TDS Compliance for Businesses: Deduct, Deposit, Report
TDS defaults are among the most common findings in a tax audit, and almost always for the same reason: the deduction was made correctly and something downstream went wrong.
The cycle has three steps, not one
- Deduct at the right rate, at the earlier of credit or payment
- Deposit with the government by the due date
- Report in a quarterly return, and issue the certificate
Businesses tend to focus on step one. Steps two and three are where the penalties live.
Common payment heads
- 194C — payments to contractors and sub-contractors
- 194J — professional and technical fees
- 194H — commission and brokerage
- 194I — rent, at different rates for plant and machinery versus land and building
- 194Q — purchase of goods above the prescribed threshold
- 192 — salaries, computed on the employee's estimated annual income
Each head has its own threshold and rate, and thresholds apply per payee per year — not per invoice. Three payments of ₹12,000 to the same contractor can cross an annual threshold that no single bill would.
Due dates
Tax deducted is generally deposited by the 7th of the following month, with March being the exception — deducted amounts for March get a longer window. Quarterly returns (24Q for salaries, 26Q for other resident payments, 27Q for non-residents) follow at the end of the month after each quarter, and TDS certificates in Form 16 or 16A follow the return.
Where it gets expensive
- Interest runs at one rate for late deduction and a higher rate for deduction made but not deposited. The second is treated as retaining government money.
- Late filing fee under Section 234E accrues per day until the return is filed, subject to a cap linked to the TDS amount.
- Disallowance under Section 40(a)(ia) is the one that hurts most: a percentage of the expense is disallowed in computing business income where TDS was not deducted or not paid. You lose the deduction on the expense itself, on top of interest.
The disallowance is generally restored in the year the TDS is eventually paid — but the cash-flow hit lands in the assessment year in question.
Getting the PAN right
Where the payee's PAN is not furnished, tax must be deducted at a higher rate under Section 206AA. Collect and verify PAN before the first payment, not after the return is rejected. A PAN mismatch also blocks the payee from claiming credit, which turns a compliance issue into a customer relationship issue.
A workable routine
Run a monthly TDS review alongside payroll: list payments made, confirm the head and rate, deposit by the 7th, and reconcile the challans to the ledger. Then the quarterly return is a formality rather than a reconstruction exercise. Check Form 26AS and the TRACES portal for defaults each quarter — short-deduction notices are far cheaper to fix early.
Want your TDS position reviewed before the next quarterly return? Talk to Kunal P Shah & Co.