TDS Compliance: A Complete Guide for Businesses in India

Tax Deducted at Source (TDS) is one of the most pervasive compliance obligations for Indian businesses. Whether you are paying salaries, contractor fees, rent, professional charges, or interest — there is likely a TDS obligation attached. Getting it wrong attracts interest, penalties, and disallowance of expenses.

This guide covers everything a business needs to know about TDS — from which payments attract TDS to how to file returns and issue certificates.

TDS is a mechanism under the Income Tax Act 1961 where the payer (deductor) deducts tax at the time of making certain specified payments and deposits it with the government on behalf of the payee (deductee). The deductee then claims credit for the TDS deducted when filing their income tax return.

The key principle: tax is collected at the source of income, rather than waiting for the recipient to pay it at year-end. This ensures a steady flow of revenue to the government and reduces tax evasion.

TDS must be deducted by:

• All companies (public and private) — for all applicable payments
• Individuals and HUFs whose accounts are subject to tax audit under Section 44AB
• Government departments and PSUs
• Partnership firms, LLPs, and trusts for applicable payments

Individuals and HUFs not subject to tax audit are generally exempt from TDS on most payments (except rent above ₹50,000/month under Section 194-IB, and contractor payments under Section 194M above ₹50 lakh).

Note: Rates above are for PAN-furnished cases. If the deductee does not furnish PAN, TDS is deducted at 20% or the applicable rate, whichever is higher.

TDS deducted must be deposited with the government by the 7th of the following month. Exception: TDS deducted in March must be deposited by 30th April.

For TDS on property purchase (Section 194-IA) and rent by individuals (Section 194-IB), the due date is 30 days from the end of the month in which TDS was deducted.

Forms for TDS returns:

• Form 24Q: TDS on salary payments
• Form 26Q: TDS on all non-salary payments to residents
• Form 27Q: TDS on payments to non-residents (other than salary)
• Form 27EQ: TCS (Tax Collected at Source) returns

After filing TDS returns, deductors must issue TDS certificates to deductees:

Form 16 (for salary TDS under Section 192):

• Part A: TDS deducted and deposited (generated from TRACES portal)
• Part B: Detailed salary breakup, exemptions, and deductions
• Due date: 15th June of the following financial year

Form 16A (for non-salary TDS):

• Issued quarterly for TDS under all sections other than 192
• Generated from the TRACES portal after filing Form 26Q
• Due date: 15 days from the due date of the quarterly TDS return

Form 16B (for property purchase TDS under Section 194-IA):

• Issued by the buyer to the seller within 15 days of the due date of deposit

Always download Form 16 and Form 16A from the TRACES portal — do not prepare them manually, as manually prepared certificates are not valid.

If a deductee believes their total income will be below the taxable threshold or their actual tax liability is lower than the TDS being deducted, they can apply to the Assessing Officer for a certificate under Section 197 authorising the deductor to deduct TDS at a lower rate or nil rate.

This is particularly useful for:

• Companies with significant losses
• Businesses with substantial deductions reducing taxable income
• Non-residents with DTAA benefits

TDS defaults are taken seriously by the income tax department. The consequences are significant:

Interest for non-deduction (Section 201(1A)):

• 1% per month from the date TDS was deductible to the date of actual deduction

Interest for non-deposit after deduction (Section 201(1A)):

• 1.5% per month from the date of deduction to the date of actual deposit

Penalty for non-deduction (Section 271C):

• Penalty equal to the amount of TDS not deducted — this is in addition to interest

Disallowance of expense (Section 40(a)(ia)):

• 30% of the payment is disallowed as a business expense if TDS was not deducted (for payments to residents)
• 100% disallowance for payments to non-residents where TDS was not deducted

Late filing fee (Section 234E):

• ₹200 per day for each day of delay in filing TDS returns, subject to a maximum of the TDS amount

Penalty for late filing (Section 271H):

• ₹10,000 to ₹1,00,000 for failure to file TDS returns or filing incorrect returns

1. Not deducting TDS on GST component TDS is deductible on the base amount (excluding GST) when the GST amount is shown separately in the invoice. If the invoice does not separately show GST, TDS must be deducted on the full invoice amount.

2. Incorrect PAN of deductee Entering a wrong PAN in the TDS return means the deductee cannot claim credit for the TDS. This leads to notices and demands. Always verify PAN before filing.

3. Not deducting TDS on advance payments TDS is deductible at the time of payment or credit, whichever is earlier. If you pay an advance to a contractor or professional, TDS must be deducted at the time of the advance — not when the final invoice is raised.

4. Overlooking Section 194Q Section 194Q (TDS on purchase of goods) applies to buyers whose turnover exceeds ₹10 crore in the preceding year, for purchases from a single seller exceeding ₹50 lakh in a year. Many businesses overlook this relatively new provision.

5. Not reconciling TDS with Form 26AS Before filing income tax returns, always reconcile TDS credits in Form 26AS with your books. Mismatches indicate either incorrect PAN in the deductor's return or deposits not yet reflected — both need to be resolved before filing.

TDS on payments to non-residents deserves special attention. The rate depends on the nature of payment and the applicable Double Taxation Avoidance Agreement (DTAA) between India and the non-resident's country of residence.

Before making any payment to a non-resident, you must:

1. Determine the nature of income (royalty, fees for technical services, interest, dividend, etc.)
2. Check the applicable DTAA rate
3. Obtain a Tax Residency Certificate (TRC) and Form 10F from the non-resident
4. Deduct TDS at the lower of the domestic rate or DTAA rate
5. File Form 15CA (online declaration) and in some cases Form 15CB (CA certificate) before remitting funds

Failure to comply with Section 195 can result in the entire payment being disallowed as a business expense.

TDS compliance is complex and the consequences of errors are costly. Contact AccentTax Consulting to set up a robust TDS compliance process for your business — from deduction to return filing and certificate issuance.