What Every Startup Must Know: TDS Compliance That Can’t Be Ignored!

TDS is an important aspect of the income tax system which has been a talk of the town whether at the time of finance budget or the time of filing of the returns. As a startup grows, a lot of compliances needs to be taken care of and TDS is one of the most significant.

If you’re not careful with TDS deductions, payments and filings, you could end up facing fines, cash flow problems and even legal issues. This can be prevented as we are here.

This guide will break it all down for that you need to know about TDS, how it impacts your business while reducing the stress of tax-related tasks. Let’s get started!

1. What is TDS and why is it Important for My Startup?

TDS (Tax Deducted at Source) is a system where a certain amount of tax is deducted from a payment at the time it’s made, instead of paying it all at once later while filing for returns. For example, when you pay a salary to an employee or a fee to a contractor, you have to deduct a portion of that payment as tax and send it to the government.

Why is it important? As a startup, you must comply with TDS regulations to avoid fines or legal complications. Moreover, TDS can impact your cash flow as it avoids a large lump sum tax payment at the end of the financial year and ultimately, affecting your business’s credibility.

Expenditures are disallowed in income tax laws if TDS has not been paid and deposited within limits.

2. How does TDS impact the cash flow of a startup?

Cash flow management is one of the most sensitive tasks for any startup and understanding with help of income tax guide how TDS impacts it can help you plan more effectively.

A. Upfront Deduction Reduces Immediate Cash Outflow:

TDS is deducted at the time of payment, which means that your startup pays a reduced amount upfront. For example, if you’re paying ₹ 10,00,000 to a contractor and TDS is 1%, you only pay ₹ 9,90,000 to the contractor, with ₹ 10,000 going directly to the government.

B. Improves Tax Planning and Prevents Lump-Sum Payments:

TDS spreads the tax payment over the course of the year, avoiding a large lump-sum tax payment at year-end. This helps startups manage their finances better and reduces the chances of cash flow crises when the full tax bill is due.

C. Potential Tax Credit Helps in Reducing Final Liability:

TDS deducted on the payments received by the startup acts as an advance payment towards your final tax liability. This helps reduce the amount of tax your startup needs to pay at the end of the year and may even result in a refund if your TDS deductions exceed your tax liability.

3. What are the key TDS compliance requirements for startups?

1. Obtain TAN:

Your startup must obtain a TAN (Tax Deduction and Collection Account Number) under Section 203A to deduct from the NSDL website andregister on TRACES portal. TAN must be quoted on all TDS-related documents, including returns and challans.

2. Deduct TDS at the Correct Rate

Deduct TDS at the correct rates based on the payment type (like, salary, contractor fees, rent).

Section	Type of Payment	TDS %	Threshold Limit
194C	Payments to Contractors	1% (Individual/HUF) 2% (Others)	₹ 30,000 (Single contract) ₹ 1,00,000 (Aggregate in a year)
192	Salaries	Income tax slabs As per New or Old Tax Regime
194J	Professional Fees	2% Technical Services 10% Professional Services, Non-Compete Fees & Royalty	₹ 30,000 (aggregate in a financial year)
194I	Rent Payments	10% (land, building, machinery) 2% (plant & machinery)	₹ 50,000 per month

3. Timely Remittance:

Deposit the deducted TDS to the government within 7 days of the end of the month (for March, by 30th April).

4. Quarterly TDS Returns:

File quarterly TDS returns (Form 24Q for salaries, Form 26Q for others) by the due dates of 31st July for Q1, 31st October for Q2, 31st January for Q3, and 31st May for Q4.

5. Issue TDS Certificates:

Issue Form 16 (for salary – annually) or Form 16A (for others – quarterly) to payees as proof of TDS deduction.

6. Correct PAN Details:

Assure the correct PAN details of payees to avoid higher TDS rates (20% under Section 206AA).

4. Can startups claim TDS deductions to reduce their tax liability?

Yes, startups can claim TDS deductions to reduce their tax liability as it has been duly paid to the authorities.

For instance, if your startup has received a few payments on which TDS has been deducted by the payer, you can use those TDS deductions as a credit while calculating your total tax liability at the end of the year.

It’s important to note that you cannot simply forget about the TDS payments made throughout the year. You must include them in your annual tax filing and ensure that the TDS credits are properly accounted for.

5. What are the penalties for non-compliance with TDS regulations for startups?

Failure to comply with TDS regulations can lead to significant penalties and interest charges. Below are the penalties for non-compliance to watch out for:

1. Interest on TDS non-compliance

• If TDS is not deduced, as per Section 201(1A), the startup will be charged 1% interest per month on TDS from the date it was deductible to the date it is finally deducted.
• If TDS is not paid on time, the startup will be charged 1.5% interest per month on the outstanding TDS amount from the due date until it’s paid.

2. Late Filing of TDS Returns

Under Section 234E, if the TDS returns are filed late, there will be a penalty of ₹ 200 per day until the return is filed, with a maximum penalty equal to the TDS amount.

3. Incorrect TDS Returns

Filing incorrect or false TDS returns could attract a penalty of ₹10,000 to ₹1,00,000 as per Section 271H, in addition to the late filing fee.

4. Failure to Issue TDS Certificates

If the startup fails to issue TDS certificates (such as Form 16/16A) to the payees, it can face penalties under Section 272A.

5. Failure to Furnish PAN Details

If a payee does not provide a PAN, TDS will be deducted at a higher rate of 20% instead of the normal rate, as per Section 206AA.

By making timely deductions (Ultimate Tax Checklist), payments, and filings, startups can avoid these costly penalties and maintain proper tax compliance.

6. How can a startup streamline its TDS filing process?

Managing TDS returns can be time-consuming, but with the right strategies, you can simplify the process and reduce errors:

• Use of Software: Taxation and accounting software can automate TDS calculations and recording.

• Outsource Tax Filing: If your startup lacks in-house expertise, consider outsourcing services TDS filing to income tax consultants filing service to avoids costly mistakes.

• Regularly Monitor TDS Payments: Set reminders to ensure timely TDS payments and keep track of deadlines.

• Hire a Dedicated Tax Manager: As your startup grows, consider hiring a full-time or part-time TDS consultant who can handle TDS obligations and is updated on dynamic tax laws.

Conclusion

TDS may seem complicated, but understanding its impact on your startup’s cash flow is crucial.

Using proper planning ahead, you can avoid penalties and guarantee smooth business operations. With the right partner like Master Brains, tools and strategies, you can streamline your TDS process and focus on growing your business to new heights.