Understanding TDS Rates, Threshold Limits & Statutory Compliance
Tax Deducted at Source (TDS) is a fundamental mechanism of income tax collection in India, governed by Chapter XVII-B of the Income-tax Act. Every person or entity making specified payments — such as salary, contractor payments, professional fees, rent, interest, or commission — above prescribed threshold limits is statutorily required to deduct tax at source at the notified rate and deposit it into the Central Government account.
The Finance Act 2024 and Budget 2025 introduced major rationalization in TDS provisions for FY 2026-27. Rates for key non-salary sections were significantly reduced to alleviate cash flow burdens for small businesses and professionals: Section 194H (commission/brokerage) rate was reduced from 5% to 2%, Section 194IB (rent by individuals) from 5% to 2%, Section 194M (contractor/professional payments by individuals) from 5% to 2%, and Section 194O (e-commerce operators) from 1% to 0.1%. Meanwhile, Section 194C (contractors) remains at 1% for Individual/HUF payees and 2% for corporate payees, and Section 194J maintains a 2% rate for technical services and 10% for professional services.
A critical compliance requirement is Section 206AA: if the payee (deductee) fails to furnish a valid Permanent Account Number (PAN) to the deductor, TDS must be deducted at a mandatory floor rate of 20% (or the applicable statutory rate, whichever is higher). Additionally, under Section 206AB, higher TDS rates apply to specified persons who have not filed income tax returns for the preceding financial year. Deductors must verify PAN validity and non-filer status on the Income Tax TRACES portal prior to releasing payments.
Payees facing genuine cash flow constraints or lower taxable income can apply for a Lower or Nil TDS Deduction Certificate under Section 197 by submitting Form 13 to their Assessing Officer online via TRACES. Once issued, the certificate specifies a reduced rate, valid threshold amount, and validity period, enabling the deductor to deduct tax at the certified lower rate. Alternatively, senior citizens and eligible individuals can submit self-declarations in Form 15G or Form 15H under Section 197A for nil deduction on interest and dividend income.
All deducted TDS must be deposited with the government using Challan ITNS 281 on the e-Pay Tax portal by the 7th of the following month (with an extension to 30th April for March deductions). Deductors must also file quarterly TDS returns — Form 24Q for salary, Form 26Q for domestic non-salary payments, Form 27Q for non-resident payments, Form 26QB for Section 194IA property TDS, Form 26QC for Section 194IB rent, and Form 26QD for Section 194M — and issue Form 16/16A TDS certificates to deductees within prescribed deadlines.
Worked Example: Vendor Payments & TDS Calculation FY 2026-27
A private limited company makes payments to three vendors in FY 2026-27. Here is the statutory breakdown of TDS deductions, net payables, and return filings:
Frequently Asked Questions (FAQs)
What is the penalty if a vendor does not provide a PAN card for TDS?
Under Section 206AA of the Income Tax Act, if the deductee fails to provide a valid PAN, the deductor must deduct tax at the higher rate of 20% (or the rate specified in the relevant section, whichever is higher). For Section 194Q (purchase of goods) and Section 194O (e-commerce), the no-PAN rate is 5%.
What are the latest TDS rate reductions introduced in FY 2026-27?
Finance Act 2024 reduced TDS rates for several non-salary sections to 2%: Section 194H (commission/brokerage) dropped from 5% to 2%, Section 194IB (rent by individuals) dropped from 5% to 2%, Section 194M (personal contractor payments) dropped from 5% to 2%, and Section 194O (e-commerce operator TDS) dropped from 1% to 0.1%.
What is the due date for depositing TDS with the Central Government?
TDS deducted during any month must be deposited by the 7th day of the following month (e.g., TDS deducted in May must be paid by June 7th). The only exception is TDS deducted for the month of March, which can be deposited up to April 30th.
When is Form 26QB required instead of a regular quarterly TDS return?
Form 26QB is a challan-cum-statement used for deducting TDS under Section 194IA on the purchase of immovable property valued at ₹50 Lakhs or more. Buyer does not need a TAN number and must file Form 26QB within 30 days from the end of the month of payment.
Can a deductor use Input Tax Credit (ITC) or GST credits to pay TDS?
No. TDS is an Income Tax obligation and must be deposited in cash via the e-Pay Tax portal. GST Input Tax Credit cannot be set off against Income Tax TDS under any circumstances.
How can a payee obtain a Lower TDS Certificate under Section 197?
The payee must submit Form 13 online on the TRACES portal along with projected financial statements, income tax returns of past 3 years, and justification for lower tax liability. If satisfied, the Assessing Officer issues a certificate specifying a reduced TDS rate and monetary limit.
What is the interest rate charged for late deduction or late payment of TDS?
Under Section 201(1A), interest for delayed deduction of TDS is charged at 1% per month (or part of a month) from the date tax was deductible to the date of actual deduction. Interest for delayed deposit of deducted TDS is charged at 1.5% per month from the date of deduction to the date of payment.