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Tax Deducted at Source (TDS) is a mechanism by which the government collects tax at the point of payment itself. As a business owner, when you make payments above prescribed thresholds - whether salaries, rent, contractor fees, professional charges, or interest - you are required by law to deduct TDS before making the payment and deposit it with the government.
Any person carrying on a business or profession who makes payments above specified limits must deduct TDS. For individuals and HUFs, TDS is required only if their business turnover exceeded Rs 1 crore (or Rs 50 lakhs for professionals) in the preceding financial year. Companies and firms must deduct TDS on all applicable payments regardless of their turnover.
Common TDS Sections Every Small Business Must Know
| Section | Nature of Payment | Threshold | TDS Rate |
|---|---|---|---|
| 192 | Salary | Basic exemption limit | As per slab |
| 194C | Contractor payments | Rs 30,000 single / Rs 1,00,000 aggregate | 1% individual / 2% others |
| 194J | Professional or Technical fees | Rs 30,000 per year | 2% technical / 10% professional |
| 194I | Rent | Rs 2,40,000 per year | 10% land/building / 2% machinery |
| 194IB | Rent by individuals/HUF | Rs 50,000 per month | 5% |
| 194Q | Purchase of goods | Rs 50 lakhs per year per seller | 0.1% |
TDS Due Dates
| Obligation | Due Date |
|---|---|
| TDS Deposit (April to February) | 7th of following month |
| TDS Deposit (March) | 30th April |
| TDS Return Q1 (Apr-Jun) | 31st July |
| TDS Return Q2 (Jul-Sep) | 31st October |
| TDS Return Q3 (Oct-Dec) | 31st January |
| TDS Return Q4 (Jan-Mar) | 31st May |
Consequences of TDS Non-Compliance
- Interest for late deduction - 1% per month from the date TDS was deductible to the date of actual deduction
- Interest for late deposit - 1.5% per month from the date of deduction to the date of deposit
- Late filing fee (Section 234E) - Rs 200 per day for each day of delay in filing TDS return
- Penalty (Section 271C) - Up to the amount of TDS not deducted or deposited
- Disallowance of expenses - 30% of payments are disallowed as business expense under Section 40(a)(ia)
This is the most financially painful consequence of TDS default. If you paid Rs 10 lakhs to a contractor but did not deduct TDS, Rs 3 lakhs (30%) of that expense will be disallowed when computing your taxable profit - meaning you pay tax on Rs 3 lakhs of expenses you actually incurred. This can be far more costly than the actual TDS amount involved.
If your vendor believes their total tax liability is lower than the TDS being deducted, they can apply to the Income Tax Officer for a Lower Deduction Certificate (LDC) under Section 197. Once you receive this certificate, you deduct TDS at the lower rate specified.
TDS compliance is one of those areas where small errors compound into large penalties quickly. Legal Chanakya manages complete TDS compliance - monthly deduction calculations, challan deposits, quarterly return filings, and Form 16/16A issuance for businesses across India.
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