पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 04 · Start

TDS: the tax you deduct and why it trips up every startup

The company is the government’s collection agent on its own payroll, rent, contractors and consultants. The rates are small. The penalties for forgetting are not.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

A startup pays a freelance designer ₹1.2 lakh for a landing page and transfers the full amount. Nine months later the auditor explains that ₹12,000 of that was never the contractor’s to receive. It was tax at 10 per cent on a professional fee, the company was meant to deduct it, deposit it by the 7th of the next month and report it in a quarterly statement, and the company now owes the ₹12,000 plus interest plus a daily fee, and may lose the deduction on the whole ₹1.2 lakh. Nobody evaded anything. Nobody knew they were a tax collector.

This lesson does three things. It explains what tax deducted at source is and why a company is the deductor on almost every payment it makes. It gives the rates and thresholds on the six payments a young company actually makes, checked against the Act on 10 October 2026, with a calculator. And it sets the calendar, because TDS is less a tax than a monthly deadline with a tax attached.

What TDS is, and who you became when you incorporated

Income tax is the payee’s liability. TDS moves the collection to the payer: when the company pays salary, rent, a fee or a commission, it holds back a slice at a rate the Act fixes, deposits that slice with the government against the payee’s PAN, and the payee gets credit for it when they file their own return. The company is not paying tax. It is collecting someone else’s, and the law treats a failure to collect as seriously as a failure to pay.

The rulebook changed on 1 April 2026. The Income-tax Act 2025 replaced the 1961 Act from that date, and the TDS provisions that practitioners knew by section number for sixty years were consolidated: salary is now section 392, and every other payment sits in a table in section 393, with residents in sub-section (1) and non-residents in sub-section (2). The old numbers survive in conversation, in software menus and in this lesson, because a chartered accountant will still say “194J” and mean professional fees. The rates themselves did not move with the renumbering.

Before the first deduction the company needs a Tax Deduction and Collection Account Number under section 397. Since incorporation through SPICe+ allots PAN and TAN together, most companies have it from day one and do not know it. It goes on every challan, statement and certificate.

The six payments a startup makes, and the rate on each

Salary, old section 192, now section 392. There is no flat rate. The employer estimates the employee’s income for the year, computes the tax at the slab rates in force and deducts the average rate from each month’s pay. The employee may declare other income and a house-property loss for the employer to take into account. In practice payroll software does the arithmetic; the founder’s job is to make sure it runs every month and that the figure is deposited.

Contractors, old section 194C. Payment for work under a contract, including supply of labour: 1 per cent if the contractor is an individual or a Hindu undivided family, 2 per cent for a firm or company. The threshold is ₹30,000 for a single payment or ₹1 lakh in aggregate for the year. The agency that builds your website, the firm that runs your events, the vendor who prints your packaging: all here.

Professional and technical fees, old section 194J. Fees for professional services, lawyers, chartered accountants, designers, consultants, at 10 per cent above ₹50,000 in the year. Fees for technical services and payments to call-centre operators at 2 per cent above the same threshold. Director’s remuneration that is not salary at 10 per cent with no threshold at all. The professional-versus-technical line is where disputes live: a freelance developer writing code is usually technical, a management consultant is professional, and the contract should say which.

Rent, old section 194I. Land, building or furniture at 10 per cent; plant, machinery or equipment at 2 per cent; threshold ₹50,000 a month or part of a month. An office at ₹60,000 a month means ₹6,000 deducted each month and the landlord receives ₹54,000. Landlords who have not been through this before will object; the certificate you issue is their proof of tax paid.

Commission or brokerage, old section 194H, at 2 per cent above ₹20,000 in the year. Sales agents, channel partners, the broker who found the office. Non-residents, old section 195, now section 393(2): payments to a payee outside India are deducted at the rates in force or, where the payee furnishes the certificate the Act requires, at the lower treaty rate, with no threshold at all. A foreign developer on a monthly retainer is a TDS event every month.

Two rules cut across every row. A payee who does not furnish a valid PAN is deducted at a higher rate under section 397. And the thresholds are annual aggregates for fees and commission but monthly for rent and per-payment-or-annual for contractors, so a ₹25,000 contractor invoice carries no TDS in April and the fourth such invoice in the year crosses ₹1 lakh and carries it on the whole amount from then.

The calendar: deduct, deposit, file, certify

TDS is deducted at the earlier of credit or payment, which means the month the invoice is booked, not the month it is paid. Rule 218 of the Income-tax Rules 2026 then gives a company seven days from the end of that month to deposit it, so the 7th of the following month, with one exception: tax deducted in March is due by 30 April. Deposit is a challan on the tax portal against the company’s TAN.

Rule 219 sets the quarterly statements, which tell the government whose tax you deposited. For the quarter ending 30 June the statement is due 31 July; 30 September, 31 October; 31 December, 31 January; and for the March quarter, 31 May of the following year. The forms were renumbered with the Act: Form 138 for salary where 24Q used to be, Form 140 for payments to residents where 26Q was, and Form 144 for non-residents in place of 27Q. The payee’s credit appears in their records only after the statement is processed, which is why a consultant will chase you for the statement rather than for the deposit.

After each statement the company issues certificates, Form 130 to employees annually in place of Form 16 and Form 131 to everyone else quarterly in place of Form 16A, within fifteen days of the statement’s due date by the convention the department has kept. The certificate is the payee’s evidence. Issue it without being asked.

TDS is not a tax you pay. It is a deadline you keep, twelve times a year, with someone else’s money.

Foreign payments: the row that needs a chartered accountant

Every payment to a non-resident is in section 393(2), and the table there has no thresholds. The rate is the rate in force under the Act unless a tax treaty gives a lower one and the payee has furnished the residency certificate and declaration the Act requires. Software subscriptions, a developer in another country, a design studio abroad, cloud bills from a foreign entity: each is a question of whether the payment is income chargeable in India at all, at what rate, and under which treaty. Banks will not remit without the remittance paperwork. The right move for a founder is not to learn the treaties but to agree a standing process with the chartered accountant before the first foreign invoice arrives, so that each payment is a form rather than a research project.

What it costs to get wrong

Section 398 of the Act makes a company that fails to deduct, or deducts and fails to deposit, an assessee in default for the tax itself. On top of that, simple interest runs at 1 per cent for every month or part of a month from the date the tax was deductible to the date it is deducted, and at 1.5 per cent a month from the date it was deducted to the date it is actually paid. A late quarterly statement carries a fee of ₹200 for every day of delay under section 427, capped at the tax deductible. And the expense itself is at risk: the rule that was section 40(a)(ia) of the old Act, carried into the new Act, disallows 30 per cent of any payment to a resident on which tax should have been deducted and was not, or was deducted but not deposited by the return date.

Put numbers on the designer in the opening paragraph. ₹12,000 not deducted in April and discovered the following January is ₹12,000 of tax, ₹1,080 of interest at 1 per cent for nine months, a statement that could not be filed correctly, and a disallowance of ₹36,000 of the ₹1.2 lakh expense. For a company with a modest profit that disallowance is real tax. The deduction would have cost the company nothing; the designer would have claimed it back.

A monthly ritual, on the 5th

On the 5th of each month, before anything else, open the previous month’s payments and sort them into the rows above: salary, contractors, fees, rent, commission, foreign. Check each against its threshold for the year so far. Compute the deduction, deposit it on one challan per row by the 7th, and record the challan numbers against the invoices. In the first week of July, October, January and May, file the quarterly statement from those records and issue the certificates in the same sitting. Give the whole thing to the accountant if you like, but keep the 5th in your own calendar, because the person the law calls the assessee in default is the company, and the company is you.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.