TDS Explained for Startups: Salaries, Freelancers, Vendors

TDS Explained for Startups: Salaries, Freelancers, Vendors

TDS (Tax Deducted at Source) is the compliance obligation Indian startups most consistently underestimate. Founders track GST registrations carefully but routinely miss deductions on freelancer invoices, co-working rent and foreign SaaS subscriptions — until a Section 234E late-fee notice or a Section 143(1) adjustment arrives. In FY 2026-27, CBDT's automated matching of Form 26AS, AIS (Annual Information Statement) and TDS returns makes every missed deduction visible almost in real time. This guide tells you exactly which section applies to every payment your startup makes, what rate to use, and how to navigate the full compliance calendar without costly surprises.

What TDS Is and Why Startups Get It Wrong

TDS is a withholding mechanism: the deductor (your startup, making the payment) withholds a percentage of each qualifying payment and remits it to the government on behalf of the deductee (the payee). The deductee sees this credit in their Form 26AS and AIS / TIS (Tax Information Summary), which offsets their final income-tax liability.

Three structural reasons startups fail here:

1. Volume blindness. A 15-person startup may process 60–80 freelancer invoices a quarter across design, development and marketing. Each potentially triggers Section 194J or 194C. Tracking the cumulative thresholds manually across invoices without a proper payables workflow is error-prone.
2. Regime confusion. The new income-tax regime has been the default for salaried employees from AY 2024-25. Many founders still compute salary TDS on old-regime slabs, producing mismatches when employees file returns and the AIS system flags the discrepancy.
3. Cross-border blind spots. Section 195 obligations on foreign SaaS subscriptions, consulting fees and software licences are almost universally skipped by early-stage startups. CBDT-RBI data-sharing and AD bank reporting mean these gaps surface during assessment.

Getting Your TAN Before the First Payment

A TAN (Tax Deduction and Collection Account Number) is mandatory under Section 203A of the Income-tax Act, 1961 before you make any TDS-applicable payment. Operating without a TAN, or quoting a wrong TAN on challans, attracts a penalty of Rs. 10,000 under Section 272BB — separate from any interest or late fee.

How to apply:

1. Visit the NSDL e-Gov TIN portal (tin.tin.nsdl.com) or the UTIITSL portal.
2. Complete Form 49B online. You need your startup's PAN, registered office address and authorised signatory details.
3. Pay the application fee (Rs. 65 plus applicable GST, as currently notified).
4. Receive the TAN by speed post within 7–10 working days, or download the e-TAN from the portal.

One TAN covers all deduction categories — salary (24Q), resident non-salary (26Q) and non-resident (27Q). You do not need separate TANs per section.

Section 192 — Salary TDS

Section 192 requires you to deduct TDS on the salary of every employee whose estimated annual taxable income exceeds the applicable basic exemption limit. The operative word is estimated: project the full year's income in April, compute the annual tax liability, divide by 12, and deduct that amount each month. Recompute every quarter to absorb changes — joining bonuses, variable pay unlocks or mid-year pay hikes.

Choosing the Regime and Collecting Declarations

The new tax regime is the default from AY 2024-25 unless the employee submits Form 10IEA to opt into the old regime before your payroll cut-off. A standard deduction of Rs. 75,000 applies under both regimes for salaried employees (confirmed by Finance Act 2024; verify continuity under Finance Act 2026 once notified).

Collect Form 12BB from every employee at the start of April. This declaration covers HRA exemption (old regime), LTA, housing loan interest and all Chapter VI-A deductions. Without it, you cannot correctly estimate taxable income and your TDS will almost certainly be wrong.

Worked Example: Monthly TDS on a Rs. 14,75,000 Gross Salary

Applying the new-regime slabs as applicable for FY 2025-26 (verify under Finance Act 2026 for FY 2026-27):

Key nuance: For employees whose net taxable income falls at or below Rs. 12,00,000 under the new regime, the Section 87A rebate (as applicable for FY 2025-26) reduces the net tax to nil — meaning zero monthly TDS even if gross salary exceeds Rs. 12 lakh after the standard deduction. Confirm the rebate threshold as notified under Finance Act 2026 for FY 2026-27.

The practical lesson: if an employee receives a variable pay payout in Q3, recompute their annualised income in October and adjust the monthly deduction for the remaining months rather than creating a large catch-up deduction in March.

Section 194J and 194C — Freelancers, Developers and Contractors

This is where most startup TDS audits originate. The wrong section means either under-deduction (you owe interest at 1.5% per month plus potential expense disallowance under Section 40(a)(ia)) or over-deduction (your vendor is unhappy and you face reconciliation pain on TRACES).

The 194J vs. 194C Decision

For most startup vendor payments:

• A solo freelance developer building your product: Section 194J at 2% (technical services).
• A law firm issuing invoices for term-sheet review: Section 194J at 10% (professional services).
• A design agency executing a brand refresh under a Statement of Work: Section 194C at 2% (the agency is a company, not an individual).
• A solo content writer: Section 194J at 10% if the nature is "professional" (creative writing is often classified here), or 194C at 1% if purely a work contract — this remains a grey area; 194J at 10% is the conservative approach.

The Threshold Trap

The aggregate threshold accumulates across all invoices to the same payee within the financial year, under your TAN. A startup that pays a UX consultant Rs. 9,000 in May, Rs. 12,000 in July and Rs. 11,000 in September totals Rs. 32,000 — crossing the Rs. 30,000 threshold on the third invoice. At that point, TDS applies retrospectively from the first payment in the year, not just on the marginal invoice. You must deduct on the full Rs. 32,000 and deposit the shortfall immediately.

Configure your accounting software to flag payees who cross 80% of any applicable threshold in the year. Both Zoho Books and Tally Prime have TDS compliance modules that do this automatically if the vendor master is set up correctly.

Section 194I — Rent on Office Space and Equipment

A startup paying Rs. 25,000 per month for a dedicated cabin in a co-working space (Rs. 3,00,000 annually) crosses the threshold comfortably. TDS of Rs. 2,500 per month (10%) must be deducted and deposited by the 7th of the following month.

The service-vs.-rent distinction: If the co-working agreement is framed as a seat service with no defined exclusive space, the operator may argue Section 194C applies (2%) or even that the arrangement is a service not attracting 194I. Examine the agreement: if it grants you exclusive possession of a fixed cabin or defined area, 194I at 10% is the safe position.

A separate provision — Section 194-IB — applies to individuals and HUFs (not companies) paying monthly rent above Rs. 50,000. If your founder is personally renting an office, deduct at 5% under 194-IB. No TAN is needed; your PAN suffices. This section is commonly overlooked by founders operating in a hybrid personal/company structure in the early days.

Section 195 — Paying Foreign Vendors and SaaS Providers

Every payment to a non-resident — a $500/month Figma subscription, a $5,000 contractor in Singapore, a $30,000 software licence from a US vendor — potentially triggers Section 195. "Potentially" because the taxability depends on whether the income has a source in India and whether a DTAA (Double Taxation Avoidance Agreement) exempts or reduces the withholding.

Form 15CA and 15CB: What They Are and When You Need Them

Before your AD bank (authorised dealer bank) processes any foreign remittance, submit:

• Form 15CA on the income-tax e-filing portal (incometax.gov.in): your startup's self-declaration of the nature, amount and taxability of the remittance.
• Form 15CB: a certificate issued by a Chartered Accountant confirming the DTAA applicability, the applicable withholding rate and the tax computed. Required for remittances exceeding Rs. 5,00,000 (aggregate to the same payee in the financial year), except where the payment falls under Rule 37BB's exempt list.

Form 15CA has four parts. Most startup cross-border payments fall under:

• Part C (with Form 15CB): taxable remittances above Rs. 5 lakh.
• Part D: remittances that are not chargeable to tax in India (after obtaining CA advice).

The Royalty Question for SaaS

Whether a monthly SaaS subscription is royalty (taxable in India at DTAA rate) or business income of a non-resident without a Permanent Establishment in India (potentially nil withholding) is a live litigation point. Courts and CBDT have not reached a uniform position.

The conservative — and currently defensible — approach:

1. Obtain a Tax Residency Certificate (TRC) from the foreign vendor annually.
2. Obtain Form 10F from the vendor (self-declaration, now filed online on the Indian IT portal).
3. Withhold at the DTAA royalty rate (e.g., 15% under the India-US DTAA, as notified).
4. Deposit via challan ITNS 281 and file the amount in 27Q quarterly.

Worked Example: A $500/Month SaaS Subscription (India-US DTAA)

You deposit Rs. 6,263 to the government under challan ITNS 281 and report it in 27Q for the relevant quarter. Many large US SaaS vendors (AWS, Google Cloud, Adobe, Salesforce) now proactively issue TRC and Form 10F. Collect and file these each April for the new financial year before the first invoice is paid.

The TDS Compliance Calendar for FY 2026-27

Critical: Form 16 and Form 16A must be downloaded and digitally signed through TRACES (traces.gov.in). You cannot issue a self-made certificate — it has no legal validity and the deductee will not receive credit in their AIS.

File 24Q for salary deductions and 26Q for all other resident payments. If you have both salaried employees and freelancers, you will file both returns every quarter. File 27Q for every non-resident payment during the quarter, even if the TDS amount was nil after DTAA exemption.

Common Mistakes Startups Make — and How to Fix Them

Mistake 1: No TAN Before the First Payroll

Some founders run April salaries before their TAN arrives, then deposit TDS against a provisional number. This breaks the Form 26AS credit chain for employees. Fix: Apply for TAN within the first week of incorporation, before the first hire is onboarded.

Mistake 2: Applying 194C Where 194J Is Correct

The most common audit trigger. If you applied 194C (2%) to a lawyer's invoice where 194J (10%) was required, the 8% shortfall is treated as non-deduction. Under Section 201(1A), you pay 1.5% per month interest on the shortfall from the date of payment to the date of deduction, plus there is a risk of expense disallowance under Section 40(a)(ia) for the payer.

On a Rs. 3,00,000 annual legal fee, the shortfall on TDS = Rs. 24,000. Six months late = Rs. 24,000 × 1.5% × 6 = Rs. 2,160 interest, plus potential disallowance of the deduction itself until the deductee pays tax on it.

Mistake 3: Missing the 7th-of-Month Deposit Window

Late deposit attracts 1.5% per month interest from the date of deduction to the actual deposit date, charged for each month or part thereof. On Rs. 80,000 of TDS for a month, a single week's delay (technically one month's interest) = Rs. 1,200. Multiply this across a year of delays and the number becomes significant — and it is not deductible.

Fix: Set a standing instruction with your CFO or accountant to process the TDS challan on the 5th of every month, giving two days of buffer.

Mistake 4: Late Filing of Quarterly Returns — Section 234E

Section 234E levies a mandatory late fee of Rs. 200 per day per return, capped at the total TDS amount in that return. The TDS officer has zero discretion to waive it — it is levied automatically by the system.

For a startup with three returns to file (24Q, 26Q, 27Q) that is 45 days late, the minimum exposure is Rs. 200 × 45 × 3 = Rs. 27,000 in non-waivable fees, even if total TDS for the quarter is small.

Mistake 5: Skipping TRACES Reconciliation

Challan amounts deposited must match exactly what is reported in the quarterly return, down to the rupee. A mismatch of even Rs. 1 creates a "challan mismatch" default that blocks Form 16A generation and triggers a system-generated demand notice. Fix: Log into TRACES at the end of every month, verify challan status under "View Challan Status", and correct any discrepancy through a correction statement before the return is filed.

Worked Example: The Real Cost of One Missed Quarter

A nine-person startup deducts Rs. 22,000 in salary TDS (24Q) and Rs. 15,000 in freelancer TDS (26Q) in Q1 FY 2026-27 (April–June 2026). Founders are busy with a Series A close and file both returns on 15 October 2026 — 76 days after the 31 July 2026 due date.

Section 234E late fee:

If the TDS itself was also deposited late — say, deposited 10 October for June deductions that were due by 7 July — that is approximately 3 months' interest:

Rs. 37,000 × 1.5% × 3 months = Rs. 1,665 interest

Total preventable cash leak: Rs. 31,865 — for a startup that was too stretched to spend two hours filing returns on time.

Key Takeaways

• Obtain TAN (Form 49B) on day one of incorporation; a missing or wrong TAN breaks every downstream credit and attracts a Rs. 10,000 penalty.
• Section 194J at 2% covers most freelance software and IT services; 10% applies to lawyers, CAs, doctors and management consultants — getting this wrong triggers retrospective interest and possible expense disallowance.
• Aggregate thresholds reset every 1 April: track cumulative payments per vendor from the year's start; once crossed, TDS applies retroactively from the first payment of the year.
• Section 195 applies to every foreign payment — collect TRC and Form 10F from foreign vendors each April and file Form 15CA/CB before every remittance where the annual aggregate to the same vendor exceeds Rs. 5 lakh.
• Deposit TDS by the 7th of the following month (30 April for March); even one day late triggers 1.5%-per-month interest that is not deductible.
• File 24Q, 26Q and 27Q by 31 July / 31 Oct / 31 Jan / 31 May; Section 234E's Rs. 200/day late fee is system-automated and non-waivable.
• Reconcile your TRACES challan status every month-end, not just before return filing — mismatches block Form 16A generation and generate demand notices before any scrutiny is even initiated.