How to File TDS for Your Business in India: A First-Timer's Complete Guide

How to File TDS Returns for Your Business in India

If your business pays vendors, contractors, professionals, or employees, there is a chance you must deduct TDS before making the payment.

After deducting TDS, you must deposit it with the government by the 7th of the following month and file a quarterly TDS return. Use Form 26Q for non-salary payments and Form 24Q for salary payments.

All filings are done through the Income Tax e-filing portal.

Before filing your first TDS return, complete the following setup steps:

1. Get a TAN

Apply for a TAN using Form 49B at the NSDL portal.

The application typically takes 7 to 10 working days to process and costs Rs. 65 plus GST.

A TAN is mandatory. You cannot legally deduct or file TDS without one.

2. Register on the Income Tax e-Filing Portal

Visit the Income Tax e-Filing portal and register as a deductor.

Use your TAN for registration, not your PAN.

3. Register on TRACES

Next, register your TAN on the TRACES portal.

TRACES is used to generate TDS certificates such as Form 16A. It is also required for downloading correction files.

Many first-time filers skip this step and face issues later when issuing certificates.

4. Set Up Challan Payments

Use Challan 281 to deposit TDS. You can pay online through the Income Tax portal or through an authorised bank.

After every payment, save the following details:

• BSR code
• Challan serial number
• Payment date

You will need these details while filing your TDS return.

Once the Setup Is Complete

Follow this process every time:

• Deduct TDS when booking the invoice or making the payment, whichever happens first.
• Deposit the TDS using Challan 281 by the due date.
• File the quarterly TDS return on the Income Tax portal.

TDS rates depend on the type of payment. For example:

• Contractors: 1 to 2%
• Professional fees: 10%
• Technical services: 2%
• Rent: 10%

TDS becomes applicable only after the payment crosses the prescribed threshold for that category.

Late deposits attract interest of 1.5% per month. Even a one-day delay is treated as a full month's delay for interest calculation.

From April 1, 2026, TDS section numbers have changed under the Income Tax Act 2025. However, Q4 FY 2025-26 filings must still use the old section references.

What Is TDS and Why Does It Apply to Your Business?

TDS, Tax Deducted at Source, is a system where you deduct a portion of tax before paying a vendor or employee. You then deposit it with the government and file a return reporting it. The vendor claims that amount as tax already paid when they file their ITR.

Example: You pay a CA Rs. 50,000. You deduct 10%, which is Rs. 5,000. You transfer Rs. 45,000 to the CA and deposit Rs. 5,000 with the government. You are not paying extra tax. You are collecting tax that was already owed on the CA's income.

TDS accounts for over 60% of India's net direct tax collections. That was Rs. 5.19 lakh crore in FY 2023-24. The government enforces it aggressively because businesses are its primary collection point.

Once you deduct TDS, you have three obligations:

• Deposit it with the government
• File a quarterly return
• Issue a TDS certificate, Form 16A, to the person you deducted from

Who Is Liable to Deduct TDS?

Your TDS obligation depends on your business type and turnover.

Turnover limit for proprietorship: If your previous year's turnover was above Rs. 1 crore (Rs. 50 lakh for professionals), TDS applies across all standard payment categories. Below that turnover, you still need to deduct TDS on rent and contractor payments regardless.

Step zero, get your TAN first: TAN is mandatory before you can deduct or file anything. Apply online at the NSDL portal using Form 49B. Processing takes 7 to 10 working days and costs Rs. 65 plus GST. Quote your TAN on every TDS challan and return you file.

What Payments Require TDS Deduction? (Rates and Sections)

TDS applies to specific payment categories, not all business outflows. Here are the most common ones:

New Income Tax Act 2025, what changed: From April 1, 2026, all TDS section numbers have been renumbered under ITA 2025. Sections 194C, 194J, and 194I no longer apply to payments made from April 1, 2026 onwards. Form 24Q for salary TDS returns is now Form 140. Form 16 for salary TDS certificates is now Form 130.

For Q4 FY 2025-26 (January to March 2026), file using old section references and old form numbers. The due date is May 31, 2026. From Q1 FY 2026-27, use new section numbers only. Do not mix old and new Act references in the same filing. If your CA or accounting software has not been updated, this is a live compliance risk right now.

What Are the TDS Thresholds? (When Does Deduction Kick In?)

TDS applies only once payments to a particular vendor cross a threshold in a financial year. Small payments below these limits are exempt.

Payment TypeThresholdContractor, single contractRs. 30,000Contractor, aggregate per yearRs. 1,00,000Professional feesRs. 30,000 per year per personRentRs. 2,40,000 per yearCommission or brokerageRs. 15,000 per year

The threshold trap most businesses fall into: The Rs. 30,000 limit on professional fees is cumulative per payee per year, not per payment. Say you pay a freelancer Rs. 10,000 in April, Rs. 10,000 in June, and Rs. 10,000 in August. TDS becomes due on the third payment. It applies to the entire Rs. 30,000, not just the Rs. 10,000 excess. Many businesses deduct only on the amount above the threshold. The Income Tax Department sends demand notices specifically for this error.

Track cumulative payments per vendor from April 1. Flag any vendor approaching the threshold before the next payment goes out.

When Do You Deposit TDS and File Returns?

Deposit due dates:

• Payments made April to February: deposit by the 7th of the following month
• Payments made in March: deposit by April 30

Quarterly return due dates:

Use Form 26Q for all non-salary payments including vendor fees, rent, professional fees, and contractor payments. Use Form 24Q for salary. File on the Income Tax e-filing portal.

Depositing TDS and filing the return are two separate requirements with different timelines. Both are mandatory.

How Do You File TDS Returns Online?

Step 1: Register on the IT e-filing portal with your TAN

Go to incometax.gov.in and register as a deductor using your TAN, not your PAN.

Step 2: Register on TRACES separately

TRACES at traces.gov.in is a separate portal. Register your TAN here too. You will use TRACES to generate Form 16A certificates for vendors and download correction files. First-time filers consistently miss this step.

Step 3: Download the RPU and the CSI File

The Return Preparation Utility is available on the TRACES or NSDL website. This is the tool you use to build your quarterly return file.

You also need to download the CSI file before you validate. The CSI file is a challan status file. It confirms that the BSR code, date, serial number, and amount you entered match what the bank actually recorded in the OLTAS system. The FVU cross-checks your return data against this file. If there is a mismatch, validation fails even if everything else is correct.

Download a fresh CSI file on the same day you run the FVU. Do not reuse one from a previous session. An outdated CSI file is the most common reason first-time filers get stuck at validation, even when their numbers are right.

Step 4: Enter deductee details

For each vendor you deducted TDS from, enter the following:

• Their PAN
• Payment amount
• TDS amount deducted
• Challan details: BSR code, date, and serial number

Step 5: Validate using the FVU

Run the completed file through the File Validation Utility. It flags errors such as wrong PAN format, challan mismatches, and missing fields before submission.

Step 6: Upload the validated file

Log in to incometax.gov.in with your TAN credentials. Upload the validated .fvu file under the TDS section.

Step 7: Issue Form 16A to deductees

Generate Form 16A on TRACES and issue it to each vendor within 15 days of the return filing due date.

The first filing takes a full day. TRACES setup and the RPU learning curve are the main time costs. Subsequent quarters are faster once the process is familiar.

What Are the Penalties for Getting TDS Wrong?

The 1% vs 1.5% distinction

Late deduction and late deposit are two separate offences with different rates. A one-day delay in depositing after deducting costs a full month's interest at 1.5%, not 1%. Most guides do not separate these clearly.

One more consequence most guides miss: If TDS is deductible but not deducted, or deducted but not deposited by the return filing due date, 30% of that expense gets disallowed while computing your business income. This is under the new Income Tax Act 2025. Your taxable profit goes up, not just your penalty.

AIS tracking

The Income Tax Department tracks all TDS discrepancies in real time through Form 26AS and the Annual Information Statement (AIS). Any mismatch reflects immediately in your vendor's tax profile. Their refund gets held up. They will come back to you. Getting TDS right protects vendor relationships, not just your compliance record.

Managing TDS across multiple vendors every quarter is exactly the kind of work that slips without a dedicated finance person. AI Accountant's Virtual Accounting service gives you a CA team that tracks TDS obligations, deposits on time, and files every quarter, so you are never the one chasing a notice.

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What Are the Most Common TDS Mistakes New Business Owners Make?

"The most common error we see with first-time business owners is [X]."

CA [Name], Virtual Accounting Team, AI Accountant

1. Wrong PAN of the deductee

This is the most frequent filing error. If the PAN does not match government records, the deductee cannot claim TDS credit. The deduction is treated as invalid. Verify PAN before the first payment to any new vendor, not after.

2. Deducting only on the amount above the threshold

Once cumulative payments cross the threshold, TDS is due on the entire amount paid to date, not just the excess. This is the most common reason for demand notices under Section 200A.

3. Using the wrong rate under Section 194J

Professional services such as CA, lawyer, and doctor attract 10% TDS. Technical services such as IT support and maintenance attract 2%. Using 10% across all 194J payments triggers notices for the rate difference.

4. Depositing one day late

A single day's delay after deduction triggers a full month's interest at 1.5%. This is especially easy to miss around month-ends and public holidays.

5. Deducting at payment instead of at invoice booking

TDS is due at the time of credit or payment, whichever is earlier. If you book an invoice in September but pay in October, TDS was due in September. Waiting for the bank transfer is the primary cause of late deduction interest.

6. Not getting TAN before starting

You cannot file TDS returns without a TAN. Businesses that begin deducting informally before registering end up filing retroactively. This creates mismatches and processing delays.

Is TDS Refundable?

Yes, but the refund goes to the deductee, your vendor or employee, not to you as the deductor.

If TDS deducted on a vendor's income exceeds their actual tax liability for the year, they claim the excess as a refund when filing their ITR. As the deductor, you do not receive a refund. You are the collecting agent.

How deductees check their credit

All TDS deducted against their PAN appears in Form 26AS and the AIS on the Income Tax portal. This is why correct PAN entry matters. A wrong PAN means the credit does not appear in the right person's account and their refund gets delayed.

Can TDS returns be corrected?

Yes, multiple times. Common corrections include wrong PAN, challan mismatch, wrong section code, and incorrect amounts. Download the consolidated file, called the conso file, from TRACES and file a correction statement. There is no fixed limit on the number of corrections. But they become harder once a return is time-barred.

TDS vs ITR: Which ITR Form Should a Business Owner File?

TDS filing and ITR filing are separate obligations. Filing 26Q or 24Q means you are filing as a deductor, reporting tax you collected from others. Filing an ITR means you are filing as a taxpayer, reporting your own income. Both are required.

Business TypeITR FormProprietorship using presumptive taxation (Section 44AD)ITR 4Proprietorship with regular books of accountsITR 3Private Limited CompanyITR 6LLPITR 5Salaried individual with additional business incomeITR 3

If you are unsure whether to opt for presumptive taxation under ITR 4 or maintain regular books under ITR 3, make that decision with a CA before the year ends. It affects both your TDS obligations and your overall tax liability.

What Changed Under the New Income Tax Act 2025?

The Income Tax Act 2025 replaced the 1961 Act from April 1, 2026. Most TDS obligations remain the same in substance. But section numbers, form names, and return formats have all changed. Every TDS guide published before 2026 references sections that are now outdated for transactions from April 2026 onwards.

What this means right now:

• Q4 FY 2025-26 (January to March 2026): File using old section numbers such as 194C, 194J, and 194I. Use old forms 24Q and 26Q. Due date is May 31, 2026. This period is still under the 1961 Act.
• Q1 FY 2026-27 onwards (April 2026 onwards): Use new ITA 2025 section numbers only. Use Form 140 instead of 24Q for salary returns. Issue Form 130 instead of Form 16 for salary certificates.
• Do not mix old and new Act references in the same return. It will generate validation errors on the portal.
• If your accounting software, payroll system, or CA firm has not updated to ITA 2025, your first Q1 filing due July 31, 2026 is at risk. Verify this before July.

Make TDS a Monthly Habit, Not a Quarterly Panic

Most TDS stress happens because founders treat it as a quarterly task. By the time the return is due, invoices are missing, vendor PANs are unverified, and challan details are scattered across email threads.

The fix is simple. Do a small amount of TDS work every month, and quarter-end becomes a 30-minute upload, not a two-day scramble.

By the 7th of every month:

• Deposit TDS on all payments made in the previous month using Challan 281
• Save the BSR code, challan serial number, and payment date from every deposit immediately. You will need these when filing the return.
• Verify the PAN of any new vendor you paid that month before the next payment goes out

At quarter end, before filing:

• Reconcile total TDS deducted against total challan deposits. The numbers must match section by section.
• Download a fresh CSI file on the same day you run the FVU. Do not reuse an old one.
• Run the FVU, fix any errors flagged, and upload the validated file to the portal.
• After the return is processed on TRACES, generate and issue Form 16A to each vendor within 15 days of the filing due date.

Businesses that do the monthly steps rarely have surprises at quarter end. The ones that skip them spend quarter end fixing what should have been caught weeks earlier.

The 3D Framework: Deduct, Deposit, Declare

TDS compliance reduces to three actions done consistently every month and quarter.

Deduct

Deduct at the time of invoice booking or payment, whichever is earlier. Not at the bank transfer stage.

Deposit

Deposit by the 7th of the following month. April 30 for March payments. One day late equals one full month's interest.

Declare

Declare by filing 26Q or 24Q quarterly by the due date. Four times a year, every year.

The rules are not complicated. The challenge is consistent execution across every vendor, every month, while running a business.

Frequently Asked Questions

Do I need to deduct TDS if I am paying a freelancer or agency outside India?

Yes, but different rules apply. Payments to non-residents fall under Section 195 of the Income Tax Act. The TDS rate depends on the nature of the payment and the tax treaty between India and the recipient's country. Consult a CA before making any cross-border payments. The rates and procedures differ significantly from domestic TDS.

What happens if I forgot to deduct TDS for a few months?

You become liable for interest at 1% per month from the date the deduction was due. Additionally, 30% of those payments may be disallowed as a business expense, increasing your taxable income. Deduct and deposit the missed TDS as soon as possible. File revised returns and document the lapse. A CA can help you calculate the exact liability and file corrections.

Can I pay my vendor the full amount and pay TDS out of my own pocket?

Technically, no. TDS is meant to be deducted from the vendor's payment, not paid separately. If you pay TDS yourself, that amount is treated as additional income in the vendor's hands. This creates further tax complications. Always deduct from the source payment.

My vendor says they have a certificate for lower or nil TDS deduction. What do I do?

Ask for a copy of the certificate issued by the Income Tax Department under Section 197. Verify it on the TRACES portal before reducing or skipping deduction. The certificate specifies the period and the applicable rate. Deduct at the rate mentioned. If you skip deduction without a valid certificate, the liability falls on you.

Does GST affect TDS? Do I deduct TDS on the GST portion of an invoice?

No. TDS is deducted on the base invoice amount, not on the GST component. If a vendor invoices you Rs. 1,00,000 plus Rs. 18,000 GST, TDS applies only on Rs. 1,00,000. This is a common confusion among first-time filers.

We just crossed Rs. 1 crore turnover this year. From when do full TDS obligations apply?

TDS applicability based on turnover is determined by the previous year's figures. If you crossed Rs. 1 crore in FY 2025-26, full TDS obligations apply from April 1, 2026. Review all payment categories immediately and start deducting accordingly.

What if a vendor refuses to share their PAN?

You are required to deduct TDS at a higher rate of 20% if the deductee does not furnish their PAN. Do not skip deduction. Deduct at 20%, deposit, and report accordingly in your return. The higher rate is a compliance mechanism to encourage PAN sharing. It is not a penalty on you.

Is TDS applicable on advance payments to vendors?

Yes. TDS is triggered at the time of credit or payment, whichever is earlier. If you pay an advance to a contractor before the work is completed, TDS applies at the time of that advance, provided the amount crosses the applicable threshold.

We use a cloud accounting tool. Will it automatically handle TDS?

Most cloud accounting tools track TDS deductions and generate reports. But the actual deposit via Challan 281 and quarterly return filing on the IT portal still require action from you or your CA. The tool organises the data. The filing and deposit are separate steps. Also confirm that your software has updated to ITA 2025 section numbers if you are filing for April 2026 onwards.

How long should we retain TDS records?

Retain TDS records for a minimum of seven years. This includes challans, deductee details, filed returns, and issued certificates. The Income Tax Department can raise queries or conduct assessments for prior years. You will need these documents to respond.