Most searches for "tax deduction at source" come from someone running a small business who just realised they might be responsible for it — usually right before paying a contractor's invoice or running their first payroll. This guide covers what an Indian small business actually needs to do: who counts as a "specified person" required to deduct, the rates and thresholds for salaries versus contractor and professional payments, how to register, and what it costs to get wrong. If you're an employee trying to understand your own payslip deduction rather than an employer trying to run payroll, see our dedicated guide to TDS on salary instead — this one is written from the paying side.
Who Actually Has to Deduct TDS?
The answer is different depending on what you're paying for, and this catches a lot of small business owners off guard.
Salaries: every employer, no exceptions
TDS on salary (Section 392, formerly Section 192) applies to every employer in India the moment an employee's projected annual income is taxable — regardless of company size, structure, or turnover. A two-person consultancy has exactly the same salary TDS obligation as a 500-person company.
Contractor and professional payments: only "specified persons"
TDS on payments to contractors (Section 393, formerly Section 194C) and on professional or technical fees (Section 393, formerly Section 194J) only applies to "specified persons" — companies, firms, LLPs, trusts, and individuals or HUFs whose accounts are subject to tax audit. A small proprietorship below the tax audit threshold genuinely isn't required to deduct TDS on what it pays a freelance designer or a contractor, even though a private limited company paying the exact same amount would be. This is the single most common point of confusion for small business owners moving from a proprietorship to a private limited company — an obligation that didn't previously apply suddenly does, often without anyone flagging it.
TDS on Contractor Payments
If your business is a specified person, TDS applies to payments for "work" under a contract — this covers a wide range of services, from a marketing agency retainer to logistics or facility management contracts.
| Details | |
|---|---|
| Section | 393 (formerly 194C) |
| Rate | 1% — contractor is an individual or HUF |
| Rate | 2% — contractor is a company, firm, or LLP |
| Threshold | No TDS if a single payment ≤ ₹30,000 AND total payments to that contractor in the year ≤ ₹1,00,000 |
| Without PAN | 20% flat, regardless of the above rates |
Worked example: your company pays a freelance contractor (an individual) ₹45,000 for a single project, with no other payments to them this year. The single-payment threshold of ₹30,000 is crossed, so TDS applies at 1% — ₹450 deducted, with ₹44,550 paid out. If instead you'd paid the same contractor ₹8,000 a month across the year (₹96,000 total, no single payment over ₹30,000), no TDS would apply, since neither threshold is crossed.
TDS on Professional and Technical Fees
This covers payments for professional services (legal, accounting, consulting, medical), technical services, royalty, and director remuneration — common categories for a small business paying a CA, a lawyer, or a consultant.
| Details | |
|---|---|
| Section | 393 (formerly 194J) |
| Rate | 10% — professional fees, royalty, director remuneration |
| Rate | 2% — technical services specifically |
| Threshold | ₹50,000 per financial year, tracked separately per category |
| Without PAN | 20% flat, regardless of the above rates |
Worked example: your company pays a CA firm ₹60,000 for the year in professional/accounting fees. The ₹50,000 threshold for that category is crossed, so TDS applies at 10% — ₹6,000 deducted, ₹54,000 paid out. If you separately paid a different vendor ₹45,000 for technical services (a distinct category from professional fees), that payment alone would stay under its own ₹50,000 threshold and no TDS would apply to it, even though your combined non-salary TDS-relevant spend for the year is over ₹1 lakh.
Quick Reference: Rates and Thresholds by Payment Type
| Payment Type | Section (New / Old) | Rate | Threshold |
|---|---|---|---|
| Employee salary | 392 / 192 | Per applicable slab | None — applies once income is taxable |
| Contractor (individual/HUF) | 393 / 194C | 1% | ₹30,000 single or ₹1,00,000/year |
| Contractor (company/firm/LLP) | 393 / 194C | 2% | ₹30,000 single or ₹1,00,000/year |
| Professional fees, royalty, director pay | 393 / 194J | 10% | ₹50,000/year per category |
| Technical services | 393 / 194J | 2% | ₹50,000/year per category |
| No PAN furnished (any category) | 397(2) / 206AA | 20% or applicable rate, whichever higher | N/A |
Before You Can Deduct Anything: Getting a TAN
A Tax Deduction Account Number (TAN) is separate from your business's PAN, and it's a prerequisite most first-time small business owners miss. Any entity required to deduct TDS must obtain a TAN before making the first deductible payment — you can't deposit TDS or file a return without one. TAN is applied for online through the NSDL/Protean portal and typically takes a few working days to issue. Quote it incorrectly or skip it, and your TDS deposits and returns can't be matched to your business at all.
Depositing and Filing: The Monthly and Quarterly Calendar
- Deposit deadline: TDS deducted in any month must be deposited with the government by the 7th of the following month — except TDS deducted in March, which can be deposited up to 30 April.
- Quarterly returns: salary TDS is reported on Form 138 (formerly Form 24Q); TDS on contractor and professional payments is reported on Form 140 (formerly Form 26Q). Both are filed quarterly.
- TDS certificates: after depositing, you issue proof to the payee — Form 130 (formerly Form 16) for employees, Form 131 (formerly Form 16A) for contractors and professionals. Employee certificates are annual; non-salary certificates are typically issued quarterly, after each return is filed.
What It Costs to Get Wrong
TDS compliance has three separate ways to cost you money, and they can stack:
- Interest for late deposit: 1.5% per month (or part of a month) from the date TDS was deducted to the date it's actually deposited — automatic, with no appeal mechanism.
- Late filing fee: ₹200 per day under the provision formerly known as Section 234E, starting the day after the return's due date, capped at the total TDS amount in that return. This fee is mandatory and cannot be waived, and it must be paid before the return can even be filed.
- Penalty for delayed or incorrect returns: ₹10,000 to ₹1,00,000 under the provision formerly known as Section 271H, at the discretion of the assessing officer — separate from, and potentially in addition to, the late filing fee.
Common Mistakes Small Businesses Make
- Not realising incorporation changes the obligation. A proprietorship with no TDS duty on contractor payments becomes a specified person the moment it incorporates as a private limited company or crosses the tax audit threshold — and the obligation applies from that point on, not from when someone notices.
- Deducting TDS on the full invoice amount including GST. TDS on contractor and professional payments is calculated on the service value excluding GST, where GST is shown separately on the invoice.
- Tracking thresholds per invoice instead of per vendor per year. The ₹30,000/₹1,00,000 and ₹50,000 thresholds are cumulative across the financial year for that specific payee — a string of small payments that individually look fine can still cross the threshold in aggregate.
- Applying for a TAN after the first payment instead of before. You need it in place before you can deposit anything you've already deducted.
- Not issuing Form 131 (formerly Form 16A) to contractors and professionals. They need it to claim credit for the tax you deducted on their behalf when they file their own returns — skipping it creates a problem for them, not you, but it's the kind of thing that damages a vendor relationship.
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The Bottom Line
Salary TDS is unconditional — every employer deducts it. Contractor and professional-fee TDS is conditional on your business structure and whether you're subject to tax audit, which is exactly the distinction that trips up small businesses as they grow. Get a TAN before your first deductible payment, track thresholds per vendor per year rather than per invoice, and treat the 7th-of-the-month deposit deadline as non-negotiable — the penalties for missing it are mandatory, automatic, and stack on top of each other.