TDS Compliance 101: A Beginner’s Guide for Startups and SMEs
Introduction
Starting a business is exciting but it comes with responsibilities, especially when it comes to tax compliance. One area that often confuses new entrepreneurs and small business owners is TDS (Tax Deducted at Source).
TDS compliance is not optional it’s a legal requirement. Whether you’re paying a freelancer, renting office space, or hiring full-time employees, you may be required to deduct tax at source, deposit it with the government, and file regular returns.
This beginner-friendly guide is crafted especially for startup founders, first-time entrepreneurs, and SMEs in India. We’ll break down what TDS is, why it matters, how to stay compliant, and how to avoid common mistakes.
What is TDS (Tax Deducted at Source)?
TDS is a system introduced by the Income Tax Department where the payer deducts a certain percentage of tax before making specified payments to the payee. This ensures a steady inflow of tax revenue to the government and reduces the chances of tax evasion.
For instance, if your startup pays a consultant ₹50,000, and the TDS rate applicable is 10%, you must deduct ₹5,000 as TDS and pay ₹45,000 to the consultant. The ₹5,000 must be deposited with the government, and the consultant will receive a TDS certificate to claim that amount as tax paid.
Why TDS Compliance Matters for Startups and SMEs
Many early-stage businesses assume TDS doesn’t apply to them, until they receive a tax notice or penalty. Here’s why you should take TDS seriously:
- It’s a legal obligation under the Income Tax Act, 1961
- Avoid interest and penalties for non-compliance
- Builds credibility with investors, vendors, and auditors
- Ensures smooth financial audits and due diligence
Even if your company is in its early stage or not making profits, TDS may still apply based on your turnover or the type and size of payments made.
Who is Required to Deduct TDS?
TDS applies to businesses based on their structure and turnover:
- Companies and LLPs – TDS provisions are applicable from the first year.
- Proprietorships and partnerships – TDS applies if turnover exceeds:
- ₹1 crore (for businesses)
- ₹50 lakh (for professionals)
If your business meets the above criteria and makes specified payments (like salaries, professional fees, rent, etc.), you must deduct TDS.
Common Payments Subject to TDS
Here’s a quick table summarizing common payments by startups and SMEs that attract TDS during the FY25-26:
| Nature of Payment | Section | Threshold Limit | TDS Rate |
| Salary | 192 | Based on slab rates | As per employee slab |
| Rent of property | 194I | ₹600,000/year | 10% (for land/building) |
| Contractor payments | 194C | ₹30,000 (single) / ₹1,00,000 (aggregate) | 1% (individual), 2% (firm/company) |
| Professional services | 194J | ₹50,000/year | 10% |
| Commission or brokerage | 194H | ₹20,000/year | 5% |
| Interest | 194A | ₹40,000 for banks | 10% |
Note: The Threshold limits and TDS Rates are also modified from time to time basis through the Annual Budget notified by the Central Government.
Step-by-Step Guide to TDS Compliance for Entrepreneurs
1. Apply for TAN (Tax Deduction Account Number)
Before deducting TDS, your business must obtain a TAN by filing Form 49B. It’s mandatory and used while depositing TDS and filing returns.
2. Identify TDS-Applicable Payments
Maintain a system or checklist to flag vendor payments or employee salaries that exceed the TDS threshold. Use accounting software or spreadsheets to track this.
3. Deduct TDS Before Payment
TDS must be deducted at the time of crediting the payee’s account or at the time of payment, whichever is earlier.
4. Deposit TDS to the Government
Deposit the deducted TDS using Challan ITNS-281 by the 7th of the following month. This can be done online through the NSDL portal.
5. File Quarterly TDS Returns
Use the following forms to file returns based on the nature of payment:
| Form | Used For |
| 24Q | Salary payments |
| 26Q | Non-salary payments |
TDS Return Filing Due Dates:
| Quarter | Period | Due Date |
| Q1 | Apr – Jun | 31st July |
| Q2 | Jul – Sep | 31st October |
| Q3 | Oct – Dec | 31st January |
| Q4 | Jan – Mar | 31st May |
6. Issue TDS Certificates
After filing returns, issue TDS certificates to payees:
- Form 16 – For salaried employees (annually)
- Form 16A – For non-salary payments (quarterly)
These certificates help vendors or employees claim the deducted tax while filing their ITR.
Common Mistakes to Avoid
- Failing to register for TAN
- Delaying TDS deposits beyond due dates
- Using incorrect PAN details of vendors
- Missing TDS on contract or freelance payments
- Not filing quarterly returns on time
- Ignoring TDS applicability on rent or tech services or any other payment
Penalties for Non-Compliance
| Default | Consequence |
| Non-deduction of TDS | Interest @ 1% per month |
| Non-payment of deducted TDS | Interest @ 1.5% per month |
| Late filing of TDS returns | ₹200/day (up to ₹10,000) |
| Failure to issue TDS certificate | Penalty of ₹100/day per certificate (up to ₹10,000) |
| False declaration or negligence | Penalty and possible prosecution under the Act |
Tools & Tips for Hassle-Free TDS Management
- Use cloud accounting software like Zoho Books or QuickBooks to track TDS
- Automate reminders for payment and filing deadlines
- Reconcile with Form 26AS and TRACES portal regularly
- Partner with a professional compliance service like Lawgical Startup to manage filings
Frequently Asked Questions (FAQs)
1. Is TDS applicable even if my startup is in its first year?
Ans: Yes, especially for companies or LLPs. TDS applies from day one, regardless of profits.
2. I only hire freelancers occasionally. Do I need to deduct TDS?
Ans: If you pay over ₹50,000 in a financial year to a freelancer or consultant, you must deduct 10% TDS under Section 194J.
3. Can I avoid TDS by splitting payments?
Ans: No. Splitting payments to avoid TDS threshold is a violation and can lead to penalties.
4. Can I do TDS compliance without a CA?
Ans: Technically yes, but professional guidance ensures accuracy and avoids costly mistakes. Using a service like ours simplifies the process.
5. What if I forget to deduct TDS?
Ans: You will be liable to pay the TDS amount, along with interest and penalties. Prompt correction and reporting is advised.
Conclusion: Don’t Let TDS Compliance Slow Down Your Growth
While TDS compliance may feel overwhelming at first, it becomes manageable once you understand the basics and follow a consistent process. Timely deduction, payment, and filing not only keep your startup legally compliant but also enhance your credibility with investors and stakeholders.
At Lawgical Startup, we help early-stage businesses and SMEs navigate the complexities of TDS and other statutory compliances with ease. From TAN registration to quarterly filings and certificate issuance, we take care of it all—so you can focus on building your dream.
Need help with TDS compliance?
Contact our experts today for a free consultation!