Even careful business owners trip up on TDS. The reason? It kicks in the moment you start paying salaries, rent, contractors or professional fees — not when you hit some big milestone. Miss it and you face interest, penalties, and the loss of those payments as tax-deductible expenses.
This guide covers the TDS rules that hit most small businesses: when to deduct, how much, when to deposit, and what it costs if you slip. Want it off your plate? Our accounting service handles TDS end to end.
What TDS is and what you need to start
TDS stands for Tax Deducted at Source. In plain terms: when you pay certain people, you hold back a small slice as tax, pay them the rest, and send that slice to the government. The person you paid gets credit for it later when they file their own return.
Example: you owe a freelance designer ₹50,000. Under TDS, you pay them ₹45,000 and deposit ₹5,000 (10%) with the government on their behalf.
To deduct TDS you need a TAN (Tax Deduction and Collection Account Number) — a 10-character code issued by the income tax department. Without a TAN you cannot legally deduct TDS or file TDS returns. Apply online at the NSDL portal.
Key TDS sections and rates for businesses
| Section | Payment type | Rate | Threshold / year |
|---|---|---|---|
| 192 | Salary | Slab rate | Basic exemption |
| 194A | Interest | 10% | ₹10,000 ₹50,000 banks/post office/co-op · ₹1,00,000 for senior citizens |
| 194C | Contractors | 1% / 2% | ₹30,000 single · ₹1 lakh total |
| 194H | Commission, brokerage | 2% | ₹20,000 |
| 194I | Rent | 10% / 2% | ₹50,000 per month |
| 194J | Professional / technical fees | 10% / 2% | ₹30,000 |
Remember: TDS thresholds apply per financial year per deductee. Track aggregate payments to each contractor or landlord across the year — once the threshold is crossed, TDS applies to all subsequent payments to that party in that year.
How to deposit TDS
Deducted TDS must be deposited with the government by the 7th of the following month (30th April for amounts deducted in March). Use Challan ITNS 281 on the income tax e-filing portal or through your bank's tax payment module. Quote your TAN and the correct section code for each payment type.
Late deposit attracts interest at 1.5% per month (or part of a month) from the date of deduction to the date of actual deposit. On a ₹5 lakh payroll, a two-month delay costs ₹15,000 in interest before you've filed anything.
Filing TDS returns
Depositing TDS is not enough. You must also file quarterly TDS statements — the form depends on the payment type:
| Form / quarter | Covers / due date |
|---|---|
| Form 24Q | TDS on salary (Sec 192) |
| Form 26Q | Other domestic payments |
| Form 27Q | Payments to non-residents |
| Q1 · Apr–Jun | 31 July |
| Q2 · Jul–Sep | 31 October |
| Q3 · Oct–Dec | 31 January |
| Q4 · Jan–Mar | 31 May |
Filing these returns generates Form 16 for employees and Form 16A for other deductees — certificates you issue confirming the TDS deducted and deposited against their PAN.
What goes wrong — and what it costs
| Mistake | What it costs |
|---|---|
| Not deducting at all | 30% of the payment disallowed as expense under Sec 40(a)(ia) |
| Late deposit | 1.5% per month interest from deduction to deposit date |
| Late filing | ₹200 per day under Sec 234E — ₹12,000 on a 60-day delay |
| Wrong TAN / section code | 26AS credit mismatch — notices for both parties |
Frequently asked questions
Does a sole proprietorship need to deduct TDS?
Individual proprietors are generally exempt from TDS on most sections (like 194C and 194J) unless their business turnover in the prior year exceeded ₹1 crore for goods or ₹50 lakh for services. TDS on salary (Section 192) applies to all employers regardless of turnover.
What if a contractor asks me not to deduct TDS?
They may provide Form 15G/15H (for eligible individuals) or a Section 197 certificate from the income tax department authorising lower or nil deduction. Without one of these, you must deduct at the applicable rate — you are legally responsible.
Can I correct a TDS return after filing?
Yes. Corrections are filed through the TRACES portal. Common corrections cover wrong PAN, wrong challan details or wrong amounts. File corrections promptly — they affect the deductee's 26AS immediately on processing.
What is Form 26AS and why does it matter?
Form 26AS is a consolidated tax statement showing all TDS deducted against a PAN. When your employees or vendors file their income tax returns, they rely on 26AS to claim TDS credit. Errors in your TDS filing cause problems in their returns and generate notices to you.
TDS compliance handled end to end. Our team manages your TDS deduction calculations, timely deposits and quarterly return filings so you're never exposed to the Section 234E penalty or expense disallowance.
Get TDS compliance off your plate
We calculate the right TDS for each payment, deposit by the 7th every month and file your quarterly 24Q and 26Q returns on time — so you never accumulate Section 234E penalties.