TDS Accounting in India: Complete Guide to Tax Deducted at Source

When Sunita Got a Notice

Sunita ran a successful interior design firm in Bangalore. One day, she received an income tax notice: ₹2,50,000 demand for TDS defaults.

“But I paid all my vendors!” she protested to her CA.

The CA explained:

• She paid her contractor ₹50 lakhs but didn’t deduct TDS
• She paid rent ₹60,000/month but no TDS
• She paid professional fees to architects but forgot TDS

Result: She owed the TDS + interest + penalty.

TDS is not your tax. It’s tax you collect on behalf of the government. Miss it, and you pay twice.

What is TDS?

Definition

Tax Deducted at Source (TDS) is a mechanism where the payer deducts tax from payments and deposits it with the government on behalf of the payee.

The Logic

Instead of chasing millions of taxpayers, the government mandates the source to deduct tax.

Without TDS: Contractor receives ₹100, may not pay tax
With TDS: Company pays ₹90, deposits ₹10 as TDS
         Government gets tax upfront

Key Parties

TDS Applicability

Who Must Deduct TDS?

TAN Requirement

Tax Deduction and Collection Account Number (TAN) is mandatory for TDS deductors.

• Format: AAAA00000A (e.g., BLRS12345A)
• Apply online through NSDL
• Without TAN, TDS returns cannot be filed

Major TDS Sections and Rates

Section-wise TDS Rates (FY 2024-25)

Higher TDS for Non-PAN

Section 206AB - Higher TDS for Non-Filers

If deductee hasn’t filed returns for past 2 years with TDS/TCS > ₹50,000:

• TDS @ higher of: 2x normal rate or 5%

TDS Accounting Entries

Basic Accounts Required

Entry 1: TDS on Contractor Payment

Paid contractor ₹1,00,000, TDS @ 2%

Contractor Expense A/c        Dr.  1,00,000
    To Contractor A/c                      98,000
    To TDS Payable (194C) A/c               2,000
(Being contractor bill booked with TDS)

On actual payment:

Contractor A/c                Dr.    98,000
    To Bank A/c                            98,000
(Being payment made to contractor after TDS)

Entry 2: TDS on Rent Payment

Monthly rent ₹1,00,000, TDS @ 10%

Rent Expense A/c              Dr.  1,00,000
    To Landlord A/c                        90,000
    To TDS Payable (194I) A/c              10,000
(Being rent expense with TDS deduction)

Entry 3: TDS on Professional Fees

Paid CA fees ₹50,000, TDS @ 10%

Professional Fees A/c         Dr.    50,000
    To CA A/c                              45,000
    To TDS Payable (194J) A/c               5,000
(Being professional fees with TDS)

Entry 4: TDS on Interest Payment

Paid interest ₹2,00,000 on loan, TDS @ 10%

Interest Expense A/c          Dr.  2,00,000
    To Lender A/c                        1,80,000
    To TDS Payable (194A) A/c              20,000
(Being interest with TDS)

Entry 5: Commission with TDS

Paid sales commission ₹1,00,000, TDS @ 5%

Commission Expense A/c        Dr.  1,00,000
    To Agent A/c                           95,000
    To TDS Payable (194H) A/c               5,000
(Being commission with TDS)

TDS Deposit Entry

Depositing TDS with Government

Monthly TDS deposit:

TDS Payable (194C) A/c        Dr.    15,000
TDS Payable (194I) A/c        Dr.    10,000
TDS Payable (194J) A/c        Dr.     8,000
TDS Payable (194A) A/c        Dr.    12,000
    To Bank A/c                            45,000
(Being TDS deposited for the month)

TDS Due Dates

Deposit Due Dates

Return Filing Due Dates

TDS Return Forms

TDS on Salary (Section 192)

Employer’s Responsibility

1. Estimate annual salary
2. Calculate tax as per slab rates
3. Deduct TDS monthly (estimated tax / 12)
4. Issue Form 16 after year-end

Monthly TDS Calculation

Employee: Annual CTC ₹12,00,000

Tax Calculation (Old Regime):

• Up to ₹2,50,000: Nil
• ₹2,50,001 - ₹5,00,000: 5% = ₹12,500
• ₹5,00,001 - ₹9,75,000: 20% = ₹95,000
• Total Tax: ₹1,07,500
• Less: Rebate 87A (if applicable): Nil
• Add: Cess @ 4%: ₹4,300
• Total TDS: ₹1,11,800
• Monthly TDS: ₹9,317

Salary TDS Entry

Salary Expense A/c            Dr.  1,00,000
    To TDS Payable (192) A/c               9,317
    To PF Payable A/c                      12,000
    To ESI Payable A/c                      1,750
    To Salary Payable A/c                  76,933
(Being salary for the month)

TDS Receivable (Deductee’s Perspective)

When TDS is Deducted from Your Income

Received professional fees ₹1,00,000, TDS ₹10,000 deducted

Bank A/c                      Dr.    90,000
TDS Receivable A/c            Dr.    10,000
    To Professional Income A/c           1,00,000
(Being professional fees received, TDS deducted)

TDS Adjustment at Year End

At tax filing, total tax liability ₹50,000, TDS receivable ₹40,000

Income Tax Expense A/c        Dr.    50,000
    To TDS Receivable A/c                  40,000
    To Tax Payable A/c                     10,000
(Being tax liability after adjusting TDS)

If TDS > Tax liability (refund due):

Income Tax Expense A/c        Dr.    30,000
Refund Receivable A/c         Dr.    10,000
    To TDS Receivable A/c                  40,000
(Being refund due after TDS adjustment)

TDS Compliance Calendar

Monthly Tasks

Quarterly Tasks

Annual Tasks

Form 26AS

What is Form 26AS?

Your consolidated tax statement showing:

• TDS deducted by employers and others
• TCS collected
• Advance tax and self-assessment tax paid
• Refunds received

How to Access

1. Login to income tax portal
2. Go to e-File → Income Tax Returns → View Form 26AS
3. Or through TRACES portal

Reconciliation Example

Common Reasons for Mismatch:

• Wrong PAN reported
• Timing difference (March deduction, April deposit)
• Return not filed by deductor
• Correction pending

Interest and Penalties

Interest on Late TDS Deposit

Note: Interest is calculated from date of deduction to date of deposit.

Penalty Provisions

Example: Interest Calculation

TDS of ₹50,000 deducted on 15th May, deposited on 20th August

• Due date: 7th June
• Delay: 15th May to 20th August = ~3 months
• Interest @ 1.5%: ₹50,000 × 1.5% × 3 = ₹2,250

TDS Certificates

Types of TDS Certificates

Importance of TDS Certificates

• Proof of TDS deduction
• Required for claiming TDS credit
• Must match with Form 26AS
• Necessary for refund claims

Lower TDS Certificate

What is It?

If your expected tax liability is lower than TDS that will be deducted, you can apply for a lower/nil TDS certificate under Section 197.

How to Apply

1. Login to TRACES
2. Apply under Section 197
3. Submit Form 13
4. Provide income estimates and existing TDS details

Example

Scenario: Consultant expects ₹20 lakh income, ₹2 lakh TDS normally Actual tax liability: ₹1 lakh (due to deductions) Solution: Apply for 5% TDS certificate instead of 10%

Common TDS Mistakes

Mistake 1: Wrong Section

Error: Deducted TDS on contractor under 194J instead of 194C Impact: Wrong rate, compliance issues Solution: Verify nature of payment before deducting

Mistake 2: Missing Threshold

Error: Deducted TDS on ₹20,000 professional fee (threshold ₹30,000) Impact: Unnecessary deduction Solution: Track cumulative payments for the year

Mistake 3: Wrong PAN

Error: Entered wrong PAN of deductee Impact: TDS doesn’t reflect in deductee’s 26AS Solution: Verify PAN before payment, file correction

Mistake 4: Late Deposit

Error: Deposited March TDS in May Impact: 1.5% interest per month Solution: Calendar reminders, automated payments

Mistake 5: Not Deducting on Gross

Error: Deducted TDS on amount excluding GST Impact: Short deduction Reality: TDS on pre-GST value for services (usually)

TDS on Various Transactions

Rent (Section 194I)

Professional Services (Section 194J)

Contractor Payments (Section 194C)

Interest Other Than Banks (Section 194A)

TDS Practical Checklist

Before Making Payment

• Identify correct TDS section
• Check threshold limits
• Verify PAN of payee
• Check if lower TDS certificate exists
• Calculate correct TDS amount

After Deducting TDS

• Record entry in books
• Deposit TDS by 7th of next month
• Keep challan copy safely
• Update TDS register

Quarterly

• Prepare quarterly summary
• File TDS return on time
• Generate and send TDS certificates
• Reconcile with TRACES

TDS Accounting Software

Popular Options

Key Features to Look For

• Automatic section identification
• PAN validation
• Threshold tracking
• Return generation
• Certificate generation

Disclaimer

This guide is for educational purposes. TDS provisions change frequently. Rates and rules mentioned are indicative and should be verified with current Income Tax Act provisions. Consult a qualified tax professional for specific compliance matters.

Summary

TDS accounting essentials:

1. Identify: Know which section applies to each payment
2. Calculate: Apply correct rate on correct amount
3. Deduct: Deduct TDS before making payment
4. Deposit: Pay to government by 7th of next month
5. Report: File quarterly returns
6. Certificate: Issue TDS certificates

Remember: TDS is not your tax—it’s tax you collect for the government. Non-compliance leads to double payment (you pay the TDS + penalties).

Social Media Posts

LinkedIn: “TDS horror story: Business owner paid ₹50 lakhs to contractors over the year. Forgot TDS.

Income Tax notice: Pay ₹1 lakh TDS + ₹30,000 interest + penalties

TDS is NOT optional. Key rates: • Contractors: 1-2% • Rent: 10% • Professional fees: 10% • Commission: 5%

Deduct → Deposit by 7th → File quarterly return

One miss = Double payment. #TDS #TaxCompliance”

Twitter/X: “TDS Cheat Sheet:

194C Contractor: 1% (individual), 2% (others) 194I Rent: 10% (building), 2% (machinery) 194J Professional: 10% 194A Interest: 10% 194H Commission: 5%

Due date: 7th of next month No PAN: 20% TDS

Don’t forget = Don’t pay twice! #IncomeTax”

Instagram: “Why businesses get tax notices 📋

THE TDS MISTAKE: • Paid vendors ✅ • Didn’t deduct TDS ❌ • Income tax notice arrives 😱 • Now pay: TDS + Interest + Penalty

TDS BASICS: 💰 Contractor? Deduct 1-2% 🏠 Rent? Deduct 10% 👔 Professional? Deduct 10% 💼 Commission? Deduct 5%

WHEN TO PAY: 7th of next month NO PAN: 20% rate!

Set calendar reminders. Automate. Don’t become a notice statistic.

#TDSIndia #TaxTips”