Tax Deducted at Source (TDS) is the mechanism under Indian tax law by which the payer of certain categories of income deducts tax at the prescribed rate before remitting the balance to the recipient. The deducted amount is deposited directly with the Central Government on behalf of the recipient and is credited against the recipient’s total tax liability for the year. TDS for Business in India is a critical compliance requirement under the Income Tax Act, 1961 for companies, LLPs, startups, sole proprietors, and partnership firms making specified payments such as salaries, contractor fees, rent, professional charges, commission, and interest. Businesses responsible for deducting tax at source must comply with TDS deduction, deposit, return filing, and certificate issuance requirements to avoid penalties, interest, and expense disallowances.
The most significant structural change to TDS law in India since independence took effect on April 1, 2026. The Income Tax Act, 1961 continues to govern TDS compliance in India in 2026, although the Government has proposed structural simplification reforms to the income tax framework.
Every TDS section number, every form number, every challan code, and every return reference has changed. The rates and threshold limits remain substantially the same, but every process, every filing, and every software system must now reference the new framework. Businesses that have not updated their systems and processes for Tax Year 2026-27 face validation errors, reconciliation mismatches, and potential penalties for incorrect filings. Many penalties imposed on businesses arise due to poor compliance with TDS for Business in India requirements such as delayed deposit, incorrect deduction rates, or inaccurate return filing.
This guide covers the complete TDS framework for businesses in India under the Income Tax Act, 2025, including the new section structure, all key payment categories and rates, TAN obligations, deposit due dates, quarterly return filing, TDS certificates, Form 121, penalties for non-compliance, and the 30% expenditure disallowance under Section 35(b).
TDS for Business in India: Key TDS Sections Explained
TDS is a withholding tax mechanism. The party making the payment (the deductor) is legally responsible for deducting tax at source, depositing it to the government, filing quarterly returns, and issuing certificates to the recipient. The recipient (the deductee) receives credit for the TDS deducted, which is set off against their total tax liability when filing their income tax return.
For businesses, TDS obligations arise across nearly every payment made: salaries paid to employees, fees paid to contractors, rent paid for office or commercial premises, professional fees paid to lawyers, consultants, and accountants, interest paid on loans, and commission paid to agents. A business that pays any of these amounts above the prescribed threshold limits is a deductor and must comply with TDS law.
Failure to deduct TDS, or deducting but not depositing within the due date, is not merely a procedural lapse. Under Section 35(b) of the Income Tax Act, 2025 (corresponding to Section 40(a)(ia) of the old Act), 30% of any sum paid to a resident on which TDS was deductible but not deducted, or not deposited by the due date of filing the return, is disallowed in computing business income. This means a business that pays Rs. 10 lakh in professional fees without deducting TDS faces a Rs. 3 lakh disallowance, increasing its taxable income and therefore its tax liability.
The New TDS Framework: Income Tax Act, 2025
What Changed on April 1, 2026
The Income Tax Act, 2025 consolidates the entire TDS framework into three sections:
Section 392 covers TDS on salary, replacing the old Section 192 and Section 192A. Salary TDS is deducted at the applicable income tax slab rate of the employee.
Section 393 covers all non-salary TDS deductions for payments to residents, non-residents, and any-person categories. This single section replaces the entire 194-series: Section 194A (interest), Section 194B (lottery winnings), Section 194C (contractor payments), Section 194D (insurance commission), Section 194DA (life insurance maturity), Section 194H (commission and brokerage), Section 194I (rent), Section 194J (professional and technical fees), Section 194N (cash withdrawals), Section 194O (e-commerce operator TDS), Section 194R (benefits and perquisites), Section 194S (virtual digital assets), and all others.
Section 394 covers Tax Collected at Source (TCS), replacing all previously scattered TCS provisions.
What Did Not Change
The rates at which TDS is deducted have not changed for most payment categories. The threshold limits above which TDS becomes applicable have not changed. The TAN (Tax Deduction Account Number) continues unchanged; no fresh TAN application is required. The obligation to deduct, deposit, and file returns continues on the same timeline.
TAN: Tax Deduction Account Number
Every business that deducts TDS must obtain a TAN. TAN is a 10-digit alphanumeric number issued by the Income Tax Department. It is mandatory to quote TAN in all TDS challans, returns, and certificates. A business without a TAN cannot legally deposit TDS and faces a penalty of Rs. 10,000 under the Income Tax Act, 2025 for failure to obtain TAN.
TAN applications are made in Form 49B, available on the NSDL TIN portal at tin.tin.nsdl.com. The TAN is issued within 7 to 10 working days of the application.
Key TDS Categories for Businesses (Income Tax Act, 2025)
Salary Payments: Section 392
TDS on salary is deducted at the applicable income tax slab rate of the individual employee, computed on the estimated total income for the financial year. The deductor is responsible for factoring in all declarations made by the employee, including HRA, LTA, and deductions under Chapter VI-A. TDS is deducted monthly at the time of payment. The annual TDS certificate issued to employees is Form 130, which replaces the old Form 16.
Contractor Payments: Section 393 (Code replacing 194C)
TDS on payments to contractors is deducted at 1% where the payment is to a resident individual or HUF, and 2% where the payment is to any other entity including companies, firms, and LLPs. The threshold is Rs. 30,000 per single payment or Rs. 1,00,000 in aggregate during the financial year. Manpower supply contracts are now explicitly covered under this category per a 2026 clarification, meaning businesses that were not deducting TDS on worker deployment invoices must correct this for all payments from April 2026.
Professional and Technical Fees: Section 393 (Code replacing 194J)
TDS on fees for professional services and technical services is deducted at 10% for most professional services and 2% for technical services. The threshold is Rs. 30,000 per financial year. Professional services include legal, medical, engineering, architectural, accountancy, and consultancy fees. Technical services include fees for rendering managerial, technical, or consultancy services that do not qualify as professional services.
Rent: Section 393 (Code replacing 194I)
TDS on rent is deducted at 10% where rent is paid for land, building, or furniture. The threshold is Rs. 2,40,000 per financial year. Rent on plant and machinery is deducted at 2%. For businesses using virtual offices or commercial spaces, TDS at 10% applies on the rent component of the monthly invoice if the aggregate rent for the year exceeds Rs. 2,40,000.
Commission and Brokerage: Section 393 (Code replacing 194H)
TDS on commission and brokerage is deducted at 5% on payments exceeding Rs. 15,000 in a financial year. This applies to payments to agents, distributors, and intermediaries.
Interest: Section 393 (Code replacing 194A)
TDS on interest (other than interest on securities) is deducted at 10% on payments exceeding Rs. 40,000 in a financial year for banks and Rs. 5,000 for others.
E-Commerce Operator TDS: Section 393 (Code replacing 194O)
TDS at 1% is deducted by e-commerce operators on gross sales or services facilitated through their platform for e-commerce participants. This applies to businesses selling on Amazon, Flipkart, Meesho, and similar platforms.
TDS Deposit Due Dates
Under Income Tax Rules, 2026 (Rule 218, corresponding to old Rule 30), the due dates for depositing TDS with the Central Government are as follows:
For non-government deductors: TDS deducted in any month other than March must be deposited by the 7th of the following month. TDS deducted in the month of March must be deposited by April 30 of the same year.
For government deductors depositing by challan: TDS must be deposited by the 7th of the following month including March.
Failure to deposit TDS by the due date attracts interest at 1.5% per month or part of month from the date of deduction to the date of actual deposit.
TDS Return Filing: Quarterly Schedule
Businesses must file quarterly TDS returns on the following schedule for Tax Year 2026-27:
| Quarter | Period | Due Date |
| Q1 | April to June 2026 | July 31, 2026 |
| Q2 | July to September 2026 | October 31, 2026 |
| Q3 | October to December 2026 | January 31, 2027 |
| Q4 | January to March 2027 | May 31, 2027 |
Returns are filed on the TRACES portal. The return for salary TDS is filed in Form 24Q. The return for non-salary TDS paid to residents is filed in Form 26Q. The return for payments to non-residents is filed in Form 27Q.
TDS Certificates
After filing quarterly returns, the deductor must issue TDS certificates to the deductees within the prescribed period. For salary deductions, Form 130 (replacing old Form 16) must be issued by June 15 following the end of the financial year. For non-salary deductions, Form 16A must be issued within 15 days of the due date of filing the quarterly return.
Lower or Nil TDS Deduction Certificate
A recipient who expects their total tax liability to be lower than the TDS that would be deducted may apply for a lower or nil deduction certificate from the assessing officer under the Income Tax Act, 2025. From April 2026, this process has been partly automated. The system applies predefined eligibility rules based on past filings and projected income. Certificates may be granted without manual officer intervention where the eligibility criteria are met, significantly reducing processing time for businesses that process high volumes of vendor lower deduction certificate applications.
Where a valid lower deduction certificate is produced by the deductor, the deductor must deduct TDS at the rate specified in the certificate and not at the standard rate.
Form 121: Replacing Forms 15G and 15H
Forms 15G and 15H, which were used by individuals and senior citizens respectively to declare that their income is below the taxable threshold and request nil TDS deduction, have been merged into a single Form 121 under the Income Tax Act, 2025. Form 15G and 15H are not valid for Tax Year 2026-27. Deductors must collect Form 121 from eligible recipients and must not continue accepting old form numbers.
Penalties for TDS Non-Compliance
Failure to deduct TDS: Interest at 1% per month or part of month from the date on which TDS was deductible to the date of actual deduction applies. Additionally, 30% of the related payment is disallowed as a business expense under Section 35(b) of the Income Tax Act, 2025. This disallowance directly increases the taxable income of the business and therefore its corporate or partnership tax liability for the year. Example: A company pays Rs. 5 lakh in professional fees in Tax Year 2026-27 but does not deduct TDS. Rs. 1.5 lakh (30% of Rs. 5 lakh) is disallowed while computing business income. At a corporate tax rate of 25%, this results in an additional tax burden of Rs. 37,500 in addition to the interest on the TDS shortfall.
Failure to deposit TDS after deduction: Interest at 1.5% per month or part of month from the date of deduction to the date of deposit. Criminal prosecution may be initiated for wilful failure to deposit deducted TDS under the Income Tax Act, 2025. The deductor is treated as an assessee in default, and the full TDS amount may be recovered from the deductor along with interest.
Failure to file quarterly TDS return: Late filing fee of Rs. 200 per day of delay under Section 234E, subject to a maximum equal to the TDS amount for the quarter. Additionally, a penalty of Rs. 10,000 to Rs. 1,00,000 may be imposed under the Income Tax Act, 2025 for failure to file or for filing an incorrect return.
Failure to issue TDS certificate: Penalty of Rs. 100 per day of delay, up to the amount of TDS for the relevant certificate. Failure to issue Form 130 to employees or Form 16A to vendors within the prescribed deadline triggers this penalty automatically.
Quoting incorrect TAN or PAN: A penalty of Rs. 10,000 applies for quoting incorrect TAN in challans or returns, or for failure to collect PAN from the deductee, which results in TDS being deducted at 20% instead of the applicable rate.
How Virtual Offices Support Business TDS Compliance
Every business required to deduct TDS must maintain a valid and verifiable registered office address on all statutory filings, including TDS returns filed on the TRACES portal, challans deposited with the bank, and TDS certificates issued to employees and vendors. The address on these filings must match the address on MCA records and GST registration to avoid discrepancies during assessments or notices from the Income Tax Department.
myHQ Virtual Offices provide businesses with a professionally documented registered office address backed by a valid lease agreement, NOC, and utility bill, ensuring address consistency across income tax, TDS, GST, and MCA records throughout the year.
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Conclusion
TDS for Business in India remains one of the most important tax compliance obligations for companies, startups, LLPs, partnership firms, and sole proprietors in 2026. Businesses making payments such as salaries, contractor fees, professional charges, rent, commission, or interest must ensure proper TDS deduction, timely deposit, and accurate return filing to avoid penalties, interest, and expense disallowances under the Income Tax Act, 1961.
As compliance systems become increasingly technology-driven, maintaining accurate vendor records, PAN details, challan reconciliation, and quarterly TDS filings is essential for smooth business operations. Proper compliance with TDS for Business in India also plays a major role in statutory audits, investor due diligence, GST reconciliation, and overall financial credibility.
Businesses that implement structured accounting and compliance processes for TDS for Business in India are better positioned to reduce regulatory risks, maintain clean tax records, and operate without disruptions as they scale in 2026. Proper accounting systems help businesses manage TDS for Business in India more efficiently as transaction volumes increase.
Frequently Asked Questions
What is the most important TDS change for businesses from April 2026?
The Income Tax Act, 1961 has been repealed and replaced by the Income Tax Act, 2025 effective April 1, 2026. All TDS section numbers from the 194-series are retired. Section 393 now covers all non-salary TDS, Section 392 covers salary TDS, and Section 394 covers TCS. Numeric payment codes from 1001 to 1092 replace section references in challans and returns. Rates and thresholds remain largely unchanged.
Do businesses need a new TAN after the Income Tax Act, 2025 came into force?
No. The Tax Deduction Account Number (TAN) continues unchanged. No fresh TAN application is required for Tax Year 2026-27. Businesses must continue quoting their existing TAN in all challans, returns, and certificates.
What is the penalty for not deducting TDS on contractor payments?
Interest at 1% per month from the date TDS was deductible to the date of actual deduction applies. Additionally, 30% of the contractor payment is disallowed as a business expense under Section 35(b) of the Income Tax Act, 2025, increasing the taxable income of the business.
What replaced Forms 15G and 15H?
Form 121 replaces both Forms 15G and 15H under the Income Tax Act, 2025. Form 15G and 15H are not valid for Tax Year 2026-27. Businesses must collect Form 121 from eligible recipients who wish to declare their income is below the taxable threshold.
What replaced Form 16 for salary TDS?
Form 130 replaces the old Form 16 under the Income Tax Act, 2025. Employers must issue Form 130 to employees for TDS deducted on salary for Tax Year 2026-27. Form 130 must be issued by June 15 of the year following the tax year.
Is TDS applicable on virtual office rent?
Yes. If a business pays rent for a virtual office or any commercial premises exceeding Rs. 2,40,000 in a financial year, TDS at 10% is applicable on the rent component under Section 393 of the Income Tax Act, 2025 (replacing old Section 194I). The deductor must deduct, deposit, and report this TDS in Form 26Q.
Why is TDS for Business in India important?
TDS for Business in India is important because it ensures timely tax collection by the government while helping businesses maintain compliant financial and tax records.
