What Is TDS on E-Commerce? A Quick Overview
Tax Deducted at Source, or TDS, collects tax right where income arises, before the money reaches the earner. For online selling, the e-commerce operator handles this job, not the seller. So the platform deducts the tax and deposits it with the government.
India’s e-commerce boom changed how people shop. Moreover, it raised a fresh question: who pays tax, and when, across platforms, sellers, and the tax department? Two sections answer this. First, Section 194H, which traditionally covered agent commissions. Second, Section 194O, which the law built for the digital economy. Therefore, understanding how both work together really matters for anyone in this space.
Key Definitions You Should Know
An e-commerce operator is any person who owns, runs, or manages a digital platform for selling goods or providing services, and who pays the participants. Meanwhile, an e-commerce participant is the resident seller or service provider who earns through that platform. So the operator deducts, and the participant earns.
Section 194O at a Glance
The Finance Act 2020 added Section 194O, and it took effect from 1 October 2020. Under this rule, the operator deducts TDS when it credits the sale amount to the seller, or when it pays the seller, whichever comes first.
Here is the important update. Earlier, the rate stood at 1%. However, Budget 2024 cut it to 0.1%, effective 1 October 2024. So the current rate is just 0.1% on the gross amount.
| Parameter | Detail |
|---|---|
| Section | 194O, Income Tax Act 1961 |
| Effective from | 1 October 2020 |
| Who deducts | E-commerce operator (the platform) |
| On whom | E-commerce participant (seller or service provider) |
| TDS rate | 0.1% of gross sales or services (reduced from 1% on 1 October 2024) |
| Rate without PAN or Aadhaar | 5% (specifically capped for Sec 194O under Sec 206AA; note that Sec 194H defaults to 20% without PAN) |
| Threshold | 5 lakh per year for resident individuals and HUFs with PAN or Aadhaar |
| When to deduct | At credit or payment, whichever is earlier |
Also note one more point. Non-resident participants stay outside Section 194O. So this rule applies only to resident sellers.
The 5 Lakh Threshold: Who Gets the Exemption?
Not every seller faces TDS under Section 194O. In fact, the 5 lakh exemption applies only when all of these conditions hold together.
| Condition | Requirement | Status |
|---|---|---|
| Entity type | Resident individual or HUF only | Eligible |
| PAN or Aadhaar | Furnished to the operator | Eligible |
| Annual gross sales | Up to 5 lakh | Eligible |
| Firms, companies, LLPs | No threshold benefit | Always deducted |
Now, here is how the mechanics actually work. The ₹5 Lakh limit is a threshold exemption. If an eligible individual or HUF crosses this limit, TDS at 0.1% is deducted only on the amount exceeding ₹5 Lakhs, not on the entire amount from the first rupee.Â
Section 194H: Commission, Brokerage, and Its E-Commerce Link
Section 194H asks anyone paying commission or brokerage to a resident to deduct TDS first. Historically, this touched e-commerce when a platform acted as the seller’s agent, sold on the seller’s behalf, and kept a cut as commission.
The rate changed here too. Until 30 September 2024, the rate was 5%. From 1 October 2024 onward, it dropped to 2%. Without a valid PAN, though, the rate jumps to 20%. Also, from 1 April 2025, the threshold rose to 20,000 a year. No surcharge or cess applies on top.
How 194H Plays Out in a Marketplace
Picture a seller listing products on a marketplace. The platform collects payment from the customer, keeps its commission, and passes the rest to the seller. In a true principal-agent setup, the seller (the principal) pays commission to the platform (the agent). So the seller would deduct 2% TDS on that commission.
However, Section 194H depends entirely on the relationship between payer and payee. It works only when a clear principal-agent link exists. In many marketplace models, that link stays blurry. As a result, courts have ruled differently across cases.
How One Transaction Can Touch Both Sections
Here is where things get tricky. Think about what really happens when a customer buys from a seller on a big marketplace.
First, the customer pays the full price to the platform. Next, the platform collects that amount, deducts its commission and charges, and sends the balance to the seller after deducting TDS under Section 194O on the gross sale value.
Notice that the seller never pays commission separately. Instead, the platform simply adjusts its charges from the sale proceeds. So the commission is not a separate payment from the seller. Rather, it sits inside the gross amount that the operator already handled.
The Double-Deduction Problem
Now suppose Section 194H also hit the commission part. In that case, the seller would face TDS twice on money from the same transaction. After all, the gross sale value already includes the commission. Therefore, taxing the commission again under a different section would mean double deduction on the same income.
That outcome made no sense. So the tax authority stepped in to settle it.
CBDT Circular 20/2023: The Clarification
On 28 December 2023, the CBDT issued Circular No. 20/2023 under Section 194O. Importantly, it clarified that convenience fees and commission charged by the operator form part of the “gross amount” for TDS under Section 194O.
In short, once the operator deducts TDS under Section 194O on the gross, Section 194H does not apply again on the commission or platform fee of that same transaction. So the operator deducts once, at 0.1% on the gross, and the matter ends there. The commission already sits within that gross figure. The only carve-out involves virtual digital assets, where Section 194S still applies.
Conclusion
Section 194H and Section 194O are not rivals. Instead, they cover different commercial realities. Section 194H grew from the old agent-commission world. Section 194O, on the other hand, fits digital platforms, where the operator facilitates, charges, collects, and pays in one smooth flow.
This dual role is exactly why the CBDT had to step in. So the rule is now clear and simple. For operators, the duty is one line: deduct 0.1% on the gross under Section 194O, and 194H stays out. For sellers, meanwhile, the TDS trail in Form 26AS stays accurate and claimable, a prepaid credit rather than a cost.
FAQs
Is TDS applicable if an individual sells below 5 lakh a year?
No. Resident individuals and HUFs providing their PAN or Aadhaar stay exempt below ₹5 Lakhs. Once gross sales cross this mark, TDS applies only on the incremental amount exceeding ₹5 Lakhs.
Does Section 194O cover freelancers and service providers?
Yes. Section 194O covers both sale of goods and provision of services through an operator.
What is the current TDS rate under Section 194O?
It is 0.1% on the gross amount, reduced from 1% with effect from 1 October 2024.
Can TDS under 194O be adjusted against my tax?
Yes. It is a prepaid tax, so you can adjust it against your total tax liability, including advance tax.
What if the operator fails to deduct TDS?
The operator pays interest at 1% per month under Section 201(1A), plus a possible penalty under Section 271C equal to the TDS not deducted.
Do both 194O and 194H apply to the same transaction?
No. Once the operator deducts 194O on the gross, 194H does not apply to the commission of that transaction.
