Understanding TDS: A Beginner’s Guide for New Entrepreneurs

Understanding TDS is essential for every new entrepreneur managing payments and vendor contracts. 

But wait! Are you confused by TDS rates, TDS rules, and who deducts what? 

This beginner-friendly guide simplifies it all, with examples, charts, and must-know rules. 

Read on to master TDS and stay compliant.

What is TDS?

Basic understanding of TDS

Tax Deducted at Source (TDS) is a way for the government to collect tax at the very point of income generation.

In simple terms, when you make certain payments like salary, rent, or professional fees, you deduct a portion of it as tax and deposit it with the government. It’s like paying advance income tax on behalf of the payee.

Let’s say you hire a freelancer and pay ₹50,000. You're required to deduct 10% as TDS, so you pay ₹45,000 to the freelancer and ₹5,000 directly to the tax department.

That ₹5,000 ensures the government gets its due, and your vendor gets tax credit.

Why was TDS introduced?

TDS exists to curb tax evasion and ensure a consistent inflow of revenue for the government throughout the year.

Instead of waiting for individuals to pay taxes at the end of the year, TDS ensures it’s collected in small parts, in real-time.

It also puts the responsibility of tax deduction on you, the payer, making the tax system more efficient and accountable.

For new entrepreneurs, understanding this concept early helps avoid legal trouble and builds financial credibility.

Who is Liable to Deduct TDS?

Are you required to deduct TDS as a startup or individual?

General Rule for Businesses and Professionals:

• Companies, LLPs, partnership firms, and government bodies are mandatorily required to deduct TDS, regardless of turnover.
• Individuals and HUFs must deduct TDS only if their turnover exceeds:
  • ₹1 crore (for business), or
  • ₹50 lakh (for profession)
    In the preceding financial year.
• Additionally, if you’re in e-commerce, understanding E-Commerce Compliance in India: GST, TDS & TCS is crucial, as platforms and sellers have specific tax deduction and collection responsibilities.

⚠️ There are specific cases where even individuals and HUFs not liable for tax audit must deduct TDS.

Exceptions: Where Individuals & HUFs Must Deduct TDS Even Without Audit

Here are some key exceptions where TDS deduction is compulsory, regardless of your turnover or audit status:

1. Purchase of immovable property > ₹50 lakh
   • Section 194-IA
   • Deduct 1% TDS even if you're just an individual buyer and not running a business.
2. Rent payment > ₹50,000/month by individuals or HUFs (non-audit)
   • Section 194-IB
   • Deduct 5% TDS even if you're not a business entity.
3. Payment to contractors > ₹50 lakh/year (individuals or HUFs not liable to audit)
   • Section 194M
   • Deduct 5% TDS if you pay contractors, professionals, or commission agents more than ₹50 lakh annually.
4. Payments under Joint Development Agreements (JDAs)
   • Section 194-IC
   • Deduct TDS when paying consideration under real estate JDAs.

Who Commonly Deducts TDS in India?

Here’s a consolidated list of typical TDS deductors:

Entity Type	TDS Deduction Required
✅ Companies (Pvt/Public)	Always, regardless of turnover
✅ LLPs and Partnership Firms	Always, regardless of turnover
✅ Sole Proprietors	Only if turnover > ₹1 crore/₹50 lakh
✅ Government Bodies	Always
✅ Individuals/HUFs (under audit)	Yes, if they meet the turnover threshold
⚠️ Individuals/HUFs (no audit)	Yes, in specific cases (194-IA, 194-IB, 194M, 194-IC, etc.)

Imagine you're an individual (not a business owner), and you're buying an apartment worth ₹70 lakh, you must deduct 1% TDS under Section 194-IA, even if you have no business income or audit requirement. Or let’s say you’re a wedding planner paying a freelance photographer ₹55 lakh this year. You’ll need to deduct 5% TDS under Section 194M, even if you’re not a company or LLP.

Types of TDS

Here’s a concise list of major transactions that commonly attract TDS (Tax Deducted at Source) in India:

Transaction Type	Section
Salary Payments	192
Contractor/Subcontractor Payments	194C
Professional & Technical Services	194J
Rent Payments	194I
Interest from Banks/Financial Institutions	194A
Commission or Brokerage	194H
Dividend Income (other than exempt)	194
Purchase of Immovable Property > ₹50 lakh	194-IA
Payments to Non-Residents	195
Cash Withdrawals > ₹1 crore (₹20 lakh for non-ITR filers)	194N
Online Gaming Winnings	194BA
Winning from Lotteries, Games, or Betting	194B

TDS Deduction Rules

You know you have to deduct TDS, but when, how, and what happens if you don’t?

Let’s decode the practical rules every entrepreneur should know.

TAN: Your First Step to Deducting TDS

Before you can deduct or deposit TDS, your business must obtain a TAN, Tax Deduction and Collection Account Number. It's a 10-digit alphanumeric code issued by the Income Tax Department, mandatory for:

• Deducting TDS
• Depositing TDS with the government
• Filing TDS returns
• Issuing TDS certificates (Form 16/16A)

Without a TAN, you're not legally allowed to deduct TDS, even if you're otherwise liable. You can apply for TAN online via the NSDL portal or submit Form 49B offline at a TIN Facilitation Center. TAN is typically issued within 5–7 working days.

When should TDS be deducted?

The timing of TDS deduction is crucial. TDS must be deducted at the earlier of two events:

• When the amount is credited to the payee’s account, or
• When the actual payment is made, whichever comes first.

That means, even if you haven't released the payment but have booked the expense in your books, TDS is still applicable.

TDS payment deadlines

Once TDS is deducted, it must be deposited on time, that’s your first compliance checkpoint. But don’t stop there. Filing returns and issuing certificates are equally important.

📅 Deadline:

• 7th of the following month in which TDS is deducted.
• For TDS deducted in March, the deadline for deposit is 30th April, for all deductors.

Quarterly TDS Returns: Your Compliance Ledger

As a deductor, you must file TDS returns every quarter, providing full details of:

• The deductor (you)
• The deductee (the person you're paying)
• Nature and amount of payment
• TDS deducted and deposited

Here’s how the forms break down:

Form	Purpose	Applicable To
Form 24Q	TDS on salary	Employers
Form 26Q	TDS on non-salary (residents)	Contractors, professionals, and rent
Form 27Q	TDS on payments to non-residents	Foreign vendors or freelancers
Form 26QA	TDS on the sale of immovable property	Buyers of property deducting TDS under Section 194IA
Form 26QB	TDS on sale/purchase of property (other than Section 194IA)	Buyers deducting TDS under Sections 194IB, 194C (specific property-related payments)
Form 26QC	TDS on rent payments by individuals/HUF (Section 194-IB)	Individual/HUF deductors on rent payments

These returns, except Form 26QA, 26QB, and 26QC, which are filed within 30 days from the end of the month in which TDS is deducted, are usually filed on a quarterly basis, and the deadlines are:

Quarter	Period	Filing Due Date
Q1	April–June	31st July
Q2	July–September	31st October
Q3	October–December	31st January
Q4	January–March	31st May

What If You Miss the Deadline?

Late filing or late deposit of TDS can lead to monetary penalties and interest:

Late Deposit Interest: Section 201(1A)
Depositing TDS after the due date? You’ll owe interest:

• 1% per month if TDS is not deducted on time
• 1.5% per month if TDS is deducted but deposited late

The interest is calculated on a monthly basis, not daily. Even a 1-day delay can cost you for the full month.

Late Filing Fee: Section 234E
If you fail to file TDS returns on time:

• A fee of ₹200 per day is levied until the return is filed
• Subject to a maximum of the total TDS amount

Other Consequences

• Disallowance of expenses:
  If TDS is not deducted or deposited, the related expense may not be allowed as a deduction in your income tax return.
• Prosecution:
  In severe cases of default, the law allows for prosecution, with possible imprisonment up to 7 years under Section 276B.

Track TDS Deductions with Form 26AS

Once TDS is deducted and deposited, it reflects in the payee’s Form 26AS — a consolidated annual tax statement available on the Income Tax portal.

Form 26AS shows:

• TDS deducted and deposited by various deductors
• Advance tax and self-assessment tax paid
• High-value financial transactions
• Refunds issued by the Income Tax Department

📌 As a deductor, it’s your responsibility to file accurate TDS returns on time so your vendors, employees, and contractors see timely credit in their Form 26AS.

TDS certificates (Form 16 & Form 16A)

TDS isn't complete until you issue certificates to the payees. These serve as proof that tax was deducted and help them claim credit.

TDS Certificate	What It Covers	How Often Issued	When to Issue
Form 16	Salary TDS	Once a year	By 31st May every year
Form 16A	TDS on payments like rent, fees	Quarterly	Within 15 days after quarterly TDS return
Form 16B	TDS on property sale	Each property transaction	Within 15 days after filing TDS return
Form 16C	TDS on rent paid by individuals	Each rent payment	Within 15 days after filing TDS return

Failing to issue these on time may lead to penalties and strained relationships with employees, vendors, or consultants.

📌 Tip: Use tools like TRACES to download and issue TDS certificates digitally.

Latest TDS Updates & Budget Announcements

TDS is a moving target. With every Union Budget, the government updates rules to match economic trends and digital behaviour. If you're running a business or freelancing, staying updated isn't optional; it's essential.

Here’s what you need to know from Budget 2024–25 and beyond.

Budget 2024–25: Key Changes in TDS

New Section 194T: TDS on Partner’s Remuneration

• 10% TDS on payments (salary, interest, bonus, commission) to partners by firms/LLPs.
• Applicable when aggregate exceeds ₹20,000/year.
• Effective from 1st April 2025.

Reduced TDS Rates for Select Transactions (Effective 1 Oct 2024)

To simplify compliance, the following TDS rates have been reduced:

Section	Nature of Payment	Old Rate	New Rate
194D	Insurance commission	5%	2%
194DA	Maturity of life insurance policy (non-exempt)	5%	2%
194G	Lottery ticket sales commission	5%	2%
194H	Commission or brokerage	5%	2%
194M	Payment to resident contractors/professionals	5%	2%
194-IB	Rent paid by individuals/HUFs	5%	2%
194-O	E-commerce operator payment to seller	1%	0.1%

Clarification on Section 194-IA: Property Transactions

• TDS at 1% must be deducted on the entire property value if it exceeds ₹50 lakh.
• In joint transactions, the ₹50 lakh threshold applies to the total deal value, not per buyer or seller.

TDS on Long-Term Capital Gains for NRIs (Amended Rate)

• Effective 23 July 2024, TDS on the sale of property by NRIs is 12.5% without indexation, replacing the earlier 20% with indexation.
• This change aims to simplify compliance and reduce documentation for NRIs.

Push for AIS/TIS Integration and E-Verification

The government continues to enhance transparency through AIS (Annual Information Statement) and TIS (Taxpayer Information Summary).

• These tools reflect all TDS entries, high-value transactions, and income details reported by third parties.
   
• Budget 2024–25 promotes e-verification of mismatches, nudging taxpayers to reconcile TDS records proactively.

📌 You should regularly review your AIS/TIS via the Income Tax e-filing portal to avoid errors or notices.

Conclusion: Take Control of TDS

TDS may sound like just another tax term. But for entrepreneurs, it’s a compliance essential.

Understanding TDS protects you from fines and boosts credibility with vendors and investors.

Use tools, consult experts, and keep learning.

💡 Need help with TDS setup and filing? Contact our experts for a free consultation today.

FAQs on TDS

Q.  Is everyone required to get a TAN before deducting TDS?

Yes. You must apply for a Tax Deduction and Collection Account Number (TAN) before deducting TDS. Without a TAN, you're not legally allowed to deduct or deposit Tax Deducted at Source, nor can you file TDS returns or issue Form 16/16A.

Q. What happens if I forget to deduct TDS?

Top trends in AI in accounting include predictive analytics, automated compliance, real-time reporting, cloud-based platforms, and AI-driven cash flow forecasting. These trends are shaping the future of startup finance.

Q. Do freelancers and consultants fall under TDS deductions?

Yes. Payments made to freelancers and consultants often attract TDS under Section 194J or 194C, depending on the nature of work. If you're hiring them, use the TDS deduction chart to apply the correct rate—usually 10% for professionals and 1% or 2% for contractors.

Q. What’s the difference between Form 16 and Form 16A?

Form 16 is for salary payments, while Form 16A is for non-salary payments like rent or contractor fees. Both are TDS certificates and must be issued by the deductor within the due dates to help recipients claim credit in their returns and Form 26AS.

Q. What are the types of TDS applicable to my business?

Common types of TDS include:

• Salary (Section 192)
• Rent (194I)
• Professional services (194J)
• Contractor payments (194C)
• Commission (194H)

Q. How can I verify if the TDS deducted from my payments has been deposited?

You can view it in Form 26AS, available on the Income Tax portal. It reflects all TDS deposited by deductors against your PAN. If you're a business making payments, ensure your TDS returns are accurate so the payee sees timely credits in their 26AS.

Q. What is the TDS rate on salary?

TDS on salary is deducted under Section 192 based on the employee’s income tax slab. It’s not a fixed rate, employers calculate it annually and deduct it monthly. The details are shown in Form 16 and Form 26AS, and returns are filed using Form 24Q.

Q. What is a TDS Certificate?

A TDS certificate is a document issued by the deductor to the deductee as proof of Tax Deducted at Source.

Form 16: For salary payments
Form 16A: For non-salary payments

It helps the payee claim TDS credit while filing income tax returns.