Updated for FY 2026-27 (AY 2027-28).

TDS Compliance Steps for Small Companies Paying Salaries, Contractors and Professionals

Small companies often overlook the exact thresholds and deposit dates for Tax Deducted at Source (TDS) under sections 192, 194C and 194J. Missing even one deadline can trigger interest penalties. Clear routines for deduction, deposit and quarterly filing reduce both penalties and follow-up queries from the assessing officer.

Section 192: Deducting TDS on Salary Payments

A small company must deduct TDS on salary when the employee’s estimated total income for the year exceeds the basic exemption limit. For FY 2026-27, the default new tax regime gives a standard deduction of ₹75,000 and a rebate under section 87A makes tax nil up to a total income of ₹12 lakh. To calculate monthly TDS, estimate the employee's annual tax using the applicable slabs, divide the total by twelve, and deduct that amount from their monthly salary. You should still collect Form 12BB declarations for any claims, even though the new regime does not allow deductions like 80C or 80D.

Example: an employee receives an annual salary of ₹8,50,000. After the ₹75,000 standard deduction, the taxable income is ₹7,75,000. Tax on this amount under the new regime is ₹18,750 (5% on the income between ₹4 lakh and ₹7.75 lakh). A 4% Health and Education Cess is added, which is ₹750 (4% of ₹18,750). The total tax liability is ₹19,500. Monthly TDS is therefore ₹19,500 ÷ 12 = ₹1,625.

Section 194C: TDS on Payments to Contractors

Section 194C applies when a company pays any contractor or sub-contractor for work. The threshold is ₹30,000 for a single payment or ₹1,00,000 in aggregate during the financial year. The rate is 1% for individuals and Hindu Undivided Families (HUFs) and 2% for other entities. The company must deduct TDS at the time of crediting the expense to the contractor's account or at the time of payment, whichever is earlier.

Journal entry when crediting a contractor’s bill of ₹1,20,000 (assuming the contractor is a company):

Section 194J: TDS on Professional and Technical Fees

Section 194J covers fees for professional services, technical services, royalty and non-compete agreements. The threshold is ₹50,000 in a financial year per payee. The rate is 10% for most professional fees and 2% for technical services. TDS should be deducted when the expense is booked or when the payment is made, whichever is earlier.

For example, a small company paying ₹75,000 to a chartered accountant for audit work deducts ₹7,500 (10%) and pays the net amount of ₹67,500.

Depositing TDS With the Government

TDS deducted in a month must be deposited with the government by the prescribed due date in the following month, using the appropriate challan. The due date for TDS deducted in March is typically at the end of April. Always keep the challan identification number (CIN) from the bank receipt, as it is required when filing the quarterly return. For specific dates and challan details, check with your CA.

Preparing and Filing Quarterly TDS Returns

Salary deductions are reported in Form 24Q and all other specified deductions (like 194C and 194J) go in Form 26Q. Both returns are filed quarterly. The return contains deductee details, PAN, amount paid, TDS deducted and challan particulars. Late filing attracts a per-day penalty, which can become substantial. Consult your CA to ensure you file before the specific due dates for each quarter.

Maintaining Records and Reconciling TDS

It is good practice to reconcile the TDS amounts in your books with the entries in Form 26AS, which is the consolidated tax statement available on the income-tax portal. Differences can arise from incorrect PANs or challan mapping. Addressing these issues promptly by making corrections helps avoid future notices. Retain original invoices, payment vouchers and other supporting documents for the period prescribed under the Income Tax Act.

Doing this in FlipAccounts

When you record a bill or salary payment in FlipAccounts, you can tag it for TDS. The system keeps track of all such payments. At the end of each period, navigate to the Reports menu to generate TDS summaries. These summaries provide the consolidated details of deductions needed for your tax advisor to prepare and file the quarterly Form 24Q and 26Q returns.

What to do this week

• List every vendor paid more than ₹30,000 in a single bill since 1 April and check if TDS was deducted.
• Calculate the estimated TDS on salaries for the current month using the appropriate tax regime for each employee.
• Log into the income-tax portal, download Form 26AS for the previous quarter and compare the TDS entries with your accounting records.

Frequently asked questions

What happens if TDS is deposited one day late?

Interest is charged for every month or part of a month from the date of deduction to the date of deposit. This interest is a penalty and cannot be claimed as a business expense. Check with your CA for the current applicable interest rate.

Can a small company avoid TDS by splitting one invoice into two smaller ones?

No. The aggregate limit of ₹1,00,000 for section 194C and ₹50,000 for section 194J is checked for the full financial year for each vendor. Splitting invoices does not remove the obligation to deduct TDS once the total payments in the year cross the threshold.

Is a proprietorship required to deduct TDS under these sections?

A proprietorship is required to deduct TDS under sections like 194C and 194J only if its business turnover in the preceding financial year exceeded the tax audit threshold (e.g., ₹1 crore). A company must deduct TDS regardless of its turnover.

How does a company correct an error after filing the quarterly return?

Correction returns can be filed to rectify errors. Your tax advisor can guide you on the process for preparing and submitting a correction file through the designated government portal.

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