TDS — Tax Deducted at Source

It is a rainy Thursday morning in Haldwani. Meera is checking the purchase register on her computer when Bisht Ji walks in, shaking water off his umbrella. "Sharma Sir, I need to pay my transporter — Rawat Transport — Rs 75,000 for last month's deliveries. Can you prepare the payment?" Sharma Sir looks up from his newspaper. "Of course. But Bisht Ji, you know we have to deduct TDS before paying, right?" Bisht Ji sighs. "Haan, haan, that TDS headache again. Meera beti, do you know about TDS?" Meera shakes her head. Sharma Sir smiles. "Perfect timing. Let's learn."

What is TDS?

Sharma Sir puts down his tea and picks up a marker.

"Meera, let me ask you something. When does the government collect income tax from a person?"

Meera thinks. "At the end of the year? When they file their return?"

"Correct — that is the normal way. But think about it. If the government waits a whole year, what happens? Some people might spend all their money. Some might hide it. Some might simply not pay. The government has to chase lakhs of people."

He draws a simple picture on the whiteboard:

"So the government came up with a clever idea. Instead of waiting till the end of the year, they said — collect a small part of the tax at the time of payment itself."

"Imagine a river. The government does not wait for all the water to reach the sea. It puts a small dam upstream and collects some water along the way. That is TDS."

TDS = Tax Deducted at Source. When you pay someone, you cut (deduct) a small percentage as tax and send it directly to the government. The person receiving the payment gets the remaining amount.

"So the tax is collected at the source — at the point where the money is paid. That is why it is called Tax Deducted at Source."

A Real-Life Example

Sharma Sir makes it even simpler.

"Bisht Ji has to pay Rs 75,000 to Rawat Transport for delivery charges. Under the TDS rules, Bisht Ji must deduct a small percentage — say 2% — as tax before paying."

Let us see the numbers:

"Bisht Ji pays Rs 73,500 to the transporter. The remaining Rs 1,500 goes to the government as tax."

"But is that fair?" Meera asks. "The transporter earned Rs 75,000 but only got Rs 73,500."

"Good question!" Sharma Sir says. "The transporter is not losing money. When Rawat Transport files their income tax return at the end of the year, they can show that Rs 1,500 was already paid on their behalf. It gets adjusted against their total tax. Think of it as an advance payment of tax."

"So TDS is like... paying tax in instalments?"

"Exactly. Small amounts collected throughout the year, instead of one big amount at the end."

Who is the Deductor? Who is the Deductee?

There are two parties in every TDS transaction:

In our example:

• Deductor = Bisht Traders (they are making the payment)
• Deductee = Rawat Transport (they are receiving the payment)

"Meera, remember this," Sharma Sir says. "The deductor has a big responsibility. They must:

1. Deduct the correct TDS amount
2. Deposit it with the government on time
3. File a TDS return (a report telling the government how much TDS they deducted and from whom)
4. Give a TDS certificate to the deductee"

"If the deductor forgets to deduct TDS, or deducts it but does not deposit it, there are penalties and interest charges."

TAN — Tax Deduction Account Number

"Before a business can deduct TDS, it needs a special number from the Income Tax Department," Sharma Sir explains. "This is called TAN."

TAN = Tax Deduction and Collection Account Number. It is a 10-character alphanumeric code. Every person who deducts TDS must have a TAN.

"Bisht Traders has a TAN. It looks something like this: DELB12345C."

"Without a TAN, you cannot deposit TDS with the government. You cannot file TDS returns. It is mandatory."

"Is TAN the same as PAN?" Meera asks.

"No. PAN (Permanent Account Number) is your personal tax identity — every taxpayer has one. TAN is specifically for people who deduct TDS. A business might have both: PAN for its own income tax and TAN for the TDS it deducts from others."

Common TDS Sections and Rates

"Now comes the important part," Sharma Sir says. "TDS is not one flat rate for everything. Different types of payments have different TDS rates. The Income Tax Act has different sections for different payment types."

He writes the most common ones on the whiteboard:

The Sections You Must Know

"These five sections cover probably 80% of the TDS work you will do in a small CA office," Sharma Sir says.

Let us understand each one.

Section 194C — Contractor Payments

This is the most common one for businesses like Bisht Traders.

"When a business pays a contractor — a transporter, a labour contractor, a printing press, a caterer — for any work done under a contract, TDS must be deducted under section 194C."

Rates:

• 1% if the contractor is an individual or HUF (Hindu Undivided Family)
• 2% if the contractor is a company or firm

Threshold: TDS is required only if:

• A single payment exceeds Rs 30,000, OR
• Total payments to that contractor during the year exceed Rs 1,00,000

"Bisht Ji's transporter bill is Rs 75,000 — that is above Rs 30,000. So TDS must be deducted."

"If Rawat Transport is a proprietorship (one person), the rate is 1%. If it is a firm or company, the rate is 2%."

Section 194J — Professional Fees

"When Bisht Ji pays Sharma Sir's CA firm for doing his audit or GST filing, TDS is deducted under 194J."

Rate: 10%

Threshold: TDS is required only if the total payment during the year exceeds Rs 30,000.

"So if Bisht Ji pays us Rs 50,000 for the full year's work, he must deduct 10% = Rs 5,000 as TDS."

Meera's eyes go wide. "He deducts tax from YOUR fees, Sir?"

Sharma Sir laughs. "Yes! Even CA's pay tax, Meera. That is the beauty of TDS — it catches everyone."

Section 194H — Commission or Brokerage

"If Bisht Ji has a sales agent who earns commission for finding customers, and the commission is, say, Rs 40,000 in a year, Bisht Ji must deduct 5% TDS."

Rate: 5%

Threshold: Payment exceeding Rs 15,000 in a year.

Section 194A — Interest

"If a business pays interest on a loan — say Bisht Ji borrowed money from a friend and pays interest — TDS at 10% must be deducted."

Rate: 10%

Threshold: Rs 5,000 per year (for non-bank payers). Banks have a separate threshold of Rs 40,000.

Section 194I — Rent

"If a business pays rent for an office, shop, warehouse, or land, and the annual rent exceeds Rs 2,40,000, TDS must be deducted."

Rate: 10% for building, furniture, land; 2% for plant and machinery.

Threshold: Annual rent exceeding Rs 2,40,000.

"Bisht Ji pays Rs 15,000 per month rent for his godown. That is Rs 1,80,000 per year — below the limit. So no TDS on rent for him. But if he moves to a bigger warehouse at Rs 25,000 per month, TDS will apply."

Summary Table of Thresholds

Meera makes a neat table in her notebook:

"Keep this table handy, Meera," Sharma Sir says. "You will refer to it almost every day."

When is TDS Deposited with the Government?

"After you deduct TDS, you must deposit it with the government. There are deadlines."

"So if Bisht Ji deducts TDS today — let's say in October — the TDS must be deposited with the government by 7th November."

"What if he is late?" Meera asks.

"Interest at 1.5% per month. And if he does not deduct at all, interest at 1% per month from the date it should have been deducted. These penalties add up quickly."

TDS Return — Form 26Q

"Every quarter, the deductor must file a TDS return. This is a report that tells the government: here is a list of all the people I paid, how much I paid them, and how much TDS I deducted."

"The form used for non-salary TDS is Form 26Q. For salary TDS, it is Form 24Q."

"After filing the return, the deductor must issue a TDS certificate to each deductee. This certificate is called Form 16A (for non-salary) or Form 16 (for salary). It shows how much TDS was deducted."

"The deductee uses this certificate to claim credit in their own income tax return."

Meera draws the complete flow in her notebook:

Deductor pays someone → Deducts TDS → Deposits TDS with government by 7th of next month → Files quarterly return (26Q) → Issues TDS certificate (16A) to deductee → Deductee claims credit in their return.

Setting Up TDS in ERPLite

Negi Bhaiya takes over. "Okay Meera, enough theory. Let me show you how TDS works in ERPLite."

Step 1: Enable TDS in Company Settings

"First, we need to make sure TDS is turned on for Bisht Traders."

1. Open ERPLite and go to Settings > Company Settings
2. Find the section called Tax Deduction at Source (TDS)
3. Toggle Enable TDS to ON
4. Enter the company's TAN number: DELB12345C
5. Click Save

Step 2: Set Up TDS Sections

"Now we need to tell ERPLite which TDS sections we use."

1. Go to Masters > TDS Sections
2. Click + New Section
3. Fill in the details:

For section 194C:

4. Click Save
5. Repeat for 194J, 194H, 194A, and 194I with their respective rates and thresholds.

"ERPLite comes with common TDS sections pre-loaded," Negi Bhaiya says. "But you should always check that the rates are correct. Sometimes the government changes rates in the Budget."

Step 3: Link TDS Section to a Vendor

"Now we need to tell ERPLite that Rawat Transport falls under section 194C."

1. Go to Masters > Vendors
2. Open Rawat Transport
3. In the Tax Information tab, set:
   • PAN: ABCPR1234F
   • TDS Applicable: Yes
   • TDS Section: 194C
   • Entity Type: Individual (so rate will be 1%)
4. Click Save

"Now, every time we create a purchase bill for Rawat Transport, ERPLite will automatically calculate TDS."

Meera Processes Bisht Ji's Transporter Payment

"Time to do this for real," Negi Bhaiya says. "Bisht Ji's transporter bill is right here. Let's go."

Step 4: Create the Purchase Bill with TDS

1. Go to Transactions > Purchase Bill > + New

2. Fill in the header:

   • Vendor: Rawat Transport
   • Bill Number: RT/2025-26/087
   • Bill Date: 15-Oct-2025
   • Due Date: 30-Oct-2025

3. Add the line item:

   • Description: Transportation charges for October 2025
   • Amount: Rs 75,000

4. ERPLite automatically shows the TDS section:

Wait — Meera notices something. "Negi Bhaiya, I calculated 2% earlier with Sharma Sir. That was Rs 1,500. But ERPLite shows 1% = Rs 750. Which is correct?"

Negi Bhaiya checks. "The vendor is set as Individual, so the rate is 1%. If Rawat Transport were a firm or company, it would be 2%. The rate depends on the entity type of the vendor. Sharma Sir used 2% as an example to make the math easy. Let me check with Bisht Ji."

He calls Bisht Ji. Rawat Transport is actually a partnership firm. So the rate should be 2%.

Negi Bhaiya updates the vendor master:

• Entity Type: Firm

Now ERPLite recalculates:

5. The bill summary now shows:

6. Click Save and then Approve.

Step 5: Check the Accounting Entries

Meera clicks on View Journal Entry to see what ERPLite recorded behind the scenes:

"See how it balances?" Negi Bhaiya says. "The full Rs 75,000 is an expense. But the vendor is only owed Rs 73,500. The remaining Rs 1,500 is a liability — we owe it to the government."

Meera traces the logic:

• Transportation Charges Debit = We incurred an expense of Rs 75,000 (the full bill amount)
• Rawat Transport Credit = We owe the vendor only Rs 73,500
• TDS Payable Credit = We owe the government Rs 1,500

"When we pay the vendor, we pay Rs 73,500. When we deposit TDS, the Rs 1,500 liability gets cleared."

Step 6: Make the Payment

1. Go to Transactions > Payment > + New
2. Select Vendor: Rawat Transport
3. The outstanding amount shows Rs 73,500 (not Rs 75,000 — because TDS was already deducted)
4. Pay Rs 73,500 via NEFT
5. Click Save and Approve

Step 7: Deposit TDS with the Government

"This Rs 1,500 must be deposited by 7th November," Negi Bhaiya reminds Meera.

1. Go to Compliance > TDS > Deposit TDS
2. ERPLite shows all pending TDS amounts:

3. Select the entry and click Generate Challan
4. ERPLite generates a challan (payment form) that Bisht Ji uses to pay the TDS online through the government portal (OLTAS/e-Pay Tax)
5. After payment, enter the BSR Code and Challan Serial Number in ERPLite

TDS on Sharma Sir's Own Fees

Sharma Sir chuckles. "Meera, now process TDS on my fees too. Bisht Ji pays our firm Rs 60,000 per year for accounting and GST services. What section?"

Meera thinks. "Professional fees... that is section 194J. Rate is 10%. Threshold is Rs 30,000 per year. Bisht Ji is paying Rs 60,000 — above the threshold. So TDS = Rs 6,000."

"Correct! Go ahead and set it up."

Meera creates the purchase bill:

Sharma Sir nods approvingly. "Even I am not above the tax system, Meera. No one is."

Common Mistakes to Avoid

Sharma Sir lists the mistakes he has seen in thirty years:

1. Not deducting TDS at all — "I didn't know" is not an excuse. Interest at 1% per month from the date of deduction.

2. Deducting but not depositing — This is the worst. Interest at 1.5% per month, plus penalty. The expense may be disallowed.

3. Wrong section or rate — If you use 194C when it should be 194J, the TDS return will have errors. Always check the nature of the payment.

4. Ignoring thresholds — TDS is only required above certain limits. Deducting on small amounts creates unnecessary work.

5. Late filing of return — Late fee of Rs 200 per day (maximum = TDS amount). So if TDS is Rs 1,500 and you are 10 days late, you pay Rs 2,000 late fee — more than the TDS itself!

6. Not issuing TDS certificate — The deductee needs their Form 16A. Penalty for not issuing: Rs 100 per day per certificate.

The Deductee's Side — Checking Form 26AS

"One more thing," Sharma Sir says. "The deductee — like Rawat Transport — can check if the TDS deposited by Bisht Ji actually reached the government."

"How?"

"Through Form 26AS. This is a statement available on the Income Tax website. It shows all TDS credits for a PAN. Rawat Transport can log in, check their 26AS, and see: 'Yes, Bisht Traders deducted Rs 1,500 under 194C and deposited it.' If it does not show there, there is a problem."

"This is important for us too. When we prepare Rawat Transport's income tax return, we check their 26AS to claim TDS credit."

Quick Recap — Chapter 23

What is TDS? Tax Deducted at Source — a small percentage of tax cut at the time of payment and deposited with the government.

Who is the Deductor? The person making the payment (e.g., Bisht Traders).

Who is the Deductee? The person receiving the payment (e.g., Rawat Transport).

Key Sections:

• 194C — Contractor payments (1% individual, 2% firm/company)
• 194J — Professional fees (10%)
• 194H — Commission (5%)
• 194A — Interest (10%)
• 194I — Rent (10%)

TAN is mandatory for deductors.

Deposit deadline: 7th of the next month.

TDS Return: Form 26Q filed quarterly.

TDS Certificate: Form 16A issued to each deductee.

In ERPLite: Set up TDS sections in Masters, link to vendors, and TDS auto-calculates on purchase bills.

Practice Exercise — Try This Yourself

Exercise 1: Identify the correct TDS section and calculate TDS for each payment:

Answers:

1. 194C, 1%, Rs 400 (above Rs 30,000 single bill threshold)
2. 194J, 10%, Rs 5,000 (above Rs 30,000 annual threshold)
3. 194H — but No TDS, because Rs 8,000 is below the Rs 15,000 threshold
4. 194I, 10%, Rs 2,500 per month (annual rent = Rs 3,00,000, above Rs 2,40,000 threshold)
5. 194C — but No TDS, because single bill Rs 20,000 is below Rs 30,000 threshold and it is the only bill this year (below Rs 1,00,000 annual)

Exercise 2: Write out the journal entry for payment #1 above (labour contractor, Rs 40,000, TDS 1%).

Exercise 3: Bisht Ji deducted TDS of Rs 1,500 on 15th October but forgot to deposit it until 15th December. How many months of interest is charged? At what rate? Calculate the interest amount.

(Answer: 2 months late. Interest at 1.5% per month = Rs 1,500 x 1.5% x 2 = Rs 45.)

Fun Fact

Did you know that the TDS system was introduced in India way back in 1961 with the Income Tax Act? The idea was borrowed from the British "Pay As You Earn" (PAYE) system. Today, TDS is the single largest source of income tax collection for the Indian government. In 2023-24, TDS collections crossed Rs 8 lakh crore — that is more than the entire GDP of many small countries! Every time you deduct TDS, even Rs 750 from a transporter's bill, you are part of this massive system that keeps the country running.

And here is something that might make you smile: even Bollywood actors and cricket players have TDS deducted from their fees. So the next time you see a superstar on screen, know that someone, somewhere, did exactly what Meera just learned — deducted TDS from their payment.

Next chapter, Meera faces a different challenge — processing salaries for the office staff. Payroll, PF, ESIC — it's all new. Let's find out how she handles it.