Understanding TDS: A Complete Guide for Indian Businesses (FY 2025-26)

1. What is TDS and Why Does It Exist?

TDS is a collection mechanism, not a tax itself. The Income Tax Department uses it to collect tax in advance from the source of income. This serves two purposes:

1. Regular Revenue Flow: The government receives tax throughout the year, not just during filing season.
2. Reduced Evasion: Tax is collected before money reaches the recipient, minimizing the risk of non-compliance.

Who Deducts TDS?

TDS may be deducted by:

• Businesses making payments to vendors, contractors, or professionals.
• Individuals/HUF making certain payments like rent (if exceeding thresholds).
• Government Entities for all applicable payments.

2. Key TDS Sections for FY 2025-26

The Income Tax Act specifies different sections for different types of payments. Here are the most commonly referenced sections:

Section 194J: Professional & Technical Services

Applicability: Payments for professional or technical services.

• Professional Services: 10% (CA, Lawyer, Doctor, Consultant, Architect, etc.)
• Technical Services: 2% (Software development, Engineering, Call center, Royalty)
• Threshold: ₹50,000 per financial year (increased from ₹30,000 in FY 2024-25)

When to deduct: At the time of credit to the payee's account or payment, whichever is earlier.

Section 194C: Contractor Payments

Applicability: Payments to contractors for construction, supply, or labor contracts.

• Individual/HUF Contractors: 1%
• Company/Firm Contractors: 2%
• Threshold: ₹30,000 for a single payment OR ₹1,00,000 in aggregate during the financial year

Note: This section covers a wide range of contracts including advertising, catering, and manufacturing contracts.

Section 194I: Rent Payments

Applicability: Rent for land, building, furniture, or machinery.

• Plant & Machinery: 2% (Threshold: ₹50,000/month)
• Land/Building/Furniture: 10%
  • For Individuals/HUF: Threshold ₹50,000/month
  • For Companies/Firms: Threshold ₹6,00,000/year (New for FY 2025-26)

Budget 2025 Update: The annual threshold of ₹6 Lakhs for companies is a significant change aimed at reducing compliance burden for smaller rental arrangements.

Section 194H: Commission or Brokerage

• Rate: 2%
• Threshold: ₹20,000 per financial year
• Covers: Sales commission, insurance agent commission, brokerage fees

Section 194A: Interest Payments

• Rate: 10%
• Threshold:
  • ₹50,000/year for bank/post office interest (regular individuals)
  • ₹1,00,000/year for senior citizens (60+ years) - Budget 2025 increase

Other Key Sections

• 194D (Insurance Commission): 5-10%, Threshold ₹20,000
• 194Q (Purchase of Goods): 0.1%, Threshold ₹50,00,000 (if buyer turnover > ₹10 Cr)
• 194B (Lottery Winnings): 30%, Threshold ₹10,000
• 194S (Crypto/VDA): 1%, No threshold

3. The "No PAN" Penalty Rule

If the payee does not provide their PAN, TDS must be deducted at 20% or the rate specified in the section, whichever is higher.

Examples:

• Professional fees (194J - 10%): If no PAN → Deduct 20%
• Contractor payment (194C - 1%): If no PAN → Deduct 20%
• Lottery winnings (194B - 30%): If no PAN → Deduct 30% (already higher)

4. TDS Compliance Timeline

Payment Timeline

• Others: By the 7th of the following month
• March TDS: By April 30th

TDS Return Filing

5. Consequences of Non-Compliance

• Interest Charges: 1% per month for delayed deduction or payment
• Penalties: ₹200 per day for late filing (min ₹10,000)
• Disallowance: 30% of expense may be disallowed if TDS not deducted

6. Budget 2025 Highlights

1. Section 194J Threshold: Increased from ₹30,000 to ₹50,000
2. Section 194I (Rent): Annual threshold of ₹6,00,000 for companies
3. Section 194A (Senior Citizens): TDS threshold increased to ₹1,00,000

7. Common Mistakes to Avoid

1. Not deducting TDS on time
2. Incorrect PAN verification
3. Using wrong TDS section
4. Not filing TDS returns on time
5. Not issuing TDS certificates (Form 16A)