TDS
What TDS means, how it works, a worked example, the mistakes we see and the questions founders ask.
DefinitionTax Deducted at Source (TDS) is income tax that a payer withholds from salaries, rent, professional fees, contractor payments and interest at prescribed rates and deposits with the government on the payee's behalf.
TDS pushes tax collection to the point of payment. When your company pays a consultant ₹1 lakh, it deducts 10% under Section 194J, pays ₹90,000, and deposits ₹10,000 against the consultant's PAN by the 7th of the next month (30 April for March). Common rates are 10% on professional fees and rent of buildings, 1% or 2% on contractors, 2% on rent of machinery, and slab rates on salary under Section 192, with higher rates if the payee has no PAN. Quarterly returns in 24Q for salary and 26Q for others are due on 31 July, 31 October, 31 January and 31 May, and certificates follow. You meet it the first month you pay anyone above the threshold. What it means for you: late deposit costs 1.5% interest a month, late returns ₹200 a day under 234E, and the expense can be disallowed until the tax is paid.
How TDS works
Each payment type has its own section, rate and threshold, revised from 1 April 2025. Salary is deducted under Section 192 at slab rates after the employee's declaration. Professional and technical fees under 194J: 10% (2% for technical services and call centres) above ₹50,000 a year. Contractors under 194C: 1% for individuals and HUFs, 2% for others, above ₹30,000 per bill or ₹1 lakh a year. Rent under 194-I: 10% for land and buildings, 2% for plant and machinery, above ₹6 lakh a year. Commission under 194H: 2% above ₹20,000. Interest other than on securities under 194A: 10% above ₹10,000 (₹50,000 from banks). A payee without a PAN is deducted at 20%.
Tax deducted in a month is deposited by the 7th of the next month, and by 30 April for March. Quarterly statements follow: 24Q for salary, 26Q for other resident payments, 27Q for non-residents, due 31 July, 31 October, 31 January and 31 May. Certificates in Form 16 (by 15 June) and 16A (within 15 days of each return's due date) complete the cycle. Lower or nil deduction certificates under Section 197, and Form 15G or 15H declarations for interest, let a payee reduce the rate in advance.
The costs of getting it wrong sit in four places. Interest under Section 201(1A) runs at 1% a month from the date tax was deductible until it is deducted, and 1.5% a month from deduction until deposit. A late statement costs ₹200 a day under Section 234E up to the tax amount, with a further penalty under 271H. Section 40(a)(ia) disallows 30% of an expense on which tax was not deducted or deposited by the return due date. And the deductor remains an assessee in default for the tax itself until the payee files a return and pays it. The higher rate for non-filers under Section 206AB was removed from 1 April 2025.
An Indore agency pays a freelance designer ₹1,20,000 in August 2026, its first payment above the 194J threshold. It deducts ₹12,000, pays ₹1,08,000, deposits the ₹12,000 on 5 September with its TAN, reports it in the 26Q for July to September filed on 28 October, and downloads the Form 16A for the designer by 15 November. The designer sees the ₹12,000 in Form 26AS in November and claims it in her return.
Mistakes we see with TDS
- Deducting on the net of GST when the bill shows GST separately on professional fees is correct, but failing to do so on reimbursements billed together with fees, where the whole amount attracts TDS.
- Missing that the annual threshold aggregates all bills from one vendor, so three ₹20,000 invoices to a contractor cross ₹1 lakh together even though none crosses ₹30,000 alone.
- Paying a non-resident developer abroad without deducting under Section 195 and filing Form 15CA and 15CB, which the bank should have stopped and the auditor will flag.
- Deducting correctly but depositing under the wrong section code on the challan, so the credit does not match the return and TRACES raises a short-deduction default.
Last updated 19 October 2026. Checked against the MCA, GST, Income-tax and Trade Marks rules in force for October 2026.
Where you will meet this term
- TDS ReturnsCompanies, LLPs, firms and audited businesses that pay salaries, rent, contractors or professionals.from ₹1,499/quarter
- Accounting & MISFounders who want the books closed every month and a one-page MIS they can actually read, with GST and TDS data ready on time.from ₹4,999/month
- Income Tax Planning & FilingSalaried people, investors, NRIs, freelancers and business owners who want the return right, not just filed.from ₹999
Questions founders ask about TDS
Is TDS deducted on the GST portion of an invoice?
No, where the GST is shown separately on the invoice for services. The CBDT's circular of 2017 directs deduction on the amount excluding GST on services under Sections 194J, 194C and 194-I, provided the invoice separates it. Where the GST is not shown separately, TDS applies to the whole amount.
What if the vendor does not give a PAN?
Section 206AA requires deduction at 20% (or the normal rate if higher) when the payee's PAN is not available, and no lower-deduction certificate can be used. The vendor also loses the credit, because without a PAN it cannot appear in any Form 26AS. Collect the PAN before the first payment.
Does a small proprietorship have to deduct TDS?
An individual or Hindu undivided family must deduct under most sections only if its own turnover in the previous year exceeded ₹1 crore for business or ₹50 lakh for a profession. Companies, LLPs and firms must deduct from the first payment above the threshold, whatever their size.