TDS (Tax Deducted at Source)

TDS (Tax Deducted at Source) is a mechanism under the Income Tax Act where the payer deducts a prescribed percentage of tax from a payment before transferring it to the recipient. The deducted tax is deposited with the government on the recipient's behalf and credited against the recipient's final income tax liability when they file their return. It is India's primary real-time collection system for income tax on non-corporate payments.

Who it applies to

• All companies and LLPs that make payments above specified thresholds — salaries, contractor fees, rent, professional charges
• Startups paying freelancers, consultants, or agencies, even from pre-revenue stage
• Companies making cross-border payments to foreign vendors or non-resident service providers

TDS obligations begin as soon as a company makes qualifying payments — there is no minimum turnover threshold. A seed-stage startup paying a freelance developer ₹40,000 has a TDS obligation under Section 194C from the first payment.

Key TDS rates and thresholds

Compliance calendar

Late deposit attracts interest at 1.5% per month. Late filing of returns attracts a fee of ₹200 per day (capped at the TDS amount). Corrections to filed returns require a revised return filing.

What most founders miss

Expense disallowance is the most painful consequence. If TDS was required but not deducted, Section 40(a)(ia) disallows 30% of that payment as a deductible business expense. A startup that paid ₹10 lakh to consultants without deducting TDS may have ₹3 lakh of that expense disallowed — creating a tax liability even in a loss-making year.

Cross-border payments almost always require TDS under Section 195. Paying a foreign SaaS platform, a foreign contractor, or a foreign entity for services requires TDS — unless the vendor provides a Tax Residency Certificate and Form 10F to claim a DTAA exemption, and the CA certifies the rate via Form 15CB. Banks will not process the foreign remittance without Form 15CA filed on the income tax portal. This applies to recurring payments like cloud hosting, international software subscriptions, and foreign advisor fees.

ESOP exercise triggers TDS. When an employee exercises ESOP options, the difference between FMV on the exercise date and the exercise price is a perquisite — taxed as salary under Section 17(2). The company must deduct TDS on this perquisite under Section 192. If the perquisite is large relative to cash salary, the company may not be able to recover the full TDS from payroll and must make arrangements with the employee to settle the balance.

Startups can obtain lower TDS certificates for their vendors. A freelancer or consultant who expects their total tax liability to be lower than the standard TDS rate can apply under Section 197 for a certificate authorising lower (or nil) deduction. Vendors who work primarily with one client and receive short TDS all year can pro-actively obtain these certificates to improve their cash flow.

See also

• ESOP — option exercise generates a perquisite on which the company must deduct TDS under Section 192
• Sweat Equity Shares — allotment is a taxable perquisite; TDS applies to the FMV at allotment
• FEMA (Foreign Exchange Management Act) — cross-border payments require both Section 195 TDS compliance and FEMA reporting
• MAT (Minimum Alternate Tax) — TDS credits reduce the company's advance tax and MAT payment obligations
• TCS (Tax Collected at Source) — the seller-side counterpart to TDS; relevant for e-commerce operators, scrap dealers, and LRS remittances