Tax deducted by payer when making payments above threshold and deposited with the government
TDS (Tax Deducted at Source) is a mechanism under the Indian Income Tax Act where the person making a payment deducts tax at a prescribed rate before releasing the payment to the recipient. The deducted amount is then deposited with the government on behalf of the payee. TDS applies to various payments such as salary, rent, professional or technical fees, contract payments, commission, and interest — provided the amount exceeds specified thresholds. For example, TDS on rent applies when annual rent exceeds Rs. 2,40,000, and TDS on contractor payments applies when the amount exceeds Rs. 30,000 in a single payment or Rs. 1,00,000 in a financial year. The deductor must obtain a TAN (Tax Deduction and Collection Account Number), deduct TDS at the correct rate, deposit it with the government by the 7th of the following month, and file quarterly TDS returns (Form 26Q or 24Q). For Indian small businesses, understanding TDS is crucial because failure to deduct or deposit TDS on time attracts interest at 1-1.5% per month and penalties. The recipient can claim credit for TDS deducted against their total income tax liability by verifying it in Form 26AS.
You run a trading business in Chennai and hire a chartered accountant for GST filing, paying Rs. 50,000 as professional fees. Since the payment exceeds the Rs. 30,000 threshold, you must deduct TDS at 10% (Section 194J) = Rs. 5,000. You pay Rs. 45,000 to the CA and deposit Rs. 5,000 with the government before 7th of the next month. The CA can claim this Rs. 5,000 as credit when filing their income tax return. Similarly, if you pay monthly rent of Rs. 25,000 (Rs. 3,00,000 annually, exceeding Rs. 2,40,000), you must deduct TDS at 10% = Rs. 2,500 per month.
TDS applies when you make payments above certain thresholds: Rs. 30,000 per transaction for professional or technical fees (Section 194J), Rs. 30,000 single or Rs. 1,00,000 annual for contractor payments (Section 194C), Rs. 2,40,000 annual for rent (Section 194I), and Rs. 40,000 annual for interest (Section 194A). If your business was audited in the previous year, you are generally required to deduct TDS on applicable payments.
If you fail to deduct TDS, you cannot claim the expense as a deductible expense in your income tax return (30% disallowance under Section 40(a)(ia)). If TDS is deducted but not deposited on time, interest is charged at 1.5% per month from the date of deduction to the date of deposit. Late filing of TDS returns attracts a fee of Rs. 200 per day under Section 234E.
No, they are different. TDS under the Income Tax Act applies to payments like rent, professional fees, and contracts, and is deducted from the income component. GST TDS (under Section 51 of the CGST Act) is deducted by government bodies and certain entities at 2% on payments exceeding Rs. 2,50,000 under a single contract. Most small businesses deal with Income Tax TDS, not GST TDS.
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