TDS on Business Payments in India: Complete Guide (2026)

Introduction

TDS compliance genuinely trips up small and growing businesses more than almost any other single compliance area — not because the concept is complicated, but because it applies across dozens of different payment types, each with its own specific rate and threshold that's easy to lose track of.

Note: TDS rates and thresholds are subject to periodic government revision, including recent Budget changes. Confirm current figures directly before filing, particularly given the frequency of recent threshold updates.

Table of Contents

1. The Core Concept
2. Section 194C: Contractor Payments
3. Section 194J: Professional and Technical Fees
4. Section 194I and 194-IB: Rent
5. Section 194H: Commission and Brokerage
6. Section 192: Salary
7. A Quick Reference Table
8. The No-PAN Penalty
9. What Happens If You Miss a Deduction
10. FAQ
11. Conclusion

The Core Concept

TDS (Tax Deducted at Source) requires a business making certain specified payments to deduct tax at a prescribed rate before paying the recipient, then deposit that deducted amount with the government on the recipient's behalf. The recipient later claims this deducted amount as credit against their own tax liability when filing their return. Different categories of payment trigger different sections, rates, and thresholds — this is genuinely where most confusion and errors happen.

Section 194C: Contractor Payments

• Rate: 1% for individual/HUF contractors, 2% for other entities
• Threshold: ₹30,000 for a single payment, or ₹1,00,000 aggregate to the same contractor within a financial year
• Applies to payments for work contracts — labor, construction, and similar contracted work
• A common, genuine mistake: splitting a larger contract into smaller invoices to stay under the single-payment threshold doesn't avoid TDS — the aggregate annual threshold still applies across all payments to the same contractor

Section 194J: Professional and Technical Fees

• Rate: 10% for professional services (legal, medical, consultancy, accountancy, and similar), 2% for technical services and call center services specifically
• Threshold: ₹50,000 in aggregate payments to the same professional or service provider within a financial year
• Genuinely common source of error: businesses often incorrectly apply Section 194C (contractor rate) to what's actually professional-services work under 194J — a consultant, designer, or technical-service-provider generally falls under 194J, not 194C

Section 194I and 194-IB: Rent

• Section 194I (applies to businesses subject to audit): 10% for rent on land/building, 2% for rent on plant/machinery, threshold of ₹6,00,000 aggregate annually
• Section 194-IB (applies specifically to individuals/HUFs not subject to audit): 2% TDS on rent exceeding ₹50,000 per month — note this is a monthly threshold, not annual, meaning it can apply even if the annual total looks moderate

Section 194H: Commission and Brokerage

• Rate: 2%
• Threshold: ₹20,000 in aggregate annually to the same agent or party
• Applies to commission or brokerage payments — a common category for D2C brands working with sales agents or affiliate-style commission arrangements

Section 192: Salary

• Rate: Based on the employee's applicable income tax slab rate, not a flat percentage
• Threshold: The basic exemption limit — TDS applies once an employee's estimated annual income exceeds this threshold
• Calculated and deducted each pay period, based on the employee's estimated annual income and applicable deductions

A Quick Reference Table

These figures are subject to periodic revision — several thresholds have changed in recent Budget cycles, so confirming the current figure before a specific filing is genuinely worth the extra step.

The No-PAN Penalty

This is a genuinely important, easy-to-miss detail: when a payment recipient hasn't furnished a valid PAN, TDS must generally be deducted at a significantly higher rate — 20%, or the section's specified rate if that happens to be higher. This is a substantial jump from standard rates (most of which sit at 1-10%), and it's a genuine, practical reason to collect PAN details from every vendor, contractor, or service provider before the first payment, not after a deduction has already been processed incorrectly.

What Happens If You Miss a Deduction

Missing a required TDS deduction carries genuinely more serious consequences than a simple compliance notice:

• Disallowance of the expense — the business may not be able to claim that expense as a deduction when computing its own taxable income, directly increasing its own tax liability
• Interest on the TDS amount that should have been deducted and deposited
• Potential penalties for non-compliance

This is exactly why TDS deserves proactive tracking — by the time an error surfaces during a tax assessment, the cost is meaningfully higher than the deduction itself would have been.

FAQ

Conclusion

TDS compliance is genuinely manageable once a business builds the habit of checking every new vendor, contractor, or recurring payment against the relevant section and threshold before the first payment goes out — the errors that actually cost businesses money almost always trace back to a payment category that was never checked in the first place, not a genuinely ambiguous edge case.

Want your vendor and contractor payments tracked against the correct TDS sections automatically, not manually cross-checked every time? Our Bookkeeping service handles exactly this. Book a free consultation to talk through your setup.