TDS Basics Every Indian Founder Must Understand
The tax rule most founders learn about only after they've already broken it
TDS (Tax Deducted at Source) is one of those compliance requirements that quietly accumulates until it becomes a problem. It doesn't show up directly in your bank account. It doesn't generate a penalty notice immediately. If your bookkeeper isn't tracking it, you might not even know you're liable.
Then the notice arrives.
Unlike GST, which you collect from customers and pass to the government, TDS is money you hold back from payments you make - to vendors, consultants, landlords - and deposit on their behalf with the Income Tax department.
If you're not doing this, you're technically sitting on government money. That's how the department treats it.
This guide explains exactly what TDS is, when it applies to your business, and how to stay compliant without it consuming your time.
What TDS actually is
When your business makes certain types of payments, the Income Tax Act requires you to deduct a percentage of that payment at source - before it reaches the recipient - and deposit that amount directly with the government.
The recipient then gets credit for that TDS when they file their own income tax return.
Think of it as the government's way of collecting tax in real time, rather than waiting for annual returns.
A simple example:
You hire a freelance designer and agree to pay ₹50,000. Under TDS rules, you deduct 10% (₹5,000), pay the designer ₹45,000, and deposit ₹5,000 with the Income Tax department. The designer's tax liability is reduced by that ₹5,000 when they file their return.
When does TDS apply to your startup?
TDS applies when you cross certain payment thresholds and make specific types of payments. The most common ones for startups:
| Payment Type | Threshold | TDS Rate |
|---|---|---|
| Professional / technical services (lawyers, CAs, consultants) | ₹30,000 per year per vendor | 10% |
| Contractor / sub-contractor payments | ₹30,000 single payment or ₹1 lakh per year | 2% (individuals/HUF) / 2% (companies) |
| Rent - plant, machinery, equipment | ₹2.4 lakh per year | 2% |
| Rent - land, building, furniture | ₹2.4 lakh per year | 10% |
| Salary payments | Applicable once salary exceeds basic exemption | Slab rates |
Important: If you pay a vendor less than the threshold in a year, TDS does not apply. But once you cross the threshold, TDS applies to the entire amount - not just the excess.
Your key TDS obligations
1. Obtain a TAN (Tax Deduction Account Number)
Before you can deduct TDS, your business needs a TAN - a 10-digit alphanumeric number issued by the Income Tax department. This is separate from your PAN.
Apply through the NSDL portal. It typically takes 7-10 working days.
2. Deduct at payment or credit, whichever comes first
TDS is triggered the moment you raise a payable entry for the vendor, or when you actually pay them - whichever happens first. You can't wait until payment to catch up.
3. Deposit TDS by the 7th of the following month
For any TDS deducted in a given month, the deposit is due by the 7th of the following month. For March, it's due by April 30th.
Use Challan 281 on the Income Tax portal to deposit. Late deposits attract interest at 1.5% per month.
4. File quarterly TDS returns
Every quarter, you must file a TDS return (Form 26Q for non-salary payments, Form 24Q for salary) summarising all deductions made during that quarter.
| Quarter | Period | Due Date |
|---|---|---|
| Q1 | April – June | July 31 |
| Q2 | July – September | October 31 |
| Q3 | October – December | January 31 |
| Q4 | January – March | May 31 |
5. Issue TDS certificates to vendors
After filing the quarterly return, issue Form 16A (for non-salary TDS) to each vendor within 15 days of the return due date. This is what they use to claim credit.
What happens if you don't comply
TDS is treated seriously because it's not your money - it's the government's, held in your account temporarily.
Interest on late deduction: 1% per month from the date TDS was due to the date of deduction.
Interest on late deposit: 1.5% per month from the date of deduction to the date of deposit.
Late filing fee (Section 234E): ₹200 per day for each day the TDS return is late, capped at the TDS amount.
Penalty (Section 271H): ₹10,000 to ₹1,00,000 for filing incorrect or late TDS returns.
Prosecution (Section 276B): For wilful non-deposit of deducted TDS, imprisonment of 3 months to 7 years.
That last one isn't here to alarm you. The Income Tax department treats TDS default seriously because the money was already deducted from the vendor. It exists. It just never reached the government.
Common mistakes founders make
Not deducting TDS on payments to freelancers
Many early-stage startups work heavily with freelancers and consultants. These payments attract TDS at 10% once the annual threshold is crossed. If you're not tracking cumulative payments per vendor, you're likely missing this.
Deducting but not depositing on time
The deduction is only half the job. Missing the 7th-of-the-month deposit deadline attracts interest immediately - and if it goes past the quarter-end, the vendor can't reconcile their Form 26AS.
Not accounting for TDS when negotiating vendor rates
If a vendor quotes ₹1 lakh and you need to deduct ₹10,000 in TDS, they receive ₹90,000. Some vendors factor this in; others don't. Clarify upfront to avoid payment disputes.
Forgetting international payments
Payments to foreign vendors - SaaS subscriptions, overseas contractors, licensing fees - also attract TDS under Section 195. The rates vary by country and depend on applicable tax treaties. This is frequently overlooked and can attract significant back-tax demands.
Assuming your accountant is handling it
If you haven't explicitly confirmed that TDS tracking, deduction, deposit, and filing is part of your accountant's scope, it may not be. Clarify in writing.
Key takeaways
- TDS is tax you withhold from payments you make - to vendors, consultants, landlords - and deposit with the Income Tax department
- The most common triggers for startups: professional fees (10%), contractor payments (2%), and rent on premises (10%)
- Deposit by the 7th of the following month; file quarterly returns; issue certificates within 15 days of filing
- Penalties for non-compliance range from interest charges to ₹1 lakh fines - and in serious cases, prosecution
- International payments to foreign vendors also attract TDS under Section 195
Getting TDS right from the start
Getting TDS right from the start costs almost nothing. Getting it wrong, and then correcting it under notice, costs significantly more. The sooner it becomes a routine part of your monthly financial process, the less it ever becomes a problem.
If you're not sure whether your current setup is handling TDS correctly, Initium's team can walk through what applies to your business specifically.