Identify the payer before applying the 2% rate
For tax year 2026–27, a specified person paying qualifying non-insurance commission or brokerage to a resident applies section 393(1), Table serial 1(ii): 2%, with a ₹20,000 annual threshold. Once the relevant amount or aggregate exceeds that threshold, the deduction applies to the entire covered amount. Exactly ₹20,000 does not cross the threshold. Credit or payment, whichever occurs first, determines the deduction point. The current section 393 text supplies these conditions; the former section 194H label should not replace the operative provision in a current-year working.
This article is checked on 25 October 2026 and concerns ordinary resident-payee transactions during 1 April 2026 to 31 March 2027. Examples assume valid PAN, no lower/nil certificate, no special exemption, no GST component and no agreement requiring the payer to bear the recipient’s tax. They compute withholding, not the recipient’s final income-tax liability.
The specified-person test uses the preceding year
The Income-tax Act, 2025, as amended by Finance Act, 2026 defines the payer in section 402(37). Persons other than individuals and HUFs are covered. An individual or HUF is covered where preceding-year business sales, gross receipts or turnover exceed ₹1 crore, or professional gross receipts exceed ₹50 lakh. Equality with the relevant boundary does not satisfy “exceed”. This is a specific withholding definition; do not replace it with a shorthand statement that only tax-audited persons deduct.
For an individual or HUF outside this definition, separately examine section 393(1), Table serial 6(ii). It covers the specified contract, professional-fee and non-insurance commission/brokerage payments at 2% with a ₹50 lakh threshold. Being outside serial 1(ii) does not necessarily mean that a large commission payment escapes withholding. The two payer routes require separate classification and annual aggregation.
A ledger label does not establish agency
Section 402(7) describes commission or brokerage by reference to a person acting on another’s behalf. Review the agency agreement, customer relationship, services, pricing rights, settlement and risk allocation. Its definition excludes professional services from the service limb and excludes securities from the asset-transaction limb. A genuine principal-to-principal trade discount requires its own analysis. Conversely, renaming an agency commission as a marketing discount does not resolve its character.
Insurance remuneration belongs to serial 1(i); non-salary director remuneration or commission has its own serial 6(iii) treatment. Securities brokerage, professional fees and non-resident payments should not be put into the ordinary commission bucket merely because the accounting software offers one deduction code. This article does not determine those other classifications.
Build one payee-wise cumulative control
Link invoices, credit notes, provisions and payments to the same legally identified payee. Aggregate covered commission within the tax year; do not give each branch, invoice or month a fresh ₹20,000 allowance. Separately identified payees do not lose their individual threshold simply because a payer’s total commission expense is large. Retain evidence where identities, agency capacity or reversals are disputed.
When a later credit crosses the threshold, recalculate tax on the full covered cumulative base and compare it with tax already deducted. This catches the earlier below-threshold amounts. Do not deduct again when paying an invoice already subjected to withholding at credit. Section 393(11) treats credit to a suspense or similarly named account as payee credit for this purpose; a year-end provision should be reviewed on its actual facts, rather than assumed immune because of the account name.
Common errors that change the result
Typical failures are deducting only on the excess above ₹20,000, using current-year turnover for the individual-payer test, treating every commission as insurance remuneration, or accepting a nil-tax declaration for a payment category absent from section 393(6). Ordinary non-insurance commission under serial 1(ii) is not listed in that declaration table. Any certificate or exemption must be independently applicable; a recipient’s statement that no final tax is expected is insufficient.
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Exact threshold
A company credits a resident sales agent ₹20,000 for the whole year, with no further covered amount payable. ₹20,000 does not exceed ₹20,000, so ordinary serial 1(ii) TDS is ₹0. This does not make the agent’s income tax-exempt.
Illustrative example 2: Later credit crosses the limit
An initially unanticipated second commission credit raises the same agent’s annual total from ₹18,000 to ₹25,000: ₹18,000 + ₹7,000. Required cumulative TDS is ₹25,000 × 2% = ₹500. With nothing deducted earlier, ₹500 is deducted at the second credit; if the ₹7,000 is then paid with that deduction, cash is ₹6,500. Deducting 2% only on ₹5,000 would produce ₹100 and a ₹400 shortfall.
Illustrative example 3: Credit precedes cash
A company credits ₹80,000 commission on 30 September 2026 and pays on 10 October. TDS is ₹1,600 at the September credit. The later cash settlement is ₹78,400, assuming no other adjustment. A second ₹1,600 deduction at payment would duplicate withholding.
Illustrative example 4: Individual at the turnover boundary
An individual’s preceding-year business turnover is exactly ₹1,00,00,000, with no professional activity. The individual is outside section 402(37)(b) on those facts. A qualifying ₹60,00,000 commission payment nevertheless exceeds serial 6(ii)’s ₹50,00,000 threshold. Its ordinary 2% deduction is ₹1,20,000 on the whole ₹60,00,000, subject to the stated assumptions.
Illustrative example 5: One rupee above the payer boundary
A sole proprietor’s preceding-year business turnover is ₹1,00,00,001. It exceeds ₹1 crore by ₹1, so the specified-person test is met. Qualifying commission of ₹1,00,000 to one resident agent attracts ₹2,000 under serial 1(ii), even though the commission is below ₹50 lakh.
Illustrative example 6: Two distinct recipients
A company credits ₹15,000 each to two genuinely distinct resident agents, with no other covered commission for either. Total expense is ₹30,000, but each payee’s base remains ₹15,000. Ordinary serial 1(ii) withholding is ₹0 for each; combining them into a single fictitious payee would create an incorrect ₹600 deduction.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the period | Document that the credit/payment belongs to tax year 2026–27, with transition items separately reviewed. |
| 2 | Identify the payee | Retain residency, PAN and legal identity evidence. |
| 3 | Read the agreement | Establish agency character and distinguish professional services, securities transactions and trade discounts. |
| 4 | Choose the payment entry | Record why serial 1(ii), rather than insurance or director remuneration, applies. |
| 5 | Classify the payer | For an individual/HUF, retain preceding-year turnover or professional receipts and the exact comparison. |
| 6 | Test the alternative route | Where serial 1(ii) does not apply, evaluate serial 6(ii) and its distinct ₹50 lakh trigger. |
| 7 | Aggregate by payee | Reconcile covered credits, payments and supported adjustments across branches. |
| 8 | Check the first deduction date | Compare invoice credit, provision/suspense entry and cash dates. |
| 9 | Recalculate cumulative TDS | Apply the correct full base and deduct only the balance after prior withholding. |
| 10 | Close the reporting trail | Match deduction records, deposit evidence, current statutory reporting and recipient credit; resolve mismatches. |
Sixteen practitioner FAQs
1. Does the ₹20,000 threshold apply invoice by invoice?
No. The covered annual amount or aggregate for the relevant payee must be monitored.
2. What happens at exactly ₹20,000?
The general statutory trigger is exceeding the threshold. Exactly that amount does not cross it on the assumptions used here.
3. Is tax confined to the excess above the threshold?
No. Serial 1(ii), read with the opening provision, applies to the entire covered amount after crossing.
4. Can a company avoid this duty because its turnover is small?
The individual/HUF turnover qualification is not the definition applicable to companies.
5. Which year’s turnover matters for an individual payer?
The tax year immediately preceding the year of credit or payment, under section 402(37).
6. Does a higher tax-audit threshold replace ₹1 crore here?
No. Apply this withholding definition on its own terms instead of substituting another provision’s audit test.
7. What if the payer is an HUF below the specified-person limits?
Check the separate serial 6(ii) large-payment route rather than stopping the review.
8. Is every payment described as brokerage covered?
No. The statutory definition, relationship and exclusions matter; securities transactions require separate examination.
9. Can a commission credited to a suspense ledger be ignored?
The account’s name does not override section 393(11). Examine the substance of the credit and identify the underlying liability.
10. Should payment trigger a second deduction after credit-stage TDS?
No duplicate deduction should be made on the same amount already subjected to withholding.
11. Does insurance commission use this entry?
No. Insurance-business remuneration is separately classified under serial 1(i).
12. Is a director’s non-salary commission ordinary agent commission?
It has a separate express entry under serial 6(iii); do not select the 2% agent code automatically.
13. Can the payee submit a nil-tax declaration for ordinary commission?
Serial 1(ii) is absent from section 393(6)’s listed declaration categories. A nil final-tax expectation alone does not permit non-deduction.
14. Can a lower-deduction certificate simply be assumed?
No. Verify an actually applicable certificate, its scope, validity and conditions before departing from the ordinary computation.
15. How should an agency discount dispute be documented?
Preserve contracts, invoices, price-setting rights, risk allocation and settlement evidence. The ledger description alone is weak classification evidence.
16. Does deducted TDS settle the agent’s final tax?
No. Withholding credit and the recipient’s final income computation are different exercises.
Conclusion
Classify the payer and agency payment before applying 2% TDS. Reconcile the ₹20,000 threshold, cumulative catch-up and the separate large-payment route for individuals and HUFs.