What is TDS?

Tax Deducted at Source (TDS) is a mechanism introduced by the Indian Income Tax Department where the person making specified payments (such as salaries, professional fees, or rent) is required to deduct a certain percentage of tax "at the source" before making the payment to the recipient. The deducted amount must then be deposited with the central government on behalf of the recipient. For a startup, TDS is a frequent and critical compliance obligation. Common TDS categories include Section 192 (salary), Section 194J (professional or technical fees), and Section 194-I (rent). The startup (the "deductor") is responsible for obtaining a Tax Deduction and Collection Account Number (TAN), calculating the correct amount to deduct based on the applicable rates, depositing the tax by the 7th of the following month, and filing quarterly TDS returns. Failure to comply with TDS rules can lead to significant penalties, interest, and the disallowance of the entire expense for corporate tax purposes, which can substantially increase the company's actual tax liability. For founders, implementing a systematic process for tracking payments and deducting TDS is crucial for ensuring the business remains in good standing with the tax authorities and avoids the "compliance trap" of unexpected tax demands during an audit. It also involves issuing TDS certificates (Form 16/16A) to recipients.