TDS Compliance for Business Owners: A Practical Guide

What is TDS and who must deduct it?

Tax Deducted at Source means you deduct income tax when you make certain payments, deposit it with the government, and report it so the payee gets credit against their own tax. Common examples are salaries, contractor payments, professional or technical fees, rent and commission.

Most businesses that make these payments must deduct TDS. This includes companies, LLPs and partnership firms. Individuals and HUFs running a business generally come into the net once their turnover or receipts cross specified limits, though some provisions, such as TDS on high monthly rent, apply to them more widely.

Before you deduct any tax, you need a Tax Deduction and Collection Account Number (TAN). You apply for it online, and it must be quoted on every challan, return and certificate. Existing TANs continue to work under the new law.

The new Income-tax Act, 2025

From 1 April 2026, the Income-tax Act, 2025 has replaced the Income-tax Act, 1961. The rules on who deducts, at what rate and when have largely stayed the same, but the section numbers and form names have changed. The new law also uses a single "tax year" in place of the earlier previous year and assessment year.

TDS on salary now falls under section 392, and TDS on most other payments is grouped in a table under section 393. The old section numbers such as 194C for contractors or 194J for professional fees are no longer used for new deductions, although many people still refer to them.

Transactions up to 31 March 2026 are still reported under the old Act and old forms. Deductions from April 2026 use the new forms.

• Salary TDS return: Form 138 (earlier Form 24Q)
• Non-salary TDS return for residents: Form 140 (earlier Form 26Q)
• Non-resident TDS return: Form 144 (earlier Form 27Q)
• Salary TDS certificate: Form 130 (earlier Form 16)
• Non-salary TDS certificate: Form 131 (earlier Form 16A)

Common payments and thresholds

Each type of payment has its own rate and threshold. The figures below are the thresholds revised from FY 2025-26, which continue under the new Act. Always confirm the current rate before each deduction, as the law changes through each year's budget.

Salary TDS works differently. It depends on each employee's estimated tax for the year under the regime they choose, and is deducted monthly.

• Contractors: when a single payment exceeds ₹30,000 or payments in the year exceed ₹1 lakh (1% for individuals and HUFs, 2% for others)
• Professional fees: above ₹50,000 a year (10%); technical fees at 2%
• Rent: above ₹50,000 for a month or part of a month
• Commission or brokerage: above ₹20,000 a year
• Purchase of goods by larger buyers: 0.1% on purchases from a seller above ₹50 lakh in a year
• Partner salary, commission or interest paid by a firm: above ₹20,000 a year (10%)

PAN problems and higher rates

If the payee does not give you a valid PAN, you must deduct tax at a higher rate, generally 20% or the normal rate if that is higher. A PAN that has become inoperative, for example because it was not linked with Aadhaar, is treated in the same way. Check PAN status on the income tax portal before the first payment to a new vendor.

There is some good news. The separate higher rate for payees who had not filed income tax returns, under the old section 206AB, was removed from 1 April 2025. You no longer need to run that check.

Budget 2026 also clarified that payments for supply of manpower are treated as work, so contractor rates apply to them.

Deposit and return deadlines

Tax deducted in a month must be deposited by the 7th of the following month. For deductions made in March, the due date is 30 April. Late deposit attracts interest at 1.5% a month from the date of deduction. If you fail to deduct at all, interest is 1% a month from the date tax was deductible.

Quarterly TDS returns are due by 31 July, 31 October, 31 January and 31 May for the four quarters. Issue salary certificates (Form 130, earlier Form 16) to employees by 15 June after the tax year. Issue non-salary certificates (Form 131, earlier Form 16A) within 15 days of the quarterly return due date.

Late returns attract a fee of ₹200 a day, capped at the total TDS in that return. A separate penalty can apply if a return is not filed or has incorrect details.

Mistakes that trigger notices

Most TDS defaults come from a handful of routine errors. Deducting at the wrong rate, missing or invalid PANs, wrong challan details, and late deposit or filing are the most common. Each creates a short deduction or interest demand that shows up when your return is processed.

Reconciling your books with the TRACES statement every quarter catches most of them early. Check Form 26AS or the annual information statement of your key payees too, because an unhappy vendor who cannot see their credit will call you before the department does.

• Deducting under the wrong payment type, such as contractor instead of professional fees
• Missing TDS on year-end provisions for expenses
• Challan paid under the wrong TAN, year or payment code
• Not filing correction returns after a default notice

A practical monthly checklist

TDS is easier when it is part of your monthly accounts close rather than a quarterly rush. Keep a vendor master with PAN, PAN status and the applicable payment type, so your accounting software can apply the right rate automatically.

Each month, review payments against thresholds, deduct where needed, and deposit by the 7th. Each quarter, reconcile deductions, challans and the return before filing, then download and issue certificates on time. Keep lower deduction certificates from vendors on file and track their validity.

If you want support with TDS returns, payroll or cleaning up past defaults, FBS Advisory can review your current process and help you set up a routine that works.