TDS is one of the most common compliance pain points for small businesses in India. The rules are scattered across dozens of sections of the Income Tax Act, thresholds change in every budget, and the penalties for late deduction or filing are disproportionately harsh. This guide covers what a typical MSME actually needs to know.
What TDS is (and isn't)
TDS — Tax Deducted at Source — is not an additional tax. It is income tax collected in advance by the person making a payment, on behalf of the person receiving it. The deductor deposits the tax with the government and files a return showing who they deducted from. The deductee claims credit for that TDS when filing their own income tax return.
If you are a business making certain payments (rent, professional fees, contract payments, commissions), you are likely required to deduct TDS before paying the recipient.
When does a small business need to deduct TDS?
You must deduct TDS if:
- Your business had a turnover above ₹1 crore (goods) or ₹50 lakh (services) in the previous financial year, or
- You are required to get your accounts audited under section 44AB, or
- You are a company, partnership, or LLP (regardless of turnover)
Individuals and HUFs whose books are not audited are generally exempt from TDS obligations, except on rent payments above ₹50,000 per month (section 194-IB) and payments to resident contractors/professionals above ₹50 lakh per year (section 194M).
Key TDS sections for MSMEs
| Section | Payment type | Threshold (per year) | TDS rate | |---|---|---|---| | 194C | Contractor/sub-contractor | ₹30,000 (single) / ₹1,00,000 (aggregate) | 1% (individual/HUF) / 2% (others) | | 194J | Professional or technical fees | ₹30,000 | 10% (professional) / 2% (technical) | | 194I | Rent — land/building | ₹2,40,000 | 10% | | 194I | Rent — plant/machinery | ₹2,40,000 | 2% | | 194H | Commission or brokerage | ₹15,000 | 5% | | 194A | Interest (non-bank) | ₹5,000 | 10% | | 194Q | Purchase of goods | ₹50,00,000 | 0.1% |
Rates as of FY 2025-26. Always verify current rates on the Income Tax Department website before applying.
These thresholds are per financial year, per deductee. If your total payments to a single contractor cross ₹1,00,000 in the year, TDS applies on the entire amount from the first rupee — not just the excess.
PAN and higher rates
If the deductee does not provide a valid PAN, the TDS rate doubles (or 20%, whichever is higher). This is section 206AA. Always collect PAN before making the first payment to any vendor or professional.
Since July 2021, section 206AB imposes even higher rates (double the normal rate, or 5%, whichever is higher) on "specified persons" — those who have not filed returns for the past two years and whose TDS/TCS in each year exceeded ₹50,000. You can check this status using the Income Tax Department's compliance check utility.
Due dates
| TDS deducted in | Deposit due date | Quarterly return | |---|---|---| | April – June | 7th of the following month | 31 July (Form 26Q) | | July – September | 7th of the following month | 31 October | | October – December | 7th of the following month | 31 January | | January – February | 7th of the following month | 31 May | | March | 30 April | 31 May |
The deposit is made using challan 281 on the TIN-NSDL or e-filing portal. Quarterly returns are filed in Form 26Q (non-salary payments) or Form 24Q (salary).
Interest and penalties
- Late deduction: Interest at 1% per month from the date the tax should have been deducted
- Late deposit: Interest at 1.5% per month from the date of deduction to the date of actual deposit
- Late filing of return: Fee of ₹200 per day under section 234E, capped at the total TDS amount
- Incorrect return: Penalty between ₹10,000 and ₹1,00,000 under section 271H
These add up quickly. For a business deducting ₹50,000 in TDS per quarter, a three-month delay in deposit costs ₹2,250 in interest — plus the daily late filing fee if the return is also delayed.
Practical workflow for a small business
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Obtain a TAN — Tax Deduction Account Number, applied for using Form 49B. Every deductor needs one; it is different from your PAN.
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Collect PAN from all vendors before the first payment. Store it alongside their ledger entry in your accounting software.
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Deduct at the time of payment or credit, whichever is earlier. "Credit" means recording the expense in your books — even if you have not actually paid yet.
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Deposit by the 7th of the next month using challan 281.
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Issue TDS certificates — Form 16A for non-salary deductions — within 15 days of the due date for filing the quarterly return.
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File quarterly returns using Form 26Q. Most businesses use a CA or a TDS return preparation utility. Your accounting software should be able to export the data in the format these utilities expect.
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Reconcile with Form 26AS / AIS — your deductees will check their Annual Information Statement to verify the TDS credit. If your return has errors, they cannot claim the credit, and they will call you.
Common mistakes
Deducting TDS on GST-inclusive amounts: TDS should be deducted on the base amount excluding GST, provided the GST component is shown separately in the invoice. If the invoice is for ₹1,00,000 plus ₹18,000 GST, deduct TDS on ₹1,00,000, not ₹1,18,000.
Ignoring aggregate thresholds: You pay a contractor ₹25,000 in April and ₹25,000 in June. Neither payment crosses the ₹30,000 single-transaction threshold, but the aggregate is ₹50,000 — which crosses the ₹1,00,000 aggregate limit once you keep paying. The moment the aggregate crosses the threshold, deduct TDS on the full accumulated amount.
Forgetting rent TDS: Rent above ₹2,40,000 per year requires TDS even if you are an individual whose books are not audited (section 194-IB at 5% on amounts above ₹50,000/month).
What your accounting software should do
A well-designed system should flag TDS-applicable payments at the time of voucher entry, compute the correct amount based on the section and rate, track aggregate thresholds per party per year, and generate the data needed for quarterly return filing. If your current software treats TDS as an afterthought — something you calculate in a spreadsheet and enter manually — you are paying for accuracy risk every quarter.