TDS for Business: Guide to Tax Deducted at Source (TDS)

TDS (Tax Deducted at Source) for a business is tax that a payer must deduct from certain payments made to vendors, contractors, employees or others and deposit with the government. Businesses must deduct TDS to comply with the Income Tax Act, 1961, and avoid liability for the tax, interest and penalties that apply if they fail to deduct or deposit TDS; common payments subject to TDS include salaries, contractor fees, rent, professional fees, dividends and purchases above specified thresholds. Deducted TDS must be deposited within prescribed due dates and reported in periodic TDS returns, and the payee is issued a TDS certificate (e.g., Form 16 or 16A) so they can claim the credit. Failure to obtain TAN or follow rates and thresholds can increase the payer’s exposure and lead to higher withholding rates if PAN is missing.

A business should deduct TDS on contractor or sub-contractor payments when the amount per contract exceeds the threshold, Rs. 30,000 per contract or Rs. 1,00,000 in aggregate in a year, and at the applicable rate of 1% for payments to individuals/HUFs and 2% for others under Section 194C. The payer must have the contractor’s PAN to apply the normal rate; absence of PAN attracts a higher rate of TDS. The deducted tax must be deposited and reported in the quarterly TDS return and a Form 16A issued to the payee.

The due dates for depositing TDS are tied to quarterly periods and for FY 2025-26 the deposit due dates are: 31st July 2025 for Apr–Jun, 31st October 2025 for Jul–Sep, 31st January 2026 for Oct–Dec, and 31st May 2026 for Jan–Mar. These are the dates by which the deducted tax must be paid to the government for the respective quarters. Missing these dates can attract interest and penalties, so businesses should calendarize deposits and file the corresponding quarterly TDS returns timely.

Common TDS sections businesses should know include Section 192 (salary: as per income tax slab), 194 (dividend: 10% above Rs. 10,000), 194C (contractor payments: 1% for individual/HUF, 2% for others), 194I (rent: 2% for plant/machinery, 10% for land/building above Rs. 50,000/month), 194J (professional/technical fees: generally 10%, with 2% for certain technical fees), 194Q (purchase of goods: 0.1% when purchases exceed Rs. 50 lakh in a year and buyer’s turnover > Rs. 10 crore), and 194R (perquisites: 10% above Rs. 20,000/year). Each section has its own threshold limits and applicability, so apply the specific rate and limit relevant to the payment type.

If the payee does not provide a PAN, the payer must deduct TDS at a higher rate rather than the normal prescribed rate; this increased rate is meant to discourage non-compliance. The elevated rate applies until the payee furnishes a valid PAN, and the payer should retain evidence of PAN requests and TDS deduction to justify the withholding. Additionally, the payer should still deposit the tax and report it in the TDS return and issue the appropriate TDS certificate once PAN details are available or as required.

After deducting TDS a business must issue the relevant TDS certificates: Form 16 for salary recipients, Form 16A for non-salary payments (e.g., contractor, professional fees), and Form 16B for TDS on sale of immovable property. These forms certify the amount of TDS deducted and allow the recipient to claim tax credit against their tax liability; they must be issued within the prescribed timelines tied to filing TDS returns. Proper issuance of these forms is also essential for the payee to reconcile and claim the deducted tax while filing their income tax return.

Yes, you must obtain a Tax Deduction Account Number (TAN) and quote it in all TDS documents because TAN is mandatory for depositing TDS and filing TDS returns. TAN should appear on challans, TDS returns and certificates; failure to obtain or quote TAN can lead to penalties and complications in compliance. Apply for TAN well before you start deducting TDS and ensure you use the same TAN consistently across filings.

Consequences include interest on late deposit of TDS, late filing fees, and penalties under the Income Tax Act; interest is charged from the date tax was deductible to the date of actual deposit. Penalties may also be levied for failure to file TDS statements or issue certificates on time, and persistent defaults can attract prosecution in severe cases. To limit exposure, businesses should follow the deposit due dates for each quarter and file accurate TDS returns, and maintain records of deductions, deposits and communications with payees.

Section 194Q applies when a buyer’s purchases from a seller exceed Rs. 50 lakh in a financial year and the buyer’s turnover in the previous financial year is more than Rs. 10 crore; the buyer must deduct TDS at 0.1% on such purchases. The obligation lies with the buyer to verify turnover and aggregate purchases, and if applicable, to deduct and deposit the TDS and report it in their TDS return. If the seller has deducted tax under other sections or the seller provides documents under section 206C(1H) as applicable, the buyer should coordinate to avoid double withholding.