The moment your business starts paying rent, contractors or professionals beyond modest thresholds, you become the government's tax collector — obliged to deduct tax at source and deposit it monthly. Most small businesses learn this the painful way: an assessment disallows 30% of an expense because TDS was never deducted. This guide covers the three sections that touch nearly every business, and the compliance rhythm that keeps you safe.
Who must deduct TDS at all
Companies, firms and LLPs must deduct TDS on qualifying payments regardless of size. Individuals and HUFs must deduct under these business sections when their accounts were auditable in the preceding year (turnover above the audit thresholds) — with a separate simplified regime (194-IB) for high personal rents. First step for any deductor: obtain a TAN (Tax Deduction Account Number); deducting and depositing under a PAN alone is not compliance.
Section 194I: rent
- Applies to rent for land, building, furniture, plant and machinery paid by auditable businesses
- Threshold: aggregate rent above the prescribed annual limit (raised to ₹6 lakh/₹50,000 per month from FY 2025-26)
- Rates: 10% for land/building/furniture; 2% for plant and machinery
- Deduct at credit or payment, whichever is earlier — including on advance rent
Section 194C: contractors
Any payment to a contractor for 'work' — job work, transport, catering, advertising production, housekeeping and security agencies, fabrication on your material — attracts 194C: 1% where the payee is an individual/HUF, 2% for others. Thresholds: deduct if a single payment exceeds ₹30,000 or the annual aggregate exceeds ₹1,00,000. The classic traps: treating recurring small bills as exempt while the annual total quietly crosses the aggregate line, and missing transporters (a declaration with PAN exempts small transporters owning ten or fewer vehicles — collect it in writing).
Section 194J: professionals and technical services
- Professional fees — CA, lawyer, architect, doctor, consultant, designer: 10%
- Fees for technical services and call-centre payments: 2%
- Royalty and non-compete fees also fall here (10%)
- Threshold: above ₹50,000 per payee per year (from FY 2025-26; earlier ₹30,000)
- Director fees (non-salary) attract 194J with no threshold — deduct from the first rupee
Expenses on which TDS was deductible but not deducted (or deducted but not deposited) face 30% disallowance under Section 40(a)(ia) — meaning you pay tax on money you actually spent. Deducting late is cheap; not deducting is expensive.
Deposit, returns and certificates — the calendar
Deposit deducted tax by the 7th of the following month (30 April for March deductions). File quarterly returns in Form 26Q (31 July, 31 Oct, 31 Jan, 31 May for Q4), then issue Form 16A certificates to payees. Late deposit attracts 1.5% per month interest; late filing costs ₹200 per day (capped at the TDS amount) plus possible penalties. Two hygiene rules: collect PAN before first payment (no PAN forces 20% deduction), and reconcile your 26Q filings with expense ledgers quarterly so nothing slips.
Lower-deduction certificates and common questions
Payees whose final tax is lower than TDS rates can give you a certificate under Section 197 for lower/nil deduction — honour it only per its validity and cap, and keep a copy. GST on the invoice is excluded from the TDS base when separately shown (per CBDT clarification) for 194C/194J/194I. And when in doubt between 194C and 194J — a recurring composite service with materials versus pure professional skill — document your reasoning; classification disputes are common and defensible positions survive them.
How Aidwish helps
Aidwish sets up the TDS function for growing businesses — TAN, payee mapping, monthly deduction checklists, deposit and return calendars run with your CA — so the 30% hammer never falls on expenses you legitimately paid.