TDS is one of those things that confuses a lot of business owners and gets them into trouble without them realising it. The concept is straightforward. The details are where people slip up.
This guide breaks it down clearly.
What Is TDS?
TDS stands for Tax Deducted at Source. It is a system where the person making a payment deducts a portion of that payment as tax and deposits it directly with the government.
Instead of waiting for the recipient to declare the income and pay tax on it later, the government collects the tax upfront at the point of payment. The recipient can then claim credit for the TDS when filing their own income tax return.
Who Has To Deduct TDS?
Any company, LLP, or individual running a business or profession is required to deduct TDS when making certain types of payments above specified thresholds.
Common payments that attract TDS:
- Salaries (Section 192): TDS is deducted based on the employee's income tax slab. No minimum threshold.
- Professional fees (Section 194J): 10% on payments above Rs. 50,000 a year to one person. Technical services, call centre services and specified royalties are 2% at the same threshold.
- Contractor payments (Section 194C): 1% (individual or HUF) or 2% (others), on a single payment above Rs. 30,000 or an annual aggregate above Rs. 1 lakh.
- Rent (Section 194I): 10% on rent of land, building, furniture or fittings, 2% on plant and machinery, tested at Rs. 50,000 per month rather than against an annual total.
- Commission and brokerage (Section 194H): 2% on payments above Rs. 20,000 a year.
The full list is longer but these are the most common ones for small and mid-sized businesses.
What You Need To Do: A Practical Checklist
1. Get a TAN
Before you can deduct TDS, you need a Tax Deduction Account Number (TAN). Apply for it using Form 49B on the TIN portal or through a professional.
2. Deduct the Correct Amount
Check the applicable section, the threshold limit, and the correct rate before making each payment. Using the wrong rate is a common and costly mistake.
3. Deposit by the 7th of the Following Month
TDS deducted in any month must be deposited to the government by the 7th of the next month. For March, the deadline is April 30th. Deposit through Challan 281 on the TIN portal.
4. File Quarterly TDS Returns
Returns must be filed every quarter:
- Q1 (April to June): due July 31
- Q2 (July to September): due October 31
- Q3 (October to December): due January 31
- Q4 (January to March): due May 31
The forms are 24Q (for salary) and 26Q (for all non-salary payments).
5. Issue TDS Certificates
After filing your return, issue Form 16 to employees and Form 16A to vendors. These are their proof of TDS deducted.
What Happens If You Get It Wrong?
The consequences of TDS non-compliance are serious:
- Late deduction: Interest at 1% per month from the date deduction was due
- Late deposit: Interest at 1.5% per month from the date of deduction to date of deposit
- Late filing of returns: Fees under Section 234E at Rs. 200 per day up to the TDS amount
- Penalty: Can be equal to the TDS amount if defaults are found during an assessment
TRACES (the TDS reconciliation and correction portal) sends notices automatically when mismatches are found.
TDS And GST: How They Connect
TDS and GST are separate systems but both apply to many of the same transactions. When you pay a vendor, you may need to deduct TDS on the base amount while the vendor collects GST on top of it. The TDS is calculated before GST, not on the GST component.
TDS Rate Chart, FY 2026-27
From 1 April 2026 the Income-tax Act 2025 renumbers the TDS provisions. Deductions now fall under Section 393, with the old section numbers retained below because that is still how everyone refers to them. Rates and thresholds are unchanged by the renumbering.
| Section | Nature of payment | Threshold | Rate |
|---|---|---|---|
| 194A | Interest from a bank or post office, senior citizen | ₹1,00,000 | 10% |
| 194A | Interest from a bank or post office, others | ₹50,000 | 10% |
| 194A | Interest other than from a bank | ₹10,000 | 10% |
| 194C | Contractor, single payment | ₹30,000 | 1% individual or HUF, 2% others |
| 194C | Contractor, annual aggregate | ₹1,00,000 | 1% individual or HUF, 2% others |
| 194H | Commission or brokerage | ₹20,000 | 2% |
| 194I | Rent of plant and machinery | ₹50,000 per month | 2% |
| 194I | Rent of land, building, furniture or fittings | ₹50,000 per month | 10% |
| 194J | Technical services, call centre, specified royalty | ₹50,000 | 2% |
| 194J | Other professional services | ₹50,000 | 10% |
| 206AA | Payee has not furnished PAN | Any | 20% |
Several thresholds were raised with effect from FY 2025-26 and carry into FY 2026-27: 194H from ₹15,000 to ₹20,000, 194J from ₹30,000 to ₹50,000, and 194I moved from an annual ₹2,40,000 to a monthly ₹50,000 test. Systems configured to the old figures will over-deduct.
The 194I Change Most People Have Missed
Rent was tested against an annual aggregate of ₹2,40,000. It is now tested monthly at ₹50,000. For a tenant paying ₹45,000 a month, the old rule caught them at ₹5,40,000 a year; the new rule does not catch them at all. For a tenant paying ₹55,000 a month, TDS applies from the first month rather than from the month the annual total was crossed.
Deposit And Return Dates
| Obligation | Due |
|---|---|
| Deposit, April to February | 7th of the following month |
| Deposit, March | 30 April |
| Q1 return, April to June | 31 July |
| Q2 return, July to September | 31 October |
| Q3 return, October to December | 31 January |
| Q4 return, January to March | 31 May |
What Non-Compliance Costs
- 1% per month for failing to deduct, from the date it was deductible
- 1.5% per month for deducting and not depositing, from the date of deduction
- ₹200 per day under Section 234E for a late return, capped at the TDS amount
- 30% of the expense disallowed under Section 40(a)(ia)
- Penalty between ₹10,000 and ₹1,00,000 under Section 271H where a return is more than a year late