TDS and TCS Compliance in India: Guide for Startups and Businesses

TDS and TCS compliance in India is one of the most consequential and most neglected areas of statutory compliance for early-stage companies. TDS defaults surface repeatedly: during due diligence, when lenders assess creditworthiness, and when the Income Tax Department issues demand notices that carry compounding interest. The good news is that TDS compliance, once structured correctly, is not difficult to maintain. The risk is almost entirely in not starting, or in starting with gaps. This guide covers everything you need to know, from first principles through the Income Tax Act 2025 transition now in effect.

What is TDS, and how does it work?

Tax Deducted at Source (TDS) is a mechanism under India’s income tax framework where the person making a payment deducts a percentage of that payment as tax before handing it to the recipient. The deducted amount is deposited with the government, and the recipient gets credit for that tax when they file their own income tax return.

The idea is straightforward. Instead of waiting for the recipient to declare income and pay tax at year-end, the government collects a portion of it upfront at the point where the money changes hands. This creates a continuous flow of tax revenue, reduces evasion, and puts the compliance responsibility on the payer, who typically has greater financial accountability.

How TDS works end to end

Consider a practical scenario. A Delhi-based startup hires a legal advisory firm and agrees to pay ₹2 lakh for a contract. The startup cannot simply transfer ₹2 lakh. It must first check whether TDS applies, which in this case it does under the fees for technical or professional services provision. At 10%, TDS is ₹20,000. The startup transfers ₹1,80,000 to the law firm and deposits ₹20,000 with the Income Tax Department using Challan ITNS-281 by the 7th of the following month. It then files a quarterly return reporting the deduction, and issues Form 16A to the law firm within 15 days of the return due date.

The law firm’s accountant, while filing the firm’s income tax return, finds the ₹20,000 already credited in their tax profile under Form 149 (the new Act equivalent of Form 26AS). The firm claims this as advance tax paid and either offsets it against their total liability or claims a refund if it exceeds what they owe.

This credit mechanism is what makes TDS a two-party system. The payer has a compliance obligation. The payee has a benefit: tax is already paid on their behalf. If the payer does not file correctly or deposits the TDS under the wrong PAN, the payee’s credit does not appear, leading to disputes, notices, and refund delays that affect both parties.

When does TDS get triggered?

TDS must be deducted at the earlier of two events: when the amount is credited to the payee’s account in the books of the payer, or when the actual payment is made. The crediting trigger is the one most founders miss. If your finance team books an expense accrual at month-end, for example crediting a vendor’s payable account for services rendered, TDS becomes applicable at that moment, not when the bank transfer is made. Booking expenses without deducting TDS at the accrual stage is a default under Section 201 of the Income Tax Act 1961 (and its equivalent under the Income Tax Act 2025).

The payment threshold matters too. For most sections, TDS does not apply until the payment or credit crosses a specified annual or per-transaction limit. Once that limit is breached, TDS applies on the entire amount paid that year, including amounts paid before the threshold was crossed. This retrospective application catches many businesses off guard.

What is TCS, and how does it differ?

Tax Collected at Source (TCS) operates from the seller’s or collector’s end rather than the buyer’s. The seller adds a percentage on top of the transaction value, collects it from the buyer, and remits it to the government. Like TDS, TCS credits to the buyer’s tax profile, who can claim it when filing their income tax return.

The practical difference:

Mechanism	Who acts	When it triggers	Common examples
TDS	Payer / buyer	At the time of payment or credit, whichever is earlier	Salary, rent, professional fees, contractor payments
TCS	Seller / collector	At the time of receipt of sale consideration	Sale of scrap, minerals, motor vehicles above ₹10 lakh, overseas tour packages

A Bengaluru-based SaaS startup paying ₹60,000 per month to a freelance designer is a TDS situation: the startup deducts 10% under the fees for professional services provision (Section 194J under the old Act, or the equivalent code under Section 393 of the Income Tax Act 2025) before paying the designer. A car dealer selling a vehicle worth ₹15 lakh collects 1% TCS from the buyer and deposits it with the government. Most startups primarily encounter TDS obligations; TCS becomes relevant once the business crosses into specific product categories, manufacturing, or marketplace models.

Why both systems exist together

TDS and TCS are complementary enforcement tools. TDS covers the income side: it captures tax on payments flowing from businesses to vendors, employees, and service providers. TCS covers the transaction side: it captures tax on specified high-value or high-risk commerce categories where income may otherwise go unreported.

For a startup, the practical implication is this: you will almost certainly be a TDS deductor from day one. You may become a TCS collector as your business scales, particularly if you build a marketplace, enter manufacturing, or make large imports. Understanding both mechanisms and knowing which side of each transaction you sit on is the foundation of clean tax compliance.

Who is required to deduct TDS in India?

The obligation to deduct TDS depends on your entity type and, for individuals and HUFs, on your turnover.

Mandatory for all entities regardless of turnover:

• Private limited companies
• Public limited companies
• Limited Liability Partnerships (LLPs)
• Partnership firms
• Government bodies and local authorities

For individuals and HUFs: TDS applies only if turnover in the preceding financial year exceeded ₹1 crore (business) or ₹50 lakh (profession). Below those thresholds, the general deduction obligation does not apply, but four specific exceptions remain:

• Purchase of immovable property above ₹50 lakh (Section 194-IA of the old Act)
• Monthly rent above ₹50,000 paid by an individual or HUF (Section 194-IB)
• Payments to contractors, professionals, or commission agents exceeding ₹50 lakh in a year (Section 194M)
• Payments under Joint Development Agreements (Section 194-IC)

For founders structured as proprietorships early in the business lifecycle, this distinction matters. Once you convert to a private limited company, TDS obligations apply from day one regardless of revenue.

What about DPIIT-recognised startups?

DPIIT recognition under the Startup India registration scheme gives access to Section 80-IAC income tax exemption and certain labour law relaxations. It does not exempt a company from TDS obligations. A loss-making DPIIT startup that pays a software consultant ₹80,000 in a month must still deduct TDS. This is the single most common misconception Treelife encounters in early-stage compliance reviews.

Common payments that attract TDS: rates and thresholds for Tax Year 2026-27

The following table covers the payments most relevant to startups and growing businesses. Rates and thresholds are as per the Income Tax Act 2025, the governing law from 1 April 2026 onwards. Section numbers shown are the new Act references; old Act equivalents are noted for context since most accounting software and legacy documentation still uses the 194-series numbering.

TDS rates applicable to startups and businesses (Tax Year 2026-27)

Nature of payment	Section (old Act)	Threshold (Tax Year 2026-27)	Rate (resident, with PAN)
Salary	192	Based on slab	As per applicable slab rate
Interest (non-bank, others)	194A	₹10,000/year (revised from ₹5,000 by Finance Act 2025)	10%
Interest (bank/FD, co-op society, post office)	194A	₹50,000/year; ₹1,00,000 for senior citizens (revised by Finance Act 2025)	10%
Dividend income	194	₹5,000/year	10%
Contractor payments (single)	194C	₹30,000/transaction	1% (individual/HUF), 2% (company/firm)
Contractor payments (annual)	194C	₹1,00,000/year	Same rates
Professional fees / technical services	194J	₹50,000/year (revised from ₹30,000 by Finance Act 2025)	10% (professional); 2% (technical)
Rent (land, building, furniture)	194I	₹6,00,000/year i.e. ₹50,000/month (revised from ₹2,40,000 by Finance Act 2025)	10%
Rent (plant and machinery)	194I	₹6,00,000/year	2%
Commission or brokerage	194H	₹20,000/year	2% (reduced from 5% from 1 October 2024)
Purchase of goods (by buyer with turnover above ₹10 crore)	194Q	₹50 lakh per vendor/year	0.1%
Immovable property purchase	194-IA	₹50 lakh	1%
Rent by individual / HUF (non-audit)	194-IB	₹50,000/month	2% (reduced from 5% from 1 October 2024)
E-commerce operator to seller	194-O	No threshold (per CBDT)	0.1% (reduced from 1% from 1 October 2024)
Partner’s remuneration (firms/LLPs)	194T	₹20,000/year	10% (applicable from 1 April 2025)
Payments to non-residents	195	As applicable	Per DTAA or applicable withholding rate
Higher rate for non-filers of ITR	206AB	As per applicable section	Twice the applicable rate or 5%, whichever is higher

Note: Online gaming winnings (Section 194BA) attract 30% TDS with no threshold. This section is rarely relevant for startup operations but applies if your platform pays out game winnings to users.

Section 194Q deserves specific attention for businesses that have crossed ₹10 crore in turnover. If your company purchases goods from a single vendor exceeding ₹50 lakh in a financial year, TDS at 0.1% applies under Section 194Q. This is separate from GST TCS under Section 206C(1H). The two provisions can overlap; CBDT has clarified that where both 194Q and 206C(1H) apply, the buyer’s TDS obligation under 194Q takes precedence and the seller’s TCS obligation is not triggered.

Two rate changes from October 2024 are material for startups to catch: commission/brokerage moved from 5% to 2%, and e-commerce operator TDS on seller payments dropped from 1% to 0.1%. If your accounting software or manual rate table has not been updated, you are likely over-deducting, which creates reconciliation work and may delay vendor payments.

Section 194T (partner remuneration TDS) is new from 1 April 2025. LLPs and partnership firms must deduct 10% on salary, interest, bonus, and commission paid to partners above ₹20,000 in aggregate for the year. Most LLPs we have reviewed had not built this into their payroll or payment processes at all. The broader LLP compliance calendar has several deadlines that interact with TDS, and it is worth mapping them together.

Higher TDS for non-filers: Sections 206AB and 206CCA

Two provisions introduced in recent years significantly increase TDS and TCS rates for payees who have not filed ITRs for the previous two financial years. Under Section 206AB, if the deductee has not filed returns for both of the last two years in which their tax due exceeded ₹50,000, TDS must be deducted at twice the applicable rate or 5%, whichever is higher. Section 206CCA applies the same logic to TCS.

For startups that pay large amounts to freelancers or small vendors, this is operational exposure. Before making substantial payments, verify the vendor’s ITR filing status on the Income Tax portal’s compliance check utility. If you deduct at the standard rate on a vendor who qualifies as a specified person under 206AB, you remain in default for the shortfall.

PAN-Aadhaar linkage and higher TDS

Since 1 May 2023, PAN cards of individuals who have not linked their Aadhaar are treated as “inoperative.” TDS on payments to such individuals must be deducted at 20% regardless of the applicable section rate, under Section 206AA. Check PAN-Aadhaar status before onboarding new individual vendors. Inoperative PAN also means the vendor cannot claim TDS credit in their Form 26AS, creating a downstream dispute regardless of how correctly you filed.

What are the TDS deposit and return filing deadlines?

Deadline misses are the most common source of TDS liability for startups, because the penalties stack: interest on delayed deposit, a late filing fee, and separately a penalty for late TDS certificates.

Deposit deadline

TDS deducted in any month must be deposited to the government by the 7th of the following month. The single exception: TDS deducted in March must be deposited by 30 April. Deposit is made using Challan ITNS-281 through the income tax e-pay portal.

A one-day delay still costs you a full month of interest at 1.5% per month under Section 201(1A). If TDS was not deducted at all, interest runs at 1% per month from the date it was due to be deducted.

Return filing deadlines

Returns must be filed quarterly for most forms. The due dates:

Quarter	Period	Filing due date
Q1	April to June	31 July
Q2	July to September	31 October
Q3	October to December	31 January
Q4	January to March	31 May

The current forms under the Income Tax Act 2025 for Tax Year 2026-27:

Form	Used for
Form 138 (was 24Q)	TDS on salary (Section 392)
Form 139 (was 26Q)	TDS on non-salary payments to residents (Section 393)
Form 140 (was 27Q)	TDS on payments to non-residents (Section 393, Table 2)
Form 26QB	TDS on property purchase (use old number; CBDT transition guidance pending)
Form 26QC	TDS on rent by individual/HUF (use old number; CBDT transition guidance pending)

Forms 26QB and 26QC continue to be filed within 30 days from the end of the month in which TDS was deducted, not quarterly. Note: For any returns or challans relating to Tax Year 2025-26 or earlier periods, the old form numbers (24Q, 26Q, 27Q) still apply. The new form numbers (138, 139, 140) apply only to Tax Year 2026-27 onwards.

How the Income Tax Act 2025 has changed TDS compliance (in force from 1 April 2026)

The Income Tax Act 2025 replaced the Income Tax Act 1961 on 1 April 2026 and is now the governing law for all transactions. If you are reading this in June 2026, every payment you make today falls under the new Act. For TDS and TCS compliance, the structural changes are significant even though the underlying rates are almost entirely unchanged.

The section number overhaul

Under the old Act, TDS provisions ran across more than 60 sections from Section 192 to Section 194T. The new Act consolidates all of this into three sections:

• Section 392: Salary TDS (replaces Section 192)
• Section 393: All other TDS (replaces Sections 193 to 195 and everything in between, structured in three tables for residents, non-residents, and any person)
• Section 394: TCS (replaces Section 206C)

The rates have not changed. The logic of thresholds and deduction timing has not changed. What has changed is the reference system. If your ERP, accounting software, challan filing, or audit workbench still uses old section numbers (194C, 194J, 194I, etc.) for transactions from April 2026 onwards, your returns will be incorrect. CBDT circulars issued after 1 April 2026 will reference new section numbers.

The form renumbering

Every TDS and TCS return form has been renumbered under the Income Tax Rules 2026. Form 24Q for salary TDS is now Form 138. Form 26Q is now Form 139. Form 27Q is now Form 140. These new form numbers apply from Tax Year 2026-27 (i.e., returns filed for the period April 2026 onwards). FY 2025-26 Q4 returns, due 31 May 2026, are still filed under old form numbers.

The new audit disclosure requirement

The new Form 26 (tax audit report under the new Act, replacing old Form 3CD) introduces significantly stricter TDS disclosure. Where the old Clause 34(b) required a yes/no answer on TDS compliance, the new equivalent under Clauses 49, 50, and 51 requires the exact count of TDS/TCS transactions not reported and the monetary amount attributable to those unreported transactions. This is not something you can reconstruct at year-end from a bank statement. Systematic transaction-level TDS tracking is now a tax audit necessity, not just a best practice.

Tax Year replaces Financial Year + Assessment Year

The 2025 Act eliminates the confusing split between previous year and assessment year. Income earned in Tax Year 2026-27 is both filed and assessed under Tax Year 2026-27. This affects how you reference periods in return forms, notices, and correspondence. For FY 2025-26, the old terminology still applies.

Other form renames under the new Act

Two more form changes affect day-to-day compliance. Form 15G and Form 15H (used by payees to declare that their income is below the taxable limit and request zero TDS deduction) have been replaced by a single unified Form 121 under the Income Tax Act 2025. Deductors receiving these declarations from April 2026 onwards will receive Form 121, not the old Form 15G or 15H. Correspondingly, Form 26AS (the consolidated annual tax statement showing all TDS credited against a PAN) has been replaced by Form 149 under the new Act. For Tax Year 2026-27, reconcile against Form 149, not Form 26AS.

What is TCS, and when does it apply to your business?

TCS (Tax Collected at Source) is the mirror image of TDS. Where TDS requires the payer to deduct tax before making a payment, TCS requires the seller to collect tax on top of the sale consideration and deposit it with the government. The buyer pays slightly more than the transaction value, and that excess is credited to the buyer’s tax account. The buyer can claim TCS credit when filing their income tax return, just as they would with TDS.

The government uses TCS primarily on categories where cash transactions are common, where the seller has more visibility than the buyer, or where large-value transactions warrant tracking. Examples under the Income Tax Act 2025 (Section 394, previously Section 206C of the old Act) include:

• Sale of scrap: 1%
• Sale of minerals (coal, lignite, iron ore): 1%
• Sale of motor vehicles above ₹10 lakh: 1%
• Liberalised Remittance Scheme (LRS) remittances for purposes other than education or medical: 20% above ₹7 lakh (collected by the Authorised Dealer bank, not a business obligation for most companies)
• Overseas tour packages: 2% (reduced from tiered 5%/20% structure under the new Act)

TCS on e-commerce: a common point of confusion

Section 194-O (old Act) required e-commerce operators to deduct TDS at 0.1% on amounts paid to resident sellers. This is technically TDS, not TCS, but it is frequently confused with TCS because it operates on the seller-side of a marketplace. If your platform enables third-party sellers to transact and you collect and remit payments on their behalf, you are an e-commerce operator for this provision. The obligation sits with you as the operator, not the seller.

TCS under the LRS: what founders need to watch

The 20% TCS on LRS remittances above ₹7 lakh applies at the Authorised Dealer bank level. When an individual sends money abroad for investment, travel, or gifts, the bank collects 20% TCS. This is primarily a personal finance issue, but it affects founders in two specific ways. First, if your company reimburses business travel or makes overseas payments that are structured in a way that a bank characterises as LRS rather than business expenditure, the TCS applies. Second, founders who hold offshore accounts or make personal cross-border transfers should track annual LRS usage carefully to anticipate the TCS impact on their personal cash flow.

TCS on goods purchases above ₹50 lakh: Section 206C(1H) and 194Q overlap

When a seller’s aggregate receipts from a buyer exceed ₹50 lakh in a year, the seller is required to collect TCS at 0.1% under Section 206C(1H) of the old Act (now covered under Section 394 of the new Act). However, if the buyer’s turnover exceeds ₹10 crore and the same transaction attracts TDS under Section 194Q, the buyer’s TDS obligation takes precedence and the seller’s TCS obligation is not triggered. This is one of the few places where TDS and TCS directly collide, and getting the priority wrong results in either double collection or a gap that auditors will flag.

What are the penalties for TDS non-compliance?

Penalties stack. That is the aspect most founders do not fully register until they are sitting with a notice. A single missed TDS deposit does not produce one penalty; it produces three simultaneous liabilities: interest under Section 201(1A) for the late deposit, a late filing fee under Section 234E if the quarterly return is also missed, and potential disallowance of the underlying expense under Section 40(a)(ia). In the worst case, all three compound over the same months.

To make this concrete: suppose a startup pays ₹10 lakh in professional fees in April 2026 without deducting TDS, does not file the Q1 return (due 31 July 2026), and the department raises a notice in October 2026. By that point, interest under Section 201(1A) has run for six months at 1% per month on the ₹1 lakh that should have been deducted, totalling ₹6,000. Late filing fees under Section 234E have run from 1 August to October at ₹200 per day for approximately 90 days, totalling ₹18,000 (capped at the TDS amount of ₹1 lakh, so the full ₹18,000 applies here). And because TDS was not deducted, 30% of the ₹10 lakh expense, that is ₹3 lakh, is disallowed under Section 40(a)(ia), inflating taxable profit by that amount. The total cost of one missed deduction over six months is not ₹24,000 in direct penalties; it is ₹24,000 plus the tax on ₹3 lakh of disallowed expense, which at a 25% corporate tax rate is another ₹75,000. A single oversight on one vendor payment has cost the company nearly ₹1 lakh.

Penalty and interest summary

Default	Consequence	Applicable provision
TDS not deducted	Interest at 1% per month from due date to deduction date	Section 201(1A), ITA 1961
TDS deducted but not deposited	Interest at 1.5% per month from deduction date to deposit date	Section 201(1A)
Late filing of TDS return	₹200 per day until return is filed, capped at total TDS amount	Section 234E
Penalty for non-filing or incorrect return	₹10,000 to ₹1,00,000	Section 271H
Late issuance of TDS certificate	₹500 per day per certificate after 15 days from due date	Section 272A
TDS not deducted, expense disallowed	30% of expense disallowed in ITR (certain categories: 100%)	Section 40(a)(ia)
Wilful default	Prosecution, imprisonment up to 7 years	Section 276B

The expense disallowance trap

Section 40(a)(ia) is the penalty most founders underestimate because it does not show up as a tax notice. It shows up quietly in the tax computation as reduced deductible expenses, which means higher taxable income and higher tax due. If your company paid ₹30 lakh in professional fees across a year without deducting TDS, 30% of that, ₹9 lakh, is disallowed. At a 25% corporate tax rate, you pay ₹2.25 lakh extra in tax on income that was genuinely a cost of doing business. In a loss-making company, the disallowance reduces the carry-forward loss available to offset future profits, compounding the impact into later years.

The due diligence risk

In every fundraising due diligence exercise Treelife has supported, TDS defaults come up. VCs and PE funds typically request TDS returns for the previous two to three financial years as part of standard investor due diligence. Defaults that could have been rectified for ₹10,000 to ₹50,000 in interest become deal-blockers or valuation haircuts when discovered during a Series A or Series B process. The typical outcome is a representation and warranty that places the liability on founders personally, or an escrow holdback. Neither is a comfortable position to be in.

Does TDS apply on payments to non-residents and foreign vendors?

Yes, and this is the most under-managed TDS obligation for technology startups. Payments to non-resident individuals, foreign companies, and overseas service providers require TDS under Section 195 of the old Act (Section 393, Table 2 under the Income Tax Act 2025), regardless of where the Indian company is incorporated or where the payment is processed.

The obligation is not limited to large payments. A ₹30,000 annual subscription to a foreign SaaS tool, a one-time ₹5 lakh payment to a Singapore-based consultant, and a recurring monthly retainer to a US-incorporated agency are all potentially subject to TDS. The test is not the size of the payment. It is whether the income accrues or arises in India, which for services consumed by an Indian company almost always triggers applicability analysis.

Common cross-border payment scenarios for startups

• Professional or advisory fees paid to an overseas individual or firm
• Cloud infrastructure costs paid to an overseas provider (where invoiced to the Indian entity)
• Software licence fees or royalties paid to a foreign IP holder
• Payments to a non-resident founder or director for services rendered
• Fees paid to a foreign law firm, bank, or financial advisor in connection with fundraising or M&A

How to determine the withholding rate

The rate under Section 195 (Section 393, Table 2) depends on the nature of the payment. Technical services fees are typically withheld at 10% to 20% before applying DTAA relief. Royalties are typically 10% to 15%. Interest paid to a foreign lender can be 5% to 20% depending on the instrument. The statutory rate applies unless a Double Taxation Avoidance Agreement (DTAA) between India and the payee’s country provides a lower rate.

To apply a reduced DTAA rate, you need two documents from the foreign entity before making the payment. First, a Tax Residency Certificate (TRC) issued by the tax authority of their country. Second, Form 10F, a self-declaration confirming eligibility for DTAA benefits. Without these, you must apply the higher statutory rate. If a vendor refuses to provide these documents, deduct at the statutory rate and document the refusal.

Form 15CA and Form 15CB: the remittance compliance layer

Before transferring money abroad, most payments require a declaration in Form 15CA (filed online on the income tax portal). For remittances above ₹5 lakh in a financial year, or for remittances where TDS is applicable, you also need Form 15CB, a certificate from a chartered accountant confirming that TDS has been correctly computed and deposited. The filled Form 15CB must be obtained before filing Form 15CA, and Form 15CA must be filed before the bank transfer is initiated.

Your Authorised Dealer bank (the bank processing the international transfer) will request these documents before releasing the payment. Not having them does not prevent the transfer in all cases, but it creates a compliance gap that shows up in AIS, in bank records, and during any future scrutiny assessment.

The FEMA compliance obligations around outward remittances sit alongside TDS here and need to be assessed together before the first cross-border payment is made.

Common TDS and TCS mistakes that cost startups money and credibility

1. Treating TDS as applicable only after you cross a revenue threshold

Companies and LLPs have no revenue threshold for TDS. The obligation starts from incorporation. A startup incorporated in September 2024 that hired a technical consultant in October 2024 had a TDS obligation on that first payment. This is the most common gap Treelife finds in early-stage compliance reviews.

2. Not updating TDS rates after budget changes

The October 2024 rate revisions (commission from 5% to 2%, e-commerce TDS from 1% to 0.1%, rent by individuals from 5% to 2%) are not reflected in most accounting software unless you update manually. Continuing to deduct at the old rates means over-deduction. Your vendors will notice because the excess TDS reduces their take-home, and correcting it requires revised returns and refund processes.

3. Missing TDS on freelance and contractor payments by treating them as ad hoc expenses

A single payment below the threshold does not attract TDS, but once aggregate payments to one vendor cross ₹1,00,000 in a year (Section 194C) or ₹50,000 (Section 194J, revised from ₹30,000 by Finance Act 2025, effective 1 April 2025), TDS is retrospectively applicable from the first rupee. Startups that track payments by invoice rather than by vendor-year aggregate routinely miss this.

4. Not deducting TDS on partner remuneration under Section 194T (new from April 2025)

Section 194T is one year old and already generating notices. LLPs, which are a popular structure for boutique tech firms and consulting practices, must deduct TDS at 10% on aggregate partner payments (salary + interest + bonus + commission) above ₹20,000 per year. Most LLPs that Treelife has reviewed since April 2025 had not built this into their payment process at all.

5. Using old section numbers for transactions after 1 April 2026

The Income Tax Act 2025 is in force. Any TDS challan, return, or audit workbench entry for April 2026 onwards that references Section 194C, 194J, or 194I is referencing a repealed provision. This creates mismatches in your TRACES profile, will likely trigger notices, and creates the exact kind of systemic unreported transaction count that the new Form 26 audit report now requires you to disclose. Update your software and payment templates now.

A step-by-step TDS compliance setup for startups

Most startup founders who contact Treelife about TDS are not asking about individual rates. They are asking how to build a process that runs cleanly without requiring them to think about it every month. Here is the sequence:

Step 1: Obtain TAN Apply for Tax Deduction and Collection Account Number (TAN) via Form 49B on the NSDL portal. Without TAN, you cannot legally deduct TDS or file returns. For a new private limited company, TAN should be obtained simultaneously with PAN at the time of incorporation. The process typically takes 5 to 7 working days. TAN is a 10-digit alphanumeric number and must be quoted on every TDS challan, return, and certificate. If you have been operating without TAN and deducting TDS, the deductions are invalid and you have a default exposure from day one.

Step 2: Build a vendor payment classification map For every vendor category your company uses, classify the applicable TDS provision, rate, and annual threshold. Do this before the first payment, not after. Freelancers and individual consultants fall under the professional services provision. Agencies and firms for technical work fall under the same provision at a lower rate. Contractors engaged for physical work, logistics, or operations fall under the contractor provision. Landlords fall under rent. A one-time mapping exercise done at incorporation prevents the ad hoc scrambling that causes most defaults. Review the map quarterly as your vendor base grows.

Step 3: Implement deduction at the point of accrual TDS is deducted at the time of payment or credit to the vendor’s account, whichever is earlier. The word credit here means the accounting entry, not the bank transfer. If your finance team books an accrual at month-end, TDS is due at that point. Configure your accounting software to flag TDS-applicable vendor payments automatically, calculate the deduction, and generate a separate liability entry for the TDS payable. Most cloud accounting platforms used by Indian businesses have this functionality built in.

Step 4: Deposit by the 7th of the following month Use Challan ITNS-281 through the income tax e-pay portal. Select the correct Tax Year (2026-27 for current transactions), the correct nature of payment code (which now maps to Section 392 or 393 of the new Act rather than the old 194-series), and quote TAN. For TDS deducted in any month from April to February, the deposit deadline is the 7th of the next month. For March, the deadline extends to 30 April. A buffer of three days before the deadline protects against portal downtime and last-minute banking delays.

Step 5: File quarterly returns Form 138 for salary TDS (Section 392), Form 139 for non-salary payments to residents (Section 393), Form 140 for payments to non-residents (Section 393, Table 2). These are the Tax Year 2026-27 equivalents of the old 24Q, 26Q, and 27Q. Q4 is due 31 May. Before filing, verify that every deductee’s PAN is correctly entered. A single PAN mismatch means that deductee will not see the TDS credit in their Form 149 (new Act equivalent of Form 26AS), which creates vendor disputes and sometimes results in the vendor filing a complaint claiming non-deposit even when the funds have been remitted.

Step 6: Issue TDS certificates Form 16 (now called Form 130 under the new Act for Tax Year 2026-27) for salaried employees must be issued by 31 May each year. Form 16A for non-salary deductions must be issued within 15 days of the quarterly return filing due date. Use TRACES to download and issue these digitally. Do not delay issuing certificates; vendors need them to file their own income tax returns, and delays damage your business relationships and can trigger complaints to the department.

Step 7: Reconcile with Form 149 and AIS quarterly Every deduction you make should reflect in the payee’s consolidated tax statement. Under the Income Tax Act 2025, this is Form 149 for Tax Year 2026-27 onwards (replacing Form 26AS). The Annual Information Statement (AIS) is the primary document the department uses for matching and captures TDS entries, high-value transactions, and all income reported by third parties. Reconcile your TRACES records against both Form 149 and AIS every quarter. Mismatches caught at this stage take hours to fix. Mismatches discovered during a scrutiny assessment take weeks and typically require professional support to resolve.

FAQs on TDS & TCS Compliance for Startups in India

Q: Does TDS apply to a company even if it is making losses?
A: Yes. TDS is an obligation on the payer, not a function of the company’s own profitability. A loss-making company that pays rent, salaries, or professional fees has full TDS obligations from day one.

Q: What is TAN, and is it different from PAN?
A: TAN (Tax Deduction and Collection Account Number) is a 10-digit alphanumeric number issued by the Income Tax Department specifically for entities that deduct or collect tax at source. PAN is the general taxpayer identification number. You need both. Without TAN, you cannot deposit TDS, file returns, or issue Form 16/16A.

Q: What happens if my vendor does not have a PAN?
A: If the deductee does not provide PAN, TDS must be deducted at 20% or the applicable rate, whichever is higher, under Section 206AA of the old Act. This is a material rate increase. Always collect and verify PAN before making the first payment to any vendor.

Q: Can splitting payments across months avoid TDS thresholds?
A: No. Threshold breaches are assessed on an aggregate annual basis for most sections. Splitting payments to stay below the per-payment threshold while the annual aggregate exceeds the limit is a violation. The Income Tax Officer will aggregate all payments to the same vendor within a financial year.

Q: What is the TDS rate on salary?
A: Salary TDS under Section 192 (Section 392 from April 2026) is deducted at the applicable slab rate for each employee. There is no flat rate. Employers compute the estimated annual tax liability at the start of the year, divide by 12, and deduct monthly. If an employee has other income sources or claims HRA or Section 80C deductions, those affect the computation. Form 12BB is the employee’s declaration of these deductions to the employer.

Q: Are cloud and SaaS subscriptions subject to TDS?
A: Subscriptions to foreign cloud and SaaS platforms paid by an Indian entity are potentially subject to TDS under Section 195 (now Section 393, Table 2) if the income is deemed to arise in India. The analysis depends on whether the payment qualifies as royalty or fees for technical services under the applicable DTAA. This is a live area of litigation and CBDT has issued multiple circulars. Get a specific opinion for material subscription amounts rather than applying a blanket rule.

Q: What is Section 194-O, and does it apply to marketplace businesses?
A: Section 194-O requires e-commerce operators to deduct TDS at 0.1% on amounts credited or paid to resident sellers. If your platform enables third-party sellers to transact and you collect payment on their behalf, you are likely an e-commerce operator for this provision. The threshold is effectively nil under current CBDT interpretation. Platforms that have not implemented this face both TDS default and the potential for demand on the full seller payout amount.

Q: What is the due date for TDS deposit in March?
A: TDS deducted in March has an extended deposit deadline of 30 April, not 7 April. This is the only month with a different deadline, and it applies to all deductors. Missing this deadline generates interest from 1 April at 1.5% per month.

Q: How do I correct a TDS return that has already been filed with wrong PAN details?
A: File a correction statement (revised TDS return) on TRACES. Corrections can be filed up to the point of assessment. PAN mismatches are the most common reason payees do not see TDS credit in their Form 26AS, which creates disputes and sometimes leads the deductee to claim the tax credit has not been received even though the deductor has deposited the funds.

Q: Do DPIIT-recognised startups have any TDS exemptions?
A: No. DPIIT recognition provides income tax exemption under Section 80-IAC on profits, angel tax relief under Section 56(2)(viib), and certain regulatory relaxations. It does not affect TDS obligations. A DPIIT-recognised startup that pays a contractor, consultant, or landlord has full TDS obligations.

Q: What are the key changes under the Income Tax Act 2025 for TDS?
A: The Act, effective 1 April 2026, consolidates all TDS provisions into Sections 392, 393, and 394. Section numbers (194C, 194J, 194I, and so on) are repealed. Rates are substantially unchanged. Return form numbers have changed (Form 24Q becomes Form 138, Form 26Q becomes Form 139). The new tax audit report (Form 26) requires exact counts of unreported TDS transactions and amounts, making systematic transaction-level tracking mandatory.

Q: What TCS obligations arise from LRS remittances?
A: Authorised Dealer banks collect TCS on LRS remittances above ₹7 lakh in a year at 20% (for purposes other than education and medical treatment). This is primarily a bank-level obligation, not a business obligation. However, if a company routes remittances in a way that looks like personal LRS (e.g., business travel or offshore investments structured as personal payments), the Authorised Dealer may apply TCS. This is particularly relevant for founders with offshore accounts.

Q: If I discover a TDS default from a past year, what should I do?
A: File belated or revised returns and pay the outstanding TDS with applicable interest under Section 201(1A) and Section 234E late filing fee. Voluntary disclosure before a notice is received typically results in lower total liability and avoids the Section 271H penalty of ₹10,000 to ₹1 lakh. If the exposure is material, get a professional assessment of the total liability before filing, because incorrect belated returns compound the problem.

Q: How long does it take to set up TDS compliance from scratch for a new startup?
A: TAN registration typically takes 5 to 7 working days via the NSDL portal. Configuring TDS in accounting software and classifying your vendor base takes one to two weeks depending on the complexity of your payment types. From TAN receipt to the first clean TDS challan deposit, expect two to three weeks. For a company with a backlog of uncorrected defaults, clearing arrears, filing revised returns, and obtaining fresh TAN (if one was never obtained) typically takes four to six weeks with professional support.

Regulatory references:

• Income Tax Act, 1961: Sections 192, 193, 194, 194A, 194C, 194H, 194I, 194J, 194-IA, 194-IB, 194M, 194-O, 194Q, 194T, 195, 201, 206AA, 206AB, 206CCA, 234E, 271H, 272A, 276B, 40(a)(ia), 80-IAC, 56(2)(viib)
• Income Tax Act, 2025: Sections 392, 393, 394, 448 to 468
• Income Tax Rules, 2026: Forms 138, 139, 140, 130 (new TDS return and certificate forms effective Tax Year 2026-27)
• CBDT Notification on reduced TDS rates effective 1 October 2024
• CBDT Notification introducing Section 194T effective 1 April 2025
• CBDT Circular on interplay of Section 194Q and Section 206C(1H)
• Form 15CA and Form 15CB requirements under Rule 37BB, Income Tax Rules 1962
• PAN-Aadhaar linkage: CBDT circular on inoperative PAN treatment under Section 206AA
• DPIIT recognition framework under Startup India (for Section 80-IAC and Section 56(2)(viib) context)

External sources:

• incometaxindia.gov.in
• tdscpc.gov.in (TRACES portal)
• startupindia.gov.in