Tax Deduction at Source (TDS)

By Manu Rao | Updated March 2026

What Is TDS?

Tax Deduction at Source (TDS) is India's pay-as-you-earn tax collection system. When your company makes certain payments — salaries, rent, professional fees, interest, contractor payments — it must deduct a percentage of the payment as income tax and deposit it with the government. The recipient gets the balance and claims credit for the TDS deducted when filing their income tax return.

TDS applies to both domestic and cross-border payments. For foreign-owned companies in India, cross-border TDS under Section 195 is often the most complex part of tax compliance.

Legal Framework

TDS provisions are spread across Sections 192 to 206C of the Income Tax Act 1961. Key sections for companies include:

• Section 192 — TDS on salary payments
• Section 194A — TDS on interest other than interest on securities (10%)
• Section 194C — TDS on contractor payments (1% for individuals, 2% for companies)
• Section 194H — TDS on commission or brokerage (5%)
• Section 194I — TDS on rent (10% for land/building, 2% for plant/machinery)
• Section 194J — TDS on professional/technical fees (10%, reduced to 2% for certain technical services)
• Section 194O — TDS on e-commerce operator payments (1%)
• Section 195 — TDS on payments to non-residents (rates per DTAA or domestic law)
• Section 196D — TDS on income of Foreign Institutional Investors (20%)

TDS Rates — Key Payments

If the recipient does not furnish their PAN, TDS is deducted at 20% or the applicable rate, whichever is higher (Section 206AA).

TDS on Cross-Border Payments (Section 195)

This is where foreign-owned companies need to pay close attention. Any payment to a non-resident is subject to TDS under Section 195. This includes:

• Management fees paid to the foreign parent company
• Royalties for use of brand, technology, or intellectual property
• Interest on loans from the foreign parent (External Commercial Borrowings)
• Commissions paid to foreign agents
• Software license fees paid to foreign vendors

The TDS rate depends on whether a DTAA exists between India and the recipient's country. For example:

• Royalties to a US company: 15% under the India-US DTAA (compared to 10% under domestic law for certain royalties post-April 2020)
• Interest to a UK lender: 15% under the India-UK DTAA
• Technical fees to a German company: 10% under the India-Germany DTAA

To claim DTAA rates, the recipient must provide a Tax Residency Certificate and the payer must file Form 15CA/15CB.

TDS Compliance Process

1. Obtain TAN — Apply for a Tax Deduction Account Number before making the first TDS-liable payment
2. Deduct at the time of payment or credit — Whichever is earlier. If you credit an expense to the payee's account on March 25 but pay on April 5, TDS is due on March 25.
3. Deposit with government — By the 7th of the following month. For March deductions, the deadline extends to April 30.
4. File quarterly TDS returns — Form 24Q for salary TDS, Form 26Q for non-salary payments, Form 27Q for payments to non-residents. Deadlines: July 31, October 31, January 31, May 31 for Q1-Q4 respectively.
5. Issue TDS certificates — Form 16 for salary (by June 15), Form 16A for non-salary (within 15 days of filing the quarterly return)

Deadlines Summary

Penalties

• Non-deduction — Disallowance of 30% of the expense under Section 40(a)(i) for payments to non-residents (100% disallowance if Section 195 TDS not deducted)
• Late deposit — Interest at 1.5% per month from date of deduction to date of deposit (Section 201(1A))
• Late filing of return — Late fee of INR 200/day under Section 234E (capped at the TDS amount)
• Penalty for incorrect return — INR 10,000 to INR 1,00,000 under Section 271H
• Non-issuance of TDS certificate — Penalty of INR 100/day under Section 272A(2)

The 30% disallowance under Section 40(a)(i) is particularly painful. If your company pays INR 50 lakhs to the foreign parent without deducting TDS, you lose the deduction for INR 50 lakhs when computing taxable income — adding roughly INR 12.5 lakhs to your tax bill at 25% tax rate.

Common Mistakes

• Not deducting TDS on payments to foreign parent — Management fees, reimbursements with a markup, and service charges paid to the parent company are all subject to Section 195. "Reimbursement" is not a magic word that removes TDS liability.
• Applying wrong DTAA rate — The DTAA rate applies only if the recipient provides a Tax Residency Certificate. Without it, domestic rates apply — which may be higher.
• Missing the "credit or payment" trigger — TDS is due on whichever happens first: payment or credit to the payee's account. Booking an expense in March but paying in April still triggers March TDS.
• Incorrect PAN/TAN on returns — Entering the wrong PAN of the deductee means the credit does not appear in their Form 26AS. This creates reconciliation problems.
• Not filing Form 27Q for non-resident payments — Many companies file 26Q for domestic payments but forget that payments to non-residents need a separate Form 27Q.

Practical Example

A Singapore-based company owns an Indian subsidiary in Chennai. The Indian company has 5 employees (salary TDS under Section 192), pays rent of INR 3 lakhs/year for office space (Section 194I — 10% TDS), engages a CA firm for INR 50,000/year (Section 194J — 10% TDS), and pays management fees of SGD 20,000/quarter to the Singapore parent (Section 195 — 15% under India-Singapore DTAA, subject to the parent providing a TRC). Each month, the company deposits TDS by the 7th. Quarterly, it files Form 24Q (salary), Form 26Q (domestic non-salary), and Form 27Q (non-resident payments). The Singapore parent gets Form 16A showing TDS deducted, which it credits against Indian tax liability.

Related Terms

• TAN — Required before deducting TDS
• Form 15CA/15CB — Required for cross-border remittances
• Withholding Tax — Broader concept covering TDS
• Tax Residency Certificate — Needed to claim DTAA rates

Managing TDS on cross-border payments requires precision. Beacon Filing handles TDS compliance end-to-end for foreign-owned companies.