The moment your startup starts paying salaries, a consultant, or rent, the Income Tax Department expects you to act as its collection agent. That is what Tax Deducted at Source (TDS) means: on certain payments you must hold back a slice of tax, deposit it with the government, and hand the balance to your payee. Get this wrong and the interest, fees, and disallowed expenses land on you, not on the person you paid. Here is what a first-time founder needs to run TDS cleanly.
The idea in one line
You pay the vendor or employee a net amount, park the deducted tax with the government against their PAN, and they claim credit for it when they file their own return. Your company is the deductor. Before you deduct anything, you need a TAN (Tax Deduction and Collection Account Number), which is separate from your PAN and mandatory to deposit TDS and file returns.
The sections you will meet most
Each type of payment sits under its own section, with its own rate and threshold. The thresholds below reflect the increases that took effect from 1 April 2025.
- Section 192 (salaries): Deduct tax on employee salaries at the employee's average rate of income tax, estimated over the full financial year based on their projected annual pay and declared investments. There is no flat percentage here.
- Section 194C (contractors): On payments to contractors and sub-contractors, deduct 1% if the payee is an individual or HUF and 2% otherwise. It applies once a single payment crosses ₹30,000 or aggregate payments to that party cross ₹1,00,000 in the year.
- Section 194J (professional and technical fees): 10% on professional services, royalty, and director remuneration; 2% on technical services. The threshold is now ₹50,000 per year (raised from ₹30,000), though director remuneration carries no threshold and is deducted from the first rupee.
- Section 194I (rent): 10% on rent for land, building, or furniture; 2% for plant and machinery. From 1 April 2025 the test is monthly: TDS applies once rent to a single landlord crosses ₹50,000 in any month (roughly ₹6,00,000 a year, up from the old limit of ₹2,40,000 a year).
- Section 194H (commission or brokerage): 2% once payments cross ₹20,000 in the year.
Note: if a payee does not give a valid PAN, you generally have to deduct at a higher rate (commonly 20%) under Section 206AA.
Depositing the tax
Whatever you deduct in a month must be deposited with the government by the 7th of the following month. The one exception is March: tax deducted in March can be deposited by 30 April. Deposits are made online against your TAN. Missing this is expensive, so treat the 7th as a hard payroll-style deadline.
Filing quarterly returns
Beyond depositing, you must file quarterly TDS statements so credit reaches each payee's account. Use Form 24Q for salary TDS and Form 26Q for non-salary TDS. The due dates are 31 July (Q1), 31 October (Q2), 31 January (Q3), and 31 May (Q4). After filing, you issue certificates: Form 16 to employees once a year by 15 June, and Form 16A to other payees every quarter.
What it costs to slip
- Interest under Section 201(1A): 1% per month for failing to deduct, and 1.5% per month from the date of deduction to the date of deposit if you deduct but deposit late.
- Late filing fee under Section 234E: ₹200 per day until you file the return, capped at the TDS amount.
- Expense disallowance: if you do not deduct or deposit TDS, 30% of that expense can be disallowed when computing your company's income, effectively taxing you on money you already spent.
A simple operating rhythm
Build a monthly checklist: identify TDS-liable payments, deduct at the right section and rate, deposit by the 7th, and reconcile every quarter before you file. Keeping this boring and on time is one of the cheapest forms of compliance insurance a young company can buy.