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Commission Income
Commission income is the earnings an individual or entity receives for facilitating a transaction or sale. It is typically a percentage of the total transaction amount. Agents, brokers, consultants, and sales representatives commonly earn commissions. This income can be derived from business deals, property sales, insurance policies, or financial services. The commission is considered a part of taxable income under the Income Tax Act, 1961, and is subject to deductions, TDS (Tax Deducted at Source), and GST applicability in certain cases, depending on the nature of the service provided.
Commission income can be categorized into:
Sales Commission: Earned by sales representatives or agents on product sales.
Brokerage Commission: Received by real estate agents or stockbrokers.
Insurance Commission: Paid to insurance agents for selling policies.
Financial Services Commission: Earned by investment advisors or mutual fund distributors.
Referral Commission: Earned by referring clients to businesses or services.
Each type of commission has distinct tax implications, and depending on the source, the applicable tax rates, GST, and deductions may vary.
Commission-based earnings provide several benefits:
Performance-Based Earnings: Higher sales or business leads generate more income.
Flexibility: Many commission-based roles offer flexible working hours.
Entrepreneurial Opportunity: Agents can work independently without being salaried.
Passive Income Potential: Referral commissions may continue even after the initial sale.
Tax Deductions: Business expenses related to earning commission, such as travel or marketing costs, can be deducted while filing taxes, reducing the taxable amount.
As per Section 194H of the Income Tax Act, TDS is deducted at 5% if the total commission exceeds ₹15,000 in a financial year. The deductor must issue a TDS certificate (Form 16A), and the recipient can claim the deducted amount as a credit while filing an income tax return.
If the total commission income exceeds ₹20 lakh (₹10 lakh for special category states), GST at 18% applies. GST registration is mandatory in such cases. Certain categories, like insurance agents, have different GST compliance rules, where the service recipient may need to pay GST under the reverse charge mechanism.
Unlike salaried individuals, those earning commission cannot claim standard deductions. However, business-related expenses, including travel, marketing, office rent, and staff salary, can be deducted under Section 37(1). Proper documentation of expenses is essential to claim deductions.
Individuals earning commission income must file ITR-3 or ITR-4 (if eligible for presumptive taxation under Section 44ADA for professionals). Maintaining books of accounts is crucial for accurate tax filing, especially if the total income exceeds ₹50 lakh in a year.
Commission income refers to earnings received as a reward for facilitating a transaction, typically calculated as a percentage of the deal’s value. It is common in sectors such as real estate, insurance, financial services, and sales-based businesses. Individuals earning commission include sales agents, brokers, consultants, and advisors who work on a performance-based model rather than a fixed salary.
This type of income is considered taxable under the Income Tax Act, 1961 and is classified as “Income from Business or Profession” rather than “Salary Income.” As a result, it is subject to tax under applicable slabs based on total earnings. Unlike salaried employees, commission earners do not receive standard deductions under Section 16 but can claim business-related expenses such as travel, marketing, office rent, or internet costs under Section 37(1).
Additionally, TDS (Tax Deducted at Source) under Section 194H applies to commission income exceeding ₹15,000 in a financial year, with a deduction rate of 5%. If annual commission income crosses ₹20 lakh (₹10 lakh in special category states), GST at 18% is applicable. Proper tax planning, maintaining books of accounts, and filing ITR-3 or ITR-4 are essential to comply with income tax regulations and optimize tax liabilities.
For assistance with GST filing, tax notices, ITR filing, company formation, and tax planning, feel free to contact Kumar & Associates, your trusted tax consultancy partner !
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