TDS Compliance for Businesses: Deduction, Deposit, Returns and Certificates Without the Stress

What TDS is, and why it matters

Tax Deducted at Source (TDS) requires the person making certain payments to deduct tax before paying, and deposit it with the government on behalf of the recipient. Salaries, contractor payments, professional fees, rent, commission, interest and several other payments can be covered, subject to thresholds and conditions.

For businesses, this creates a compliance responsibility with real consequences. If tax is not deducted, deducted late, deposited late or reported incorrectly, the business can face interest, fees, disallowance of expenses and notices, while the payee may not receive credit for tax deducted from them.

This guide explains TDS services and compliance in plain language. It is general information, not tax advice. TDS rates, thresholds and provisions change regularly, and the new Income-tax Act, 2025, effective from 1 April 2026, restructures section numbering. Always confirm current requirements on the income tax portal and the TRACES site, or with a qualified professional.

TAN: the starting point

Every person required to deduct tax needs a Tax Deduction and Collection Account Number (TAN), which must be quoted on TDS payments, returns and certificates. Businesses should obtain TAN before making payments that require deduction, and keep it consistent across all branches or registrations as applicable.

Common payments where TDS may apply

Each category has its own rate and threshold, and some depend on whether the payee is an individual or a company, whether PAN is furnished and whether a lower deduction certificate exists. Maintaining a TDS matrix, a table of payment types, rates and thresholds updated each year, is the simplest way to apply rules consistently.

• Salaries to employees
• Payments to contractors and sub-contractors
• Professional and technical service fees
• Rent for land, buildings, plant or equipment
• Commission and brokerage
• Interest other than on certain securities
• Purchase of goods above specified thresholds, where applicable
• Payments to non-residents, which follow separate rules

When to deduct

TDS is generally deducted at the earlier of crediting the amount to the payee’s account in your books or making the payment. That means TDS can arise when an expense is booked as payable, not only when money is paid, so accounting and TDS processes must work together.

Where a payee provides a lower or nil deduction certificate, deduction follows the certificate within its limits and validity period. Where PAN is not furnished or is invalid, higher rates generally apply, which is why collecting and validating vendor PANs at onboarding matters.

Depositing TDS on time

Tax deducted must be deposited with the government by the due date, which for most deductions has typically been the 7th of the following month, with a longer period for deductions made in March. Payments are made through the income tax portal with the correct TAN, assessment year, section and payment type.

Late deposit attracts interest for each month or part of a month of delay, and late deduction attracts interest too. A fixed monthly calendar, aligned with the accounts close, prevents most delays.

Quarterly TDS returns

Returns are filed quarterly, with due dates that have typically fallen at the end of the month following each quarter, and in May for the last quarter. Forms and numbering may change under the new Act, so confirm the current forms each year. Late filing attracts a fee per day of delay, and incorrect returns can lead to penalties.

Accuracy matters as much as timeliness. Returns must match challans, PANs must be valid, and amounts must agree with the books. Errors lead to defaults in the TRACES system and missing credits for payees.

TDS certificates

After filing returns, deductors issue certificates: Form 16 to employees annually and Form 16A to other payees each quarter, generated through TRACES. These certificates let payees claim credit for the tax deducted when filing their own returns.

Late certificates attract penalties and frustrate vendors and employees who need them for their own tax filing. Issuing them promptly, and accurately, is part of being a good business partner. Our ITR filing guide explains how payees use them.

PAN, Form 26AS and reconciliation

Every TDS entry is linked to the payee’s PAN, and appears in the payee’s Form 26AS and AIS once the return is processed. Wrong PANs mean the payee does not receive credit and the deductor may face higher-rate demands.

Monthly reconciliation of TDS deducted in the books, challans deposited and amounts reported prevents most problems. Before filing, PANs should be validated in bulk, and after processing, the TRACES justification report should be reviewed for defaults.

Corrections and default notices

Mistakes happen: wrong PANs, wrong challan details, short deduction or missed entries. Correction statements can be filed through TRACES to fix returns already submitted. The sooner errors are caught, the easier they are to correct.

Default notices from the TDS Centralised Processing Cell typically relate to short deduction, short payment, late payment interest, late filing fees or PAN errors. Each should be reviewed against the books and justification report, then resolved either by paying the amount due or by filing a correction where the default arises from a data error.

TDS and your accounting

TDS works best when built into everyday accounting. Vendor masters should hold PAN, category and applicable TDS rate; accounting software should calculate TDS automatically when bills are booked; and month-end closing should include TDS reconciliation.

Because TDS and GST often apply to the same transactions, coordinating them avoids inconsistencies. Our accounting & bookkeeping, GST and payroll services share the same records, so returns always agree.

TDS on salaries

TDS on salaries is estimated on each employee’s projected annual income, considering their chosen tax regime and, under the old regime, declared deductions and exemptions. It is deducted monthly and adjusted as the year progresses, with final adjustments after investment proofs are verified.

Getting salary TDS right avoids large deductions in the final months and mismatches in employees’ Form 26AS. Our payroll guide covers the full salary process.

Payments to non-residents

Payments to non-residents for services, royalties, interest or other income can require TDS under specific provisions, and tax treaties may affect rates, subject to documentation such as a tax residency certificate. Additional forms and certifications may be required for foreign remittances.

Because the rules are complex and errors costly, non-resident payments warrant professional review before money is remitted.

An example: cleaning up TDS for a growing company

A services company with 60 vendors and 120 employees receives several TDS default notices. Review shows invalid vendor PANs, TDS missed on some rent payments, challans entered against the wrong section and late filing in two quarters.

The clean-up validates all vendor PANs, builds a TDS matrix, configures automatic TDS in the accounting software, pays outstanding interest, files correction statements for past quarters and resolves notices. A monthly reconciliation and quarterly filing calendar are then put in place. Subsequent quarters file on time with no defaults, and vendors receive Form 16A promptly.

Common TDS mistakes

A disciplined monthly routine prevents nearly all of these.

• Missing TDS on recurring payments such as rent or professional fees
• Using outdated rates or thresholds
• Invalid or missing PANs
• Deducting on payment instead of on credit, or vice versa
• Challan details that do not match returns
• Late deposit, late returns or late certificates
• Ignoring TRACES default notices until they escalate

Lower and nil deduction certificates

Payees whose actual tax liability is lower than the TDS that would otherwise be deducted can apply for a certificate authorising a lower or nil deduction rate. When a vendor provides such a certificate, the deductor applies the authorised rate within the certificate’s amount limit and validity period.

Tracking these certificates matters: once the limit is exhausted or the certificate expires, normal rates apply again. Keeping certificate details in the vendor master, with alerts for expiry and limits, avoids short deduction defaults.

Year-end TDS activities

Starting this process early, rather than at the last deadline, keeps vendors and employees confident and avoids penalties.

• Reconcile TDS deducted, deposited and reported for the full year
• Ensure March deductions are deposited by the extended due date
• File the final quarterly returns accurately
• Issue Form 16 to employees and the final Form 16A to vendors
• Review TRACES for unresolved defaults and file corrections
• Update the TDS matrix for rate or threshold changes in the new year

Communicating with vendors

TDS affects vendors directly, so clear communication helps relationships. Inform vendors at onboarding which TDS rate applies, request PAN and any lower deduction certificate upfront, show TDS clearly on payment advices and issue Form 16A promptly. When disputes arise about credits, reconciling with their Form 26AS together usually resolves them quickly.

Should you outsource TDS compliance?

Outsourcing helps when TDS volumes are high, when notices or defaults have appeared, when the business has many vendors or non-resident payments, or when the accounts team is stretched. A specialist provider maintains the TDS matrix, validates PANs, prepares challans and returns, issues certificates and handles TRACES.

Read our complete finance guide, or talk to our TDS team.

Frequently asked questions

• Do you issue Form 16 and Form 16A?

  Yes. We generate certificates through TRACES after returns are processed and share them with employees and vendors on time.

• Do we need a separate TAN for each branch?

  Businesses may obtain TAN for each branch or division that deducts tax, or deduct centrally under one TAN, depending on how payments are made. We advise on the arrangement that suits your structure.

• Can vendors claim TDS credit if our return has errors?

  Not fully. Errors such as wrong PAN or challan details stop credits reaching the vendor’s Form 26AS until a correction statement is processed.

• What is TDS?

  Tax Deducted at Source: the payer deducts tax from certain payments, such as salaries, contractor and professional fees, and rent, and deposits it with the government on the payee’s behalf.

• When is TDS due to be deposited?

  For most deductions, typically by the 7th of the following month, with a longer period for March deductions. Confirm current due dates each year.

• Which TDS returns do businesses file?

  Commonly Form 24Q for salaries, Form 26Q for other payments to residents and Form 27Q for non-residents, filed quarterly. Forms may change under the new Income-tax Act.

• What happens if TDS is not deducted or paid on time?

  Interest applies for late deduction and late payment, fees apply for late returns, and expenses may be disallowed. Payees may also lose tax credits.

• What is Form 16A?

  A quarterly certificate issued to non-salary payees showing tax deducted and deposited, generated through TRACES after the return is processed.

• How do we resolve a TDS default notice?

  Review the TRACES justification report, compare with your books, then pay any amount genuinely due or file a correction statement where the default arises from data errors.

• Do you handle TDS on payments to non-residents?

  Yes, including review of applicable provisions and treaty benefits, documentation, and the related returns and certificates.

• Can TDS be automated in our accounting software?

  Yes. We configure vendor masters and TDS rules so tax is calculated automatically when bills are booked, then reconcile monthly.

Still curious? Ask the assistant Talk to a specialist →

Explore our Accounts & Finance services