TDS on Commission and Incentive in India: Section 192 vs Section 194H

TDS on a sales incentive or commission depends on who receives it. Pay your own employee an incentive and it is salary — TDS under Section 192 at their applicable rate. Pay an outside agent, consultant or referral partner a commission and it is Section 194H (2%), now Section 393 from 1 April 2026, plus 18% GST on their invoice.

Key facts at a glance

	Employee incentive	Partner / agent commission
Section	Section 192 (salary)	Section 194H → Section 393
How it is taxed	As salary, at the employee's applicable rate	TDS 2% on the base commission
Threshold	Part of salary	₹20,000 aggregate per payee per FY
GST	Outside GST (Schedule III)	Partner raises an 18% GST invoice
Where it shows	Payslip / Form 16	Commission invoice; TDS on base, not GST

Source: ClaimDS — free to reuse with a link back to this article.

The one question that decides everything: is the payee an employee or an agent?

Almost every mistake in this area comes from starting with the wrong question. People ask "what rate of TDS applies to an incentive?" when the question that actually governs the answer is "who is being paid, and in what relationship?"

There are two relationships that matter. In an employer-employee relationship, whatever you pay for the work — salary, bonus, incentive, commission-by-name — is remuneration for employment. In a principal-to-agent relationship, you pay an independent person a fee for a service they render on your behalf. The tax treatment follows the relationship, and the relationship follows the substance.

This is why the label does not control the outcome. Calling a payment an "incentive", a "referral support" or a "business promotion payout" does not change its character. If it is paid to your employee for their work, it is salary however you name it. If it is paid to an outside party for procuring business for you, it is a commission however you name it. Get the relationship right and the section, the rate and the GST position all follow.

Paying an employee: Section 192 (salary)

An incentive, bonus or commission paid to your own employee under an employment relationship is salary. TDS is deducted under Section 192, at the employee's applicable rate, and it appears on the payslip and in Form 16 like the rest of their pay.

Two things do not apply to an employee incentive, and both are common sources of error:

• Section 194H does not apply. Section 194H is about commission or brokerage paid to a non-employee. A payment inside the employment relationship is salary, not 194H commission.
• Section 194R does not apply. Section 194R deals with benefits or perquisites provided to a non-employee in the course of business; it does not reach the employer-employee relationship.

Whether a particular incentive also affects other payroll obligations — provident fund, for instance — is a separate, fact-specific question that turns on how the incentive is structured; it is taken up, at pointer level, in the companion article on incentives and PF wages.

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Paying an external agent or partner: Section 194H, now Section 393

Commission or brokerage paid to a non-employee — an agent, a referral partner, a consultant who books business for you — is dealt with under Section 194H. The core figures:

• Rate: 2%.
• Threshold: ₹20,000 aggregate per payee per financial year.
• No PAN: 20% can apply.
• Return: Form 26Q.

From 1 April 2026, this obligation is carried into Section 393 of the Income-tax Act 2025 — the rate and threshold unchanged. That renumbering, and the new challan payment code, are covered in full in Section 194H becomes Section 393.

Alongside the TDS, the partner is rendering you a service, so they generally raise an invoice charging 18% GST. The TDS is deducted on the base commission, not on the GST component, where the GST is shown separately on the invoice — the calculation that is most often got wrong.

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When is it a discount, not a commission at all?

There is a third case that looks like the second but is taxed like neither: the principal-to-principal sale. Where the payee buys your goods and resells them on their own account, a later reduction in what they paid is a discount on their purchase price — not a fee for a service — and commission TDS under Section 194H may not arise. This is the bridge from the sales-partner world to the channel-rebate world, where the same reduction is settled by a credit note rather than a commission.

Indian courts have looked at both sides of this line on similar-looking facts — treating a concessional price to agents in a principal-to-principal sale as a discount, and a manufacturer-funded dealer incentive tied to onward sales as commission — but the outcome turns entirely on the facts, so take professional advice on your own arrangement.

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GST: the employee/agent split again

The same employee-vs-agent line runs through GST. An employee's incentive is outside GST — services by an employee to an employer in the course of employment are neither a supply of goods nor of services under Schedule III — so there is no GST invoice and no GST on it.

An external partner's commission is a taxable service at 18%; the partner invoices the GST and, in most cases, accounts for it. One carve-out to confirm case by case: for certain individual agents providing services to a bank or NBFC, the reverse-charge mechanism can place the GST liability on the recipient rather than the agent.

A quick decision guide

Read it as guidance, not a determination — the outcome always turns on your facts:

1. Is the payee on your payroll (your employee)? → It is salary. TDS under Section 192 at their applicable rate; no separate GST.
2. Not on payroll — do they act on your behalf to get you business (an agent)? → It is commission. Section 194H → 393, 2%, ₹20,000 threshold, plus 18% GST on their invoice; TDS on the base, not the GST.
3. Do they buy your goods and resell on their own account? → It is likely a discount, settled by credit note — not commission. Take advice.

Read next

• Section 194H becomes Section 393 — the renumbering and the new payment code (required reading for the agent case).
• TDS on dealer and distributor benefits in kind — the benefits-and-perquisites provision, for non-employees.
• Financial vs tax credit notes and the treatment of post-sale discounts — the discount side of the line.
• Distributor margin, commission and incentives and how rebates, chargebacks and buybacks are taxed.
• Rebate management — the product basics.

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Tax note. This article is general information, not tax or legal advice. Every statutory reference and figure above — Sections 192, 194H, 393, 194R (referenced only to note it does not apply to employees), Schedule III, the 2% rate, the ₹20,000 threshold, the 20%-without-PAN rate, the 18% GST rate, the reverse-charge point, Form 26Q, the Income-tax Act 2025 and the 1 April 2026 effective date — must be verified against the notified law and reviewed by a qualified chartered accountant or cost accountant before it is relied upon.

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