TDS on Vendor Payments: A Business Owner's Guide

TDS on vendor payments is one of the most routine yet error-prone compliance areas for Indian businesses. When you pay a contractor, a professional, a landlord or a commission agent, income-tax law often requires you to deduct tax at source (TDS) before paying, deposit it with the government, file quarterly returns and issue certificates. Miss a deduction and part of the expense can be disallowed, with interest on top. This guide explains the concepts, the common payment categories with typical rates and thresholds, how GST is treated, deadlines and worked examples. Note that the Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered sections; we use concept names and mention the old section numbers for reference.

How TDS works in four steps

1. Deduct tax at the specified rate at the time of credit to the vendor's account or payment, whichever is earlier.
2. Deposit the tax with the government by the due date, using your TAN.
3. File a quarterly TDS statement (Form 26Q for resident non-salary payments under the old numbering) with deductee-wise details.
4. Issue a TDS certificate (Form 16A under the old numbering) to the vendor, who claims the credit in their own return.

You need a TAN to deduct TDS. Most businesses with turnover above the tax audit limit, and all companies and firms making such payments, are deductors. Individuals and HUFs below the audit threshold are excluded from many categories.

Common vendor payment categories

The table below summarises common categories with rates and thresholds as they stood for FY 2025-26 after the Budget 2025 changes. The new Act broadly carries these forward, but always verify current rates, thresholds and section references on the income-tax portal before applying them.

Payment	Formerly section	Typical rate	Threshold (indicative)
Contractors and sub-contractors (including labour, transport, catering, advertising contracts)	194C	1% for individuals and HUFs; 2% for others	₹30,000 single payment or ₹1,00,000 aggregate in a year
Fees for professional services	194J	10%	₹50,000 in a year
Fees for technical services, call centres	194J	2%	₹50,000 in a year
Rent of land, building or furniture	194-I	10%	₹50,000 per month or part of a month
Rent of plant and machinery	194-I	2%	₹50,000 per month or part of a month
Commission or brokerage	194H	2%	₹20,000 in a year
Purchase of goods (buyer with turnover above ₹10 crore)	194Q	0.1% of amount above ₹50 lakh	₹50 lakh purchases from a seller in a year
Interest other than on securities (non-bank payers)	194A	10%	₹10,000 in a year

If the vendor does not furnish a valid PAN, a higher rate (generally 20%) applies. Vendors can also obtain lower or nil deduction certificates, which you must honour for the amount and period stated.

TDS and GST: which amount to deduct on

Where the vendor's invoice shows GST separately, TDS is deducted on the amount excluding GST, as clarified by CBDT. Where GST is not shown separately, TDS applies to the full amount.

Example 1: contractor

A company pays a housekeeping contractor (a company) ₹1,00,000 plus 18% GST of ₹18,000. TDS at 2% on ₹1,00,000 = ₹2,000. Payment to the contractor: ₹1,18,000 minus ₹2,000 = ₹1,16,000.

Example 2: professional fees

A firm pays its CA ₹80,000 plus 18% GST of ₹14,400 for audit fees. Annual payments exceed ₹50,000, so TDS at 10% on ₹80,000 = ₹8,000. Payment: ₹94,400 minus ₹8,000 = ₹86,400.

Example 3: office rent

A business pays monthly rent of ₹60,000 plus GST for an office. Rent exceeds ₹50,000 per month, so TDS at 10% on ₹60,000 = ₹6,000 each month, or ₹72,000 for the year.

Example 4: purchase of goods

A distributor with turnover of ₹25 crore last year buys goods worth ₹80 lakh (excluding GST) from one supplier this year. TDS applies at 0.1% on the amount exceeding ₹50 lakh, that is 0.1% of ₹30 lakh = ₹3,000. If the seller is already collecting TCS on the same transaction, only one of the two applies, with TDS by the buyer taking priority.

Deadlines

Task	Usual due date
Deposit TDS deducted in April to February	7th of the following month
Deposit TDS deducted in March	30 April
Quarterly TDS statement	31 July, 31 October, 31 January and 31 May
Issue TDS certificates	Within 15 days of the due date of the quarterly statement

The cost of getting TDS wrong

Default	Consequence
Not deducting, or short deducting	Interest at 1% per month from the date it should have been deducted to the date of deduction; and 30% of the expense disallowed in computing business income (formerly section 40(a)(ia)) until TDS is deducted and paid
Deducting but depositing late	Interest at 1.5% per month from the date of deduction to the date of payment
Late filing of TDS statement	Fee of ₹200 per day until filed, capped at the TDS amount (formerly section 234E), plus possible penalty
Not issuing certificates	Penalty per day of default

Worked cost example

A company forgets to deduct TDS of ₹6,000 on a ₹60,000 rent payment made in July and deducts it only in October. Interest at 1% per month for 4 months (July to October, part months counted as full) is ₹240. If the company never deducted, 30% of ₹60,000, that is ₹18,000, would be disallowed as an expense, increasing taxable income. At a 25% effective tax rate, that is ₹4,500 of extra tax, in addition to the TDS exposure.

Building a TDS process for payables

1. Vendor master: capture PAN, vendor type (individual, company, firm), nature of payment and any lower deduction certificate.
2. Bill booking: apply the TDS category and rate on the bill, not at payment time, so that TDS is deducted on credit.
3. Threshold tracking: track aggregate payments per vendor per category so TDS starts when thresholds are crossed.
4. Monthly deposit: generate challans by the 7th.
5. Quarterly return: reconcile deductions, challans and vendor details before filing.
6. Certificates: download and send them to vendors on time.
7. Annual review: reconcile TDS payable ledgers, Form 26AS or AIS of vendors where disputes arise, and update rates for the new year.

Correcting TDS mistakes

Errors happen: a wrong PAN, a payment classified under the wrong category, or a challan mapped to the wrong quarter. Corrections are made by filing a correction statement for the relevant quarterly return through the TRACES portal, after which revised certificates can be issued. Fix errors quickly, because vendors see their TDS credits in their tax credit statements and will chase you if amounts are missing or attributed to the wrong PAN. Interest for short deduction or late payment, if any, should be paid before filing the correction.

Year-end provisions and TDS

At year end, businesses often book provisions for expenses such as audit fees, consultancy or rent where the bill has not yet arrived. If the provision is credited to the vendor's account, TDS applies at that point. If it is booked only as a general provision without crediting the vendor, practice varies and you should take advice. A safe approach is to identify large year-end provisions, determine whether the payee is known, and deduct TDS where the amount is credited to a specific vendor, depositing it by 30 April. This avoids disallowance of the expense in the year it is claimed.

TDS for vendors: the receiving side

If you are the vendor, TDS deducted by customers is your tax credit. Book it as TDS receivable, check it in Form 26AS or AIS every quarter, and chase customers who deducted but did not deposit or file. Unclaimed TDS is money lost. GST TDS deducted by government customers is different and goes to your GST cash ledger, as explained in our guide to TDS under GST.

Common mistakes

• Deducting TDS on the GST component when GST is shown separately.
• Missing thresholds because payments are spread across months.
• Wrong category: treating professional fees as contract payments, or the reverse.
• Not applying the higher rate for vendors without PAN.
• Deducting on payment instead of on credit, when the bill was booked earlier.
• Ignoring TDS on year-end provisions for expenses credited to vendor accounts.

How Fininvo helps

Fininvo ERP applies TDS automatically based on vendor and transaction type, considering the section and PAN availability, generates quarterly TDS returns and certificates, and reconciles with Form 26AS and AIS. See tax compliance, accounting and pricing.

This is general information, not tax advice. The Income-tax Act, 2025 changed section numbers and may change rates or thresholds; consult your CA before applying any rate.

Frequently Asked Questions

Should TDS be deducted on the GST amount?

No, if GST is shown separately on the vendor's invoice. TDS is deducted on the value excluding GST. If GST is not shown separately, TDS applies to the full amount.

When should TDS be deducted: on booking the bill or on payment?

At the time of credit to the vendor's account or payment, whichever is earlier. Most businesses deduct when booking the bill.

What if a vendor has no PAN?

A higher rate, generally 20%, applies. Ask vendors for PAN during onboarding.

Can I claim the expense if I did not deduct TDS?

Part of the expense (30% under the earlier law) is disallowed in the year until TDS is deducted and paid. It is allowed in the year in which you deduct and pay.

Is TDS on vendor payments the same as GST TDS?

No. Income-tax TDS applies to many private businesses; GST TDS applies mainly to government bodies and notified persons and works differently.