Decoding TDS for Indian Startups: A Founder’s Guide to Compliance

As a startup founder in India, you’re juggling a dozen critical tasks, from product development to fundraising. Amidst the chaos, it’s easy to overlook a crucial financial responsibility: TDS (Tax Deducted at Source).

Getting TDS wrong is not just a minor accounting error; it can lead to significant interest, penalties, and even prosecution from the Income Tax Department. Understanding your obligations from day one is essential for maintaining a clean financial record and avoiding costly mistakes.

This simple guide will break down the basics of TDS for you.

What Exactly is TDS?

TDS is a mechanism introduced by the Indian government to collect tax at the very source of income. It requires the person or company making certain types of payments (like salary, rent, professional fees, or payments to contractors) to deduct a specific percentage of that payment as tax before releasing the final amount to the recipient. This deducted amount is then paid to the government on behalf of the recipient.

When Does a Startup Need to Deduct TDS?

Your startup is required to deduct TDS if you make payments for specific services that exceed certain threshold limits in a financial year. The most common payments a startup makes are:

• Salary (Section 192): TDS must be deducted if an employee’s total annual salary is above the basic exemption limit. This is the most common TDS obligation for any business with employees.
• Payments to Contractors (Section 194C): If you pay a contractor for carrying out any work (including advertising, broadcasting, transport, etc.), you must deduct TDS if a single payment exceeds ₹30,000 or the total payments in a financial year exceed ₹1,00,000.
• Professional or Technical Fees (Section 194J): When you pay fees to professionals like consultants, lawyers, or freelancers, TDS must be deducted if the total payments exceed ₹30,000 in a financial year.
• Rent (Section 194-I): If your startup pays rent for office space, TDS is applicable if the total annual rent exceeds ₹2,40,000.

Your Key Responsibilities as a Founder

Compliance with TDS involves more than just deducting the tax. Here are your core responsibilities:

1. Obtain a TAN: Before you can deduct TDS, you must obtain a Tax Deduction and Collection Account Number (TAN). This is a mandatory 10-digit alpha-numeric number.
2. Deduct the Correct Amount: Ensure you are deducting tax at the rates specified in the Income Tax Act for each type of payment.
3. Deposit on Time: The TDS you deduct must be deposited with the government by the 7th of the following month.
4. File TDS Returns: You are required to file a quarterly statement (TDS return) detailing all the TDS deductions and deposits made during that quarter.
5. Issue TDS Certificates: After filing your returns, you must issue a TDS certificate (Form 16 for salary, Form 16A for other payments) to the person whose tax you have deducted. This is proof that the tax has been deposited on their behalf.

The Bottom Line

TDS compliance is non-negotiable. It requires meticulous record-keeping and a clear understanding of the rules. For a busy founder, managing this process can be a significant drain on your time and focus.

Don’t let compliance become a bottleneck. At InPursuit, we provide end-to-end management of your TDS obligations, from correct deduction to timely filing of returns. Contact us for a free consultation and ensure your business stays compliant from day one.