, using the wrong payment code under Section 393 will cause processing errors. Correct it in the next revised return.

Is TDS applicable on brokerage paid for buying goods for my business?

Yes. Section 194H covers commission or brokerage in relation to buying or selling of goods. If you pay a broker to source raw materials or goods for your business, TDS at 2% applies on the brokerage once the aggregate exceeds Rs 20,000 in the financial year.

Can a commission agent request lower TDS deduction?

Yes. The payee can apply to the Assessing Officer for a lower or nil TDS certificate under Section 197 (corresponding provision under the new Act). Once issued, the deductor must apply the rate specified in the certificate. The payee must furnish the certificate before the payment is made.

Does TDS apply on the GST component of commission?

If the invoice separately shows the commission amount and the GST charged on it, TDS is deducted on the commission amount excluding GST. If the invoice shows a single consolidated amount without separating GST, TDS applies on the full invoice value. Ask agents to issue invoices with a clear GST breakup.

Sources

This guide is verified against Section 194H of the Income Tax Act, 1961 (TDS on commission or brokerage), Section 393(1) of the Income Tax Act, 2025 (consolidated non-salary TDS table, payment code 1014, effective April 1, 2026), Finance (No. 2) Act, 2024 (rate reduction from 5% to 2% effective October 1, 2024), Finance Act, 2025 (threshold increase from Rs 15,000 to Rs 20,000 effective April 1, 2025), Section 40(a)(ia) (30% disallowance for non-deduction), Section 206AA (TDS at 20% for no PAN), Section 201(1A) (interest on late deduction/deposit), and Section 271C (penalty for failure to deduct). The principal-agent vs. principal-to-principal distinction is established by the Supreme Court in Bharti Cellular Limited v. ACIT (2024 INSC 148). Rates, thresholds, and definitions confirmed from ClearTax, Tax2win, TaxGuru, and BajajFinserv reference materials as of May 2026. All rates and thresholds should be verified against incometax.gov.in before applying to specific deductions.