Tax Deduction at Source (TDS)

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 is the payer-side counterpart to Tax Collected at Source (TCS), where the seller collects tax instead of the payer deducting it.

TDS applies to both domestic and cross-border payments. For foreign-owned companies in India, cross-border TDS under section 393(2) of the Income-tax Act, 2025 (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) is often the most complex part of tax compliance.

Legal Framework

Under the Income-tax Act, 2025 the TDS provisions are consolidated: section 393 carries the Table of payments and rates, with sections 394 to 402 covering collection at source, certificates, compliance and the consequences of default. Under the Income-tax Act, 1961 — which still governs tax years beginning before 1 April 2026 — the same ground was spread across sections 192 to 206C. Key provisions for companies:

• Section 392 of the Income-tax Act, 2025 (section 192 of the Income-tax Act, 1961) — TDS on salary payments
• Section 393(1) (section 194A of the Income-tax Act, 1961) — TDS on interest other than interest on securities (10%)
• Section 393(1) (Table, Sl. Nos. 6(i), 6(ii)(a) and 6(iii); section 194C of the Income-tax Act, 1961) — TDS on contractor payments (1% for individuals, 2% for companies)
• Section 393(1) (section 194H of the Income-tax Act, 1961) — TDS on commission or brokerage
• Section 393(1) (section 194-I of the Income-tax Act, 1961) — TDS on rent (10% for land/building, 2% for plant/machinery)
• Section 393(1) (Table, Sl. No. 6(iii); section 194J of the Income-tax Act, 1961) — TDS on professional and technical fees: 2% for fees for technical services and call-centre work, 10% otherwise, on a threshold of INR 50,000
• Section 393(1) (section 194-O of the Income-tax Act, 1961) — TDS on e-commerce operator payments (1%)
• Section 393(2) (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961) — TDS on payments to non-residents, at the rates in force, or the DTAA rate where that is lower
• Section 393 (section 196D of the Income-tax Act, 1961) — 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 397(2)(b)(i)(C) of the Income-tax Act, 2025 (section 206AA of the Income-tax Act, 1961). Where the payee is a non-resident, relief from this higher rate is now available only as may be prescribed under the Income-tax Act, 2025, so the earlier exemption route cannot be assumed to survive.

TDS on Cross-Border Payments (Section 393(2))

This is where foreign-owned companies need to pay close attention. Any payment to a non-resident is subject to TDS under section 393(2). 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 Forms 145 and 146 (formerly Forms 15CA and 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 138 (formerly Form 24Q) for salary TDS, Form 140 (formerly Form 26Q) for non-salary payments, Form 144 (formerly 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 130 (formerly 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 — 30% of the expense is disallowed under section 35(b)(i) of the Income-tax Act, 2025 (section 40(a)(ia) of the Income-tax Act, 1961) for payments to residents; the whole expense is disallowed under section 35(b)(ii) of the Income-tax Act, 2025 (section 40(a)(i) of the Income-tax Act, 1961) where TDS was not deducted on a payment to a non-resident
• Late deposit — Interest at 1.5% per month from date of deduction to date of deposit (section 398(3)(a) of the Income-tax Act, 2025; section 201(1A) of the Income-tax Act, 1961)
• Late filing of return — Late fee of INR 200/day under section 427(1) of the Income-tax Act, 2025 (section 234E of the Income-tax Act, 1961), capped at the TDS amount
• Penalty for incorrect return — INR 10,000 to INR 1,00,000 under section 461 of the Income-tax Act, 2025 (section 271H of the Income-tax Act, 1961)
• Non-issuance of TDS certificate — Penalty of INR 100/day under section 465 of the Income-tax Act, 2025 (section 272A(2) of the Income-tax Act, 1961)

The disallowance under section 35(b)(ii) is particularly painful. If your company pays INR 50 lakhs to the foreign parent without deducting TDS, you lose the deduction for the whole 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 393(2). "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 168 (formerly Form 26AS). This creates reconciliation problems.
• Not filing Form 144 for non-resident payments — Many companies file Form 140 for domestic payments but forget that payments to non-residents need a separate Form 144.

Practical Example

A Singapore-based company owns an Indian subsidiary in Chennai. The Indian company has 5 employees (salary TDS under section 392), pays rent of INR 3 lakhs/year for office space (section 393(1) — 10% TDS), engages a CA firm for INR 50,000/year (section 393(1) — 10% TDS), and pays management fees of SGD 20,000/quarter to the Singapore parent (section 393(2) — capped at 10% as fees for technical services under Article 12 of the India-Singapore DTAA where the make-available test is met, subject to the parent providing a TRC). Each month, the company deposits TDS by the 7th. Quarterly, it files Form 138 (salary), Form 140 (domestic non-salary), and Form 144 (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
• Forms 145 and 146 — 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.