TDS compliance India

Virtual CFO Payroll & TDS Compliance: Scope, Filing Controls

Posted on 13 Oct, 202613 Oct, 2026 by Treelife

Virtual CFO payroll and TDS compliance covers the full cycle, from salary structuring to the last salary TDS certificate handed to an employee. In India that cycle now runs under two Acts: the Income-tax Act, 1961 for tax years up to 2025-26 and the Income-tax Act, 2025 from 01/04/2026, alongside the labour codes in force since 21/11/2025. A missed deposit on the 7th or a mismatched challan costs interest, late fees and a disallowed expense. This article sets out the scope, the responsibility split and the filing controls that prevent those outcomes.

What does a virtual CFO do for payroll and TDS compliance in India?

A virtual CFO owns payroll and TDS as a controlled finance process, not a vendor task. That covers salary and perquisite computation, deduction of tax under section 392 and section 393 of the Income-tax Act, 2025, deposit by the 7th of the next month, quarterly returns, certificates, and reconciliation of the books to Form 26AS and the Annual Information Statement (AIS) before every filing.

Why do payroll and TDS errors compound as a company grows?

Payroll errors compound because every pay run feeds four downstream records: the salary TDS return, the provident fund return, the Employees’ State Insurance (ESI) return and the books. A wrong figure in month one carries into every later month and surfaces only when an employee’s tax statement or a quarterly return disagrees with the register. Finance ownership catches the error at source instead of at notice stage.

The break usually comes between 25 and 150 employees. A founder who ran payroll from a spreadsheet at 10 people now has a payroll vendor, a CA and an HR executive, each holding one piece of the cycle. Nobody owns the tie out between the payroll register, the challan and the return. Three patterns recur in the engagements we see:

Salary changes (new hires, increments, ESOP exercises) reach the payroll vendor but not the tax computation.
TDS on contractor and professional payments is handled by the accounts payable team on a different calendar from salary TDS, so one challan is deposited late.
Regime choices and investment declarations (Form 122 and Form 124 under the Income-tax Rules, 2026) are collected in April and never refreshed, so the February and March deductions are wrong.

For many SaaS and services businesses, employee cost is the largest operating line, which makes the TDS and provident fund liabilities attached to it the largest recurring statutory cash calls. That is a finance question before it is an HR one. Our virtual CFO payroll service is built around that view.

What is in scope for virtual CFO payroll processing?

The scope runs from salary structuring and input control through the pay run, payslips, statutory deductions, bank payment file and journal posting, to full and final settlement on exit. The virtual CFO signs off the payroll register before money moves, not after. The payroll vendor or in-house HR keeps data entry and payslip distribution.

Payroll scope by stage

Stage	What the virtual CFO does	Output
Salary structuring	Splits CTC into components, tests it against the wages definition in the labour codes, models employer provident fund and gratuity cost	Approved structure sheet
Input control	Collects joiners, leavers, increments, loss of pay, reimbursements, loans and perquisite data with written approvals	Locked input file
Gross to net	Computes earnings, provident fund, ESI, professional tax, labour welfare fund and income tax on salary	Draft payroll register
Review and release	Reviews variance against the prior month, signs off, approves the bank payment file	Approved register and payment file
Posting	Books salary, statutory liabilities and reimbursements	Month end payroll journal
Exits	Settles dues, gratuity, leave encashment, notice recovery and the final TDS true up	Full and final statement

Salary structuring sits at the front of this cycle because the new tax regime and the 50% wages floor change both take-home pay and employer cost. The structure itself, including NPS, allowances and reimbursements, is covered in Treelife’s guide to salary structuring and TDS. The virtual CFO’s job here is narrower: cost the rebuild for the company, show the take-home effect side by side, and freeze the approved structure so payroll cannot drift from it.

The review step needs a written standard. Variance review means comparing headcount, gross pay, deductions and net pay to the prior month and explaining every line that moves beyond an agreed tolerance. Without a tolerance, the review becomes a glance.

How do master data controls stop ghost employees and payroll fraud?

Master data is the cheapest place to stop payroll fraud. Test every new employee, bank detail change and exit before the pay run, not after payment, and keep the exception report as evidence. The same data also drives TDS, because a wrong PAN or a missing exit date flows straight into the deduction and the return.

Payroll master data tests

Test	Risk it catches	Evidence kept	When run
New employee matched to the signed joining pack, PAN and bank proof	Ghost employee	Joining checklist with approver	Before the first pay run
Duplicate bank account or PAN across employees	Fictitious or duplicate payee	Exception report	Every pay run
Bank detail changed inside an agreed freeze window before payroll	Salary diversion	Change request confirmed by the employee	Every pay run
Payroll headcount matched to HR headcount and attendance or access records	Absent or exited employees paid	Three-way headcount match	Monthly
Exit processed in the month of the last working day	Salary continuing after exit	Exit checklist with settlement status	On every exit
Manual overrides, overtime and variable pay	Inflated pay	Override log approved by someone other than the preparer	Every pay run

Two links to TDS are worth stating. A missing or inoperative PAN attracts a higher deduction rate (section 206AA of the 1961 Act, covered in Treelife’s TDS and TCS guide), and the employee’s credit then fails to show in the annual tax statement. Payroll master data is also personal data, so access, retention and vendor terms matter; the data protection angle of handing payroll to a third party is covered in payroll outsourcing for startups.

Which TDS streams does a virtual CFO own, and what feeds each one?

A virtual CFO owns six TDS streams: salary, perquisites and ESOPs, vendors and professionals, rent and commission, foreign payments, and year-end provisions. Each has a feeder system, a trigger and a named owner. Rates, thresholds and section codes for each are in Treelife’s TDS and TCS compliance guide and are not repeated here.

TDS streams under virtual CFO ownership

Stream	Feeder	Trigger to watch	Control the virtual CFO runs
Salary	Payroll register, regime and investment declarations	Mid-year joiners, regime switch, previous employer income	Monthly computation review, refresh before Q3, true up in Q4
Perquisites and ESOPs	Cap table, ESOP ledger	Exercise or vesting event	Same day trigger from the cap table to payroll, with a tax funding plan
Vendors and professionals	Accounts payable, vendor master	Credit or payment of the invoice, whichever is earlier	PAN, nature of payment and section assigned before the first payment
Rent and commission	Lease and agent agreements	Monthly credit to the party	Rent roll and commission ledger tied to the TDS ledger
Foreign payments	Remittance requests	Payment or credit to a non-resident	Rate and treaty check and remittance certification before release
Year-end provisions	Month 12 close	Provision booked on 31/03	Provision list reviewed for TDS due by 30/04

Salary TDS and the ESOP handoff

Salary TDS (section 392 of the Income-tax Act, 2025, earlier section 192) is estimated on the declared regime and spread over the remaining months. Three inputs decide whether the number is right: the regime declaration (Form 122), the investment declaration (Form 124) and income from a previous employer in the year. The virtual CFO fixes cut off dates for all three and trues up in the last quarter.

ESOP exercises are the stream most often missed, because the event is created on the cap table and not in payroll. Tax on the perquisite must be deducted even though no cash has moved, so the exercise should trigger a payroll entry and a tax funding arrangement on the same day.

How do PF, ESI, professional tax and gratuity fit the same monthly close?

Provident fund, ESI, professional tax, labour welfare fund and gratuity each run on their own calendar and wage definition, and the labour codes in force from 21/11/2025 changed the wage base for several of them. The virtual CFO closes all of them in the monthly cycle off one payroll register, applying the rules set out in Treelife’s guides to PF compliance, ESI compliance and professional tax compliance.

The wage definition is where these obligations meet the books. If allowances above 50% of total remuneration are added back to wages, the PF and ESI base, the gratuity provision and the cost per head all move together. The mechanics are in the PF guide and in Treelife’s note on the new labour codes. The finance task is to rebuild the structure once and push the change through all three places in the same month.

Two accounting consequences follow. First, the gratuity provision needs re-measurement on the new base, which for companies reporting under Ind AS 19 or AS 15 is an actuarial exercise with a catch up entry. Second, the 21/11/2025 start date means the provision gap is already running for months, and an audit in March 2027 will ask when it was recognised.

Who is responsible for what: founder, virtual CFO, HR and external CA?

The virtual CFO owns computation, deposit, filing and reconciliation. The founder owns approvals and the statutory signature, HR owns the accuracy of employee data, and the external CA or auditor owns attestation. Liability for non-deduction and non-deposit stays with the company and its responsible person, and no engagement letter moves it.

Responsibility matrix for payroll and TDS

Task	Founder or director	Virtual CFO	HR	External CA or auditor
Salary structure and policy	Approves	Designs and costs	Communicates	Advises on tax position
Regime and investment declarations	None	Sets cut off dates, checks	Collects	None
Monthly inputs (joiners, exits, LOP)	None	Locks and reviews	Supplies	None
Payroll register and payment file	Releases payment	Computes and signs off	Reviews payslips	None
Salary TDS deduction and deposit	None	Owns	Supplies data	None
Vendor and professional TDS	Approves large contracts	Owns	None	Reviews sample
Quarterly returns and certificates	Authorises signatory	Prepares and files	Distributes certificates	Reviews on request
Reconciliation to Form 26AS and AIS	None	Owns	None	Relies on it
Notices and rectification	Approves response	Drafts and tracks	Supplies employee data	Represents where needed
Tax audit clause on TDS	Signs accounts	Prepares data	None	Reports under tax audit

Two points sit outside the matrix. Under section 204 of the 1961 Act the person responsible for paying is the company, acting through its principal officer, and prosecution for failure to deposit deducted tax is under section 276B of that Act (confirm the equivalent provisions in the 2025 Act). The company, not the virtual CFO firm, should therefore hold the TRACES login, the digital signature certificate and the Tax Deduction Account Number (TAN) records, with the virtual CFO using delegated access. If an engagement ends, the company keeps its filing history.

How far ahead of the statutory dates should internal deadlines sit?

Internal deadlines should sit two to five days ahead of every statutory date, so a bank failure, a portal outage or a rejected file does not turn into a default. The statutory dates themselves are in Treelife’s TDS and TCS guide and the compliance calendar for 2026. As on 13/10/2026, the 07/10 deposit for September has passed and the Q2 statements are due on 31/10/2026, which puts the internal target at 26/10/2026.

Statutory dates and internal targets

Obligation	Statutory date	Internal target	Owner
TDS deposit, all months except March	7th of the following month	5th	Virtual CFO prepares, company approves release
TDS deposit for March	30/04	25/04	Virtual CFO prepares, company approves release
Quarterly TDS statements (salary, resident non-salary, non-resident)	31/07, 31/10, 31/01, 31/05	Five working days earlier	Virtual CFO files, authorised signatory signs
Salary TDS certificate	15/06 after the tax year	First week of June, each matched to the filed statement	Virtual CFO prepares, HR distributes
PF contribution and return	15th of the following month	10th	Virtual CFO
ESI contribution	15th of the following month	10th	Virtual CFO
Professional tax and labour welfare fund	As notified by each state	Five days earlier	Virtual CFO

A dated working calendar, assigned to a named owner for each line and reviewed on the first working day of the month, is the simplest control in this article. It costs nothing and is the one most companies lack.

Which filing controls keep payroll and TDS clean?

Seven controls do most of the work: maker-checker on every pay run, a three-way tie out of register, ledger and challan, challan mapping before filing, reconciliation of the return to Form 26AS and AIS, a vendor master gate, declaration cut offs and segregated access. Each produces evidence a reviewer or auditor can open without asking anyone.

Payroll and TDS control set

Control	What it tests	Evidence kept
Maker-checker on the payroll register	Preparer and approver are different people, variance explained against the prior month	Signed register with variance note
Three-way tie out	TDS in the payroll register equals the TDS payable ledger equals the challan paid	Monthly reconciliation sheet
Challan mapping before filing	Each challan (BSR code, date, serial number) is matched to the deductee rows in the return	Mapping file per quarter
Return to Form 26AS and AIS	After processing, tax credit shown against each employee and vendor equals the return	Deductee-wise difference report
Vendor master gate	PAN present and operative, nature of payment recorded, section and rate assigned before first payment	Master change log
Declaration cut offs	Regime and investment declarations frozen on a set date, refreshed before Q3, trued up in Q4	Declaration tracker
Segregated access	Payroll preparation, bank release and return signing sit with different people	Access matrix, DSC custody record

The challan mapping and the 26AS check catch the defects that otherwise reach the company as notices. TRACES issues a justification report listing short deduction, late deduction and late deposit defaults after a return is processed, and the virtual CFO should pull it every quarter rather than wait for an intimation. A challan deposited under the wrong section code or the wrong assessment year is the commonest cause of a short payment default, and it is fixed by a correction statement, which is slower and costlier than a correct challan.

Three timing rules complete the set:

Close the month’s TDS payable ledger to zero by the 7th, after the deposit.
File the quarterly return at least five working days before the due date, so a rejected file can be repaired inside the deadline.
Pull Form 26AS and AIS for the quarter within 30 days of filing and clear every difference in writing.

How does payroll tie out from the register to the annual tax statement?

Payroll is clean when six records agree: the payroll register, the general ledger, the bank file, the challans, the quarterly statement and the annual tax statement. Each link has an owner and a frequency, and a break at any link is visible before it reaches an employee or a notice.

The payroll reconciliation chain

Link	What must agree	Frequency	Typical break
Register to ledger	Gross pay, deductions and net pay equal the payroll journal	Monthly	Manual journal edits, reimbursements booked elsewhere
Ledger to bank	Net pay equals the bank file and the bank debit	Monthly	Returned payments, unpaid exits
Ledger to challans	TDS, PF, ESI and professional tax payables clear to zero on deposit	Monthly	Part payments, wrong section code
Challans to quarterly statement	Each challan is mapped to deductee rows	Quarterly	PAN errors, unmapped challans
Statement to annual tax statement	Credit per employee and vendor equals the statement (Form 26AS under the 1961 Act)	Quarterly, after processing	PAN mismatch, unmatched challan
Annual tax statement to salary certificate	Tax on the certificate equals tax in the filed statement	Annual	Corrections made after filing not carried to the certificate

The accounting entries behind the first three links are simple, which is why departures from them are easy to spot:

On booking payroll: debit salary expense and employer contributions; credit salary payable, TDS payable, PF payable, ESI payable and professional tax payable.
On paying salary: debit salary payable; credit bank.
On each statutory deposit: debit the relevant payable; credit bank.

A payable that does not clear to zero after its deposit date is the first sign of a missed or short payment, and it shows up in the ledger weeks before it shows up in a notice.

What happens when TRACES shows a default or an employee reports a missing credit?

Treat it as a ticket with an owner and a closing date. Classify the default, fix it at source, then close it with the employee or vendor in writing. The sequence below keeps the fix, the cost and the explanation in one record.

Pull the justification report from TRACES and classify the default: short deduction, late deduction, late deposit, unmatched challan or PAN error.
Fix the cause: pay any tax shortfall and interest, correct the challan mapping or PAN through a correction statement, and pay any late filing fee.
Re-test after processing: confirm the credit in the annual tax statement and reissue the salary certificate if the correction changes it.
Reply to the employee or vendor in writing with the corrected credit, and log the root cause in the exceptions log.

The charges attached to each default type are set out in the penalties section of Treelife’s TDS and TCS guide. A root cause logged three times in a year is a control to redesign, not a ticket to close again.

Where do payroll and TDS controls fail in practice?

Five failures account for most of the interest, fees and notices we see: late deposit after deduction, non-deduction on vendor invoices, late returns, stale declarations with unreported ESOP perquisites, and an unrevised wage base. Each is a control gap, not a knowledge gap. The interest, fee and penalty provisions for each default are set out in the penalties section of Treelife’s TDS and TCS guide.

Mistake 1: depositing late after deducting

It happens because the deduction is booked in the ledger and the deposit waits on a bank approval or a month end rush. The cost is 1.5% per month or part of a month, and the interest is not deductible as an expense. Fix it with an internal deposit deadline of the 5th and a challan approval that sits with a person other than the preparer.

Mistake 2: not deducting on vendor invoices

It happens because accounts payable books invoices without a section assigned, or classifies a professional as a contractor to apply a lower rate. The cost is 1% per month, a short deduction demand, and a 30% disallowance of the expense. Fix it at the vendor master: no payment to a vendor without a PAN and a section.

Mistake 3: filing the quarterly return on the due date

It happens because the deductee file is built from payroll and ledger exports at the last minute. A rejected file or a challan mismatch then lands after the deadline and the fee of ₹200 per day starts. Fix it with the five working day buffer in the timing rules above.

Mistake 4: stale declarations and unreported ESOP perquisites

It happens because declarations are collected once in April and ESOP exercises are treated as a cap table event, not a payroll event. The cost is a short deduction in the final quarter and a demand on the employee. Fix it with a refresh before Q3 and an ESOP exercise trigger that flows to payroll the same day.

Mistake 5: ignoring the revised wage base

It happens because the payroll vendor’s template still follows the old basic and allowance split. The cost is a provident fund and gratuity shortfall running from 21/11/2025, with interest and damages on the provident fund side. Fix it with a structure review against the wages definition and a catch up computation.

How should payroll and TDS controls be retested after the move to the 2025 Act?

The Income-tax Act, 2025 replaced the 1961 Act from 01/04/2026, and the move changed section codes and form numbers more than rates. The retest is therefore operational: challans, deductee files, certificates and reconciliations must each carry the right period and the right code. The section and form mapping is in Treelife’s TDS and TCS guide and is not repeated here.

Test one challan end to end under the section 392 and section 393 codes before each month’s deposit run.
Keep two tracks by tax year. Periods up to tax year 2025-26 stay on the 1961 Act and the old forms. From 2026-27 the new forms apply: Form 138 for salary, Form 140 for resident non-salary and Form 144 for non-resident payments. Never merge deductee files across the cut off.
File the Q2 statements early as a test of the new utilities, and read the TRACES justification report before the Q3 filing.
Rebuild salary structures against the wages definition and re-measure the gratuity provision, as set out earlier in this article.
Match every salary certificate (Form 130) to the filed statement before issue.

Three points remain unsettled in the sources reviewed:

Publishers differ on the form number of the annual tax statement under the 2026 Rules. Check the portal before quoting it to employees.
The 2025 Act equivalents of section 40(a)(ia) and section 276B of the 1961 Act were not verified.
State rules under the labour codes are still being notified, and the central rules should be read on the Ministry of Labour and Employment portal.

What does a monthly payroll and TDS close checklist look like?

A monthly close runs in four blocks: lock inputs before the pay run, release and book payroll, deposit statutory dues ahead of the 7th and the 15th, then reconcile and report. The dates below are internal targets that sit two to five days ahead of the statutory dates, so a bank failure or a portal outage does not turn into a default.

Before the pay run (by the 22nd)

Lock joiner, leaver, increment and loss of pay inputs with written approval
Apply regime and investment declaration changes
Post ESOP exercises and other perquisites to payroll
Run the draft register and complete the variance review against the prior month

Release and booking (by the last working day)

Maker-checker sign off on the register
Approve the bank payment file and release salary
Book the payroll journal and the statutory liabilities

Statutory deposits (by the 5th and the 10th)

Deposit salary TDS and vendor TDS challans by the 5th
Deposit provident fund and ESI by the 10th
Pay professional tax and labour welfare fund where due

Reconciliation and reporting (by the 12th)

Complete the three-way tie out of register, TDS payable ledger and challan
Update the deductee-wise TDS tracker that feeds the quarterly return
Publish the payroll MIS pack and the exceptions log

The MIS pack is what makes the process visible to the founder. It should carry five items: headcount and payroll cost by department against budget, statutory dues paid against dues payable, TDS payable ageing, count and value of exceptions raised and cleared, and the next 30 days of filing dates. Anything longer than two pages stops being read. Our MIS and financial budgeting service uses the same pack format, so payroll cost sits next to the budget it is measured against.

Year-end additions (January to June)

January: refresh regime and investment declarations before the final quarter
February: run the true up computation for every employee and show employees the expected March deduction
March: review year-end provisions and accruals for TDS that falls due by 30/04
April: deposit March TDS by 30/04 and clear the payables to zero
May: file the Q4 statements by 31/05 and close all quarterly reconciliations
June: issue salary certificates by 15/06, each matched to the filed statement

Evidence pack for auditors and investors

The evidence pack is built every month, not at the audit. It holds the signed payroll registers, challans with their payment references, quarterly statements with acknowledgements, TRACES justification reports, the reconciliation chain, certificates issued, correction statements and the exceptions log. Statutory auditors test TDS payable, TDS returns reconciled to the books and defaults on TRACES, and investors ask for the same items in diligence.

Treelife’s TDS guide notes that the tax audit report under the 2025 Act asks for counts and amounts of TDS transactions not reported. Confirm the form and clause numbers before relying on that, but keep deductee-level records either way.

What changes when the employer is the Indian subsidiary of a foreign parent?

The Indian subsidiary stays the employer for tax deduction even when pay, equity or reporting lines sit abroad. Four items need a written owner: parent equity awards, secondees, cost reimbursements to the parent and dual reporting.

Parent equity awards: RSUs or options of the foreign parent are generally taxed in India as perquisites at vesting or exercise, and the Indian entity needs the vest data from the parent on the day and a way to fund the tax. See Treelife’s note on foreign parent company ESOPs and confirm the treatment for each plan.
Secondees and expatriates: residential status and the treaty position decide whether salary is taxed in India and whether the Indian entity deducts tax. Keep a day count for each person.
Cost reimbursements to the parent: recharges of salary cost can attract withholding under section 195 of the 1961 Act depending on the treaty and the nature of the payment. Check before remittance.
Dual reporting: reconcile payroll cost between the Indian statutory books and the parent’s reporting format every month.

Frequently asked questions

Q: What is the difference between a payroll vendor and a virtual CFO for payroll and TDS?

A: The vendor processes the pay run. The virtual CFO reviews it, reconciles it to the books, deposits the tax and files the statements. Most companies keep the vendor for data entry and add the virtual CFO as the independent reviewer, which is the hybrid model.

Q: Who is liable if a TDS deposit is missed under a virtual CFO engagement?

A: The company. Under section 204 of the 1961 Act the person responsible for paying is the company, acting through its principal officer. An engagement letter can add an indemnity but cannot move the statutory liability. Confirm the 2025 Act equivalent before quoting this to a client.

Q: Which TDS streams should sit under the virtual CFO?

A: Salary, ESOP perquisites, vendor and professional payments, rent and commission, foreign payments and year-end provisions. Each needs a named feeder system and owner, as in the ownership map earlier in this article.

Q: How long does it take to move payroll and TDS to a virtual CFO?

A: Plan for one parallel payroll cycle and one full quarter before the first statement under the new process. The exact plan depends on the state mix, the payroll vendor and the number of open periods, and is fixed at scoping.

Q: Which documents does a virtual CFO need to start?

A: The TAN and TRACES access, PAN, digital signature certificate, the last 12 months of registers and challans, filed statements and certificates, the salary structure, the ESOP plan and exercise records, the vendor list with PAN and sections, and the PF and ESI registrations.

Q: How are periods under the 1961 Act and the 2025 Act kept separate?

A: By tax year. Periods up to tax year 2025-26 stay on the old forms and provisions, and 2026-27 onward uses the new ones. Deductee files, challan sets and certificates are held in two tracks, and corrections to old periods are filed in the old forms.

Q: What should the founder see every month?

A: A two page pack: payroll cost against budget, statutory dues paid against due, TDS payable ageing, exceptions raised and cleared, and the filing dates for the next 30 days. The reconciliation chain is attached, not summarised away.

Q: What happens if TRACES shows a default after a statement is processed?

A: The virtual CFO classifies it from the justification report, pays any shortfall and interest, files a correction statement where the data was wrong, and replies to the affected employee or vendor in writing. The charges for each default type are in Treelife’s TDS and TCS guide.

Q: How are ESOP exercises handled in payroll?

A: The exercise triggers a payroll entry on the same day, with the perquisite valued and the tax funded by the employee or through an agreed mechanism. The cap table owner and the payroll owner confirm the figures.

Q: Does the virtual CFO also run PF, ESI and professional tax?

A: Yes, in the same monthly close and off one register. State registrations stay in the company’s name.

Q: How do investors test payroll and TDS compliance in diligence?

A: They ask for deposit dates, filed statements, TRACES defaults and PF returns. A monthly evidence pack and a clean justification report answer most of those requests directly. Open defaults and demands become findings and can lead to specific indemnities.

Q: Can the company keep its existing payroll software or vendor?

A: Yes. The vendor continues data entry and payslips, and the virtual CFO adds the maker-checker, the reconciliations, the deposits and the filings. A switch to a new system is a separate project with its own parallel run.

Q: What does an exit from a virtual CFO engagement look like?

A: Clean, if the company owns the TRACES login, the digital signature certificate and the filing history. The handover pack carries the evidence pack, the calendar, open exceptions and any pending correction statements.

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

Posted on 09 Jun, 202609 Jun, 2026 by Treelife

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:

Startup

Investor

Going Global