Library / Income-tax Act, 2025: The Professional's Master Guide

35. TDS and TCS (Sections 392 to 397)

More than 60 sections (192 to 194T and 195) are now in three sections with tables.

Section	Covers
392	TDS on salary (old 192)
393(1)	TDS on payments to residents (table): contractor, professional, rent, commission, interest, dividend, property, partners and so on
393(2)	TDS on payments to non-residents (old 195 and related)
393(3)	TDS on payments to any person, e.g. lottery and game winnings
393(6)	Declarations for no deduction (Form 121, old 15G/15H), now also through depositories
394	TCS (old 206C)
395	Lower or nil deduction certificate (old 197), now applied for electronically
397	Deposit of tax, statements and certificates

Each entry has a payment code (in the 1001 to 1067 range). Challans and statements for payments on or after 1 April 2026 must use these codes; quoting 194J or 194C can cause validation errors.

35.1 Common TDS rates for Tax Year 2026-27

Nature of payment	Old section	Threshold	Rate
Contractor	194C	Single bill above Rs. 30,000 or yearly total above Rs. 1,00,000	1% individual or HUF; 2% others
Professional fees	194J	Rs. 50,000 a year	10%
Technical services, call centre, film royalty	194J	Rs. 50,000 a year	2%
Commission or brokerage	194H	Rs. 20,000 a year	2%
Rent of land, building, furniture	194-I	Rs. 50,000 a month	10%
Rent of plant and machinery	194-I	Rs. 50,000 a month	2%
Rent paid by individuals not under audit	194-IB	Rs. 50,000 a month	2%
Interest (bank, co-operative, post office)	194A	Rs. 50,000 (Rs. 1,00,000 seniors)	10%
Other interest	194A	Rs. 10,000	10%
Dividend	194	Rs. 10,000	10%
Purchase of immovable property	194-IA	Rs. 50 lakh or more	1%
Purchase of goods	194Q	Above Rs. 50 lakh from a seller (buyer turnover above Rs. 10 crore)	0.1% on excess
Payments to partners	194T	Rs. 20,000 a year	10%
Benefit or perquisite of business	194R	Rs. 20,000 a year	10%
Transfer of virtual digital asset	194S	As prescribed	1%
Lottery, crossword, game show	194B	Rs. 10,000 per transaction	30%
No PAN of payee	206AA	Any	20% or rate, whichever higher

Illustration 132: Professional fees

An LLP pays audit fees of Rs. 80,000 to a CA firm. The Rs. 50,000 threshold is crossed, so TDS at 10% applies on the full Rs. 80,000: Rs. 8,000.

Illustration 133: Contractor with several bills

An individual contractor raises bills of Rs. 25,000 (May), Rs. 20,000 (July), Rs. 40,000 (September) and Rs. 30,000 (December).

Bill	Amount	Running total	TDS	Why
May	25,000	25,000	Nil	Below both limits
July	20,000	45,000	Nil	Below both limits
September	40,000	85,000	400	Single bill above Rs. 30,000; 1% of 40,000
December	30,000	1,15,000	750	Year total above Rs. 1 lakh; 1% on 30,000 plus earlier untaxed 45,000
Total	1,15,000		1,150	Equal to 1% of Rs. 1,15,000

Illustration 134: Property purchase

Anita buys a flat for Rs. 75 lakh from a resident. She deducts 1% = Rs. 75,000 and files Form 141 (old 26QB) within 30 days from the end of the month of deduction, then issues Form 132 (old 16B). No TAN is needed.

Illustration 135: Senior citizen FD

Mr. Iyer, 68, earns Rs. 90,000 interest from one bank. Below the Rs. 1,00,000 threshold, so no TDS. At Rs. 1,20,000, TDS of Rs. 12,000 applies unless he gives Form 121.

35.2 Due dates and consequences

Item	Due date or consequence
Deposit of TDS (non-government)	7th of next month; 30 April for March
Quarterly statements (Forms 138, 140, 144)	31 July, 31 October, 31 January, 31 May
Interest: not deducted	1% a month from date deductible to date deducted
Interest: deducted, not deposited	1.5% a month from date of deduction to date of deposit
Late statement fee (section 427, old 234E)	Rs. 200 a day, up to the TDS amount
Expense disallowance	30% (residents), 100% (non-residents) until TDS is paid

Illustration 136: Late deposit

TDS of Rs. 50,000 deducted on 10 May 2026 is deposited on 20 August 2026. Months: May, June, July, August = 4 (part month counts as full). Interest = 50,000 x 1.5% x 4 = Rs. 3,000.

35.3 TCS highlights (section 394)

Most TCS rates rationalised at 2% by the Finance Act 2026, including overseas tour packages (single rate, no threshold).
Motor vehicles above Rs. 10 lakh and notified luxury goods: 1%.
LRS remittances for education funded by loan and for medical treatment: lower or nil rates.
Quarterly TCS statement: Form 143 (old 27EQ).

35.4 General rules that apply to all TDS

Time of deduction: for most non-salary payments, at the time of credit to the payee's account (including a suspense or provision account) or at the time of payment, whichever is earlier. For salary, at the time of payment.
Amount on which TDS applies: the gross amount, but GST shown separately in the invoice is excluded for most payments (as clarified by the CBDT under the old law).
Year-end provisions: a provision for expenses at year-end, where the payee is identifiable and the amount is ascertainable, attracts TDS. Where the payee cannot be identified, the TDS obligation arises when the credit is made to the payee's account.
PAN: if the payee does not furnish PAN, or PAN is inoperative (not linked with Aadhaar), TDS is at the higher of 20% and the normal rate (5% for some payments).
Lower or nil certificate: where the payee has a certificate under section 395, deduct at the rate stated in it, within its validity and amount.
Declarations for no deduction (Form 121): individuals whose tax is nil can give a declaration for interest, dividend and certain other income; seniors can do so even if the income is above the exemption limit, if the tax on estimated total income is nil.

35.5 Contractor payments (old 194C)

"Work" includes advertising, broadcasting and telecasting, carriage of goods or passengers (other than by railways), catering, and manufacturing or supplying a product according to the customer's requirement using material purchased from the customer or its associate. It does not include manufacturing using material purchased from someone other than the customer.

Rate: 1% for individuals and HUFs, 2% for others.
Threshold: single payment above Rs. 30,000 or aggregate above Rs. 1,00,000 in the year.
Where the invoice shows the value of material separately (in a contract where material is supplied by the customer), TDS applies only on the labour or service part.
Transporters: no TDS on payments to a contractor in the business of plying, hiring or leasing goods carriages who owns 10 or fewer carriages and furnishes a declaration with PAN.
An individual or HUF paying a contractor for personal purposes need not deduct.

Illustration 137: Job work

A garment exporter supplies fabric to a job worker for stitching and pays Rs. 5,00,000 as stitching charges. This is "work" since material is supplied by the customer. TDS at 1% (job worker is an individual) = Rs. 5,000. If the job worker used his own fabric bought from the market and sold finished garments, it would be a purchase of goods, not a contract.

35.6 Professional and technical fees (old 194J)

Payment	Rate
Fees for professional services (legal, medical, engineering, architecture, accountancy, technical consultancy, interior decoration, advertising, and notified professions)	10%
Fees for technical services (not professional), payments to call centres, royalty for sale or exhibition of films	2%
Royalty (other than films)	10%
Remuneration, fees or commission to a director (other than salary)	10%, no threshold
Non-compete fees and sums for not sharing know-how	10%

The threshold of Rs. 50,000 applies separately to each category (professional fees, technical fees, royalty, non-compete fees) per payee per year. Director fees have no threshold.

Practice note

Characterisation disputes (contract vs professional vs technical) are among the most common TDS issues. If a payment for a platform or service could be either, document the nature of the service, the contract terms, and why the chosen rate applies. A file note prepared at the time of payment is valuable if the treatment is questioned later.

Judicial view: What are technical services

CIT v. Kotak Securities Ltd. (Supreme Court, 2016): transaction charges paid by a broker to the stock exchange were not fees for technical services, because they were payments for standard facilities available to all members, not services specially rendered to meet the needs of a particular user.

35.7 Rent (old 194-I and 194-IB)

Rent includes payment for use of land, building (including factory building), land appurtenant, machinery, plant, equipment, furniture or fittings, whether or not owned by the payee.
Rate: 2% for plant, machinery and equipment; 10% for land, building, furniture and fittings.
Threshold: rent above Rs. 50,000 for a month or part of a month.
Advance rent is subject to TDS when paid; a refundable security deposit is not rent.
Individuals and HUFs not liable to tax audit paying rent above Rs. 50,000 a month deduct 2% (old 194-IB), once a year or at the end of tenancy, using Form 141; no TAN needed.

Illustration 138: Rent with GST

A company pays monthly office rent of Rs. 1,00,000 plus GST of Rs. 18,000 (shown separately). TDS at 10% on Rs. 1,00,000 = Rs. 10,000 a month. GST is excluded because it is shown separately.

35.8 Purchase of immovable property (old 194-IA)

Buyer deducts 1% on the consideration if it is Rs. 50 lakh or more (for residents). If stamp duty value is higher than consideration, TDS is on the stamp duty value.
Where there are multiple buyers or sellers, the Rs. 50 lakh threshold applies to the total consideration for the property, not to each person's share.
Consideration includes all charges of the nature of club membership, car parking, electricity and water facility, maintenance fees and advance fees.
Challan cum statement in Form 141 within 30 days from the end of the month of deduction; certificate in Form 132 within 15 days thereafter.

Illustration 139: Joint buyers

Husband and wife buy a flat jointly for Rs. 80 lakh, each paying Rs. 40 lakh. Though each share is below Rs. 50 lakh, the total consideration is Rs. 80 lakh, so each deducts 1% on his or her payment: Rs. 40,000 each, and each files Form 141.

35.9 Other important entries in section 393

Payment (old section)	Rate	Threshold and key points
Interest other than on securities (194A)	10%	Banks, co-operatives, post office: Rs. 50,000 (Rs. 1,00,000 for seniors); others Rs. 10,000
Interest on securities (193)	10%	Rs. 10,000 for debentures to individuals; demat securities largely exempt
Dividend (194)	10%	Rs. 10,000 per shareholder per year
Mutual fund units income (194K)	10%	Rs. 10,000
Insurance commission (194D)	2% (individuals)	Rs. 20,000
Life insurance payout (194DA)	2% of income component	Only where payout is taxable
Commission or brokerage (194H)	2%	Rs. 20,000
Purchase of goods (194Q)	0.1%	Buyer with turnover above Rs. 10 crore, purchases above Rs. 50 lakh from a seller, on the excess
E-commerce operators (194-O)	0.1%	On gross sales facilitated for e-commerce participants
Cash withdrawals (194N)	2% (5% for non-filers above Rs. 1 crore)	Above Rs. 1 crore a year (Rs. 3 crore for co-operatives); non-filers above Rs. 20 lakh
Payments by individuals not under audit to contractors and professionals (194M)	2%	Aggregate above Rs. 50 lakh a year
Benefits or perquisites of business (194R)	10%	Value above Rs. 20,000 a year
Virtual digital assets (194S)	1%	Specified thresholds for specified persons
Payments to partners (194T)	10%	Above Rs. 20,000 a year
Winnings from lottery, games, online games (194B, 194BA)	30%	Rs. 10,000 per transaction for lottery; online games on net winnings

Key point

TCS on sale of goods (old 206C(1H)) was withdrawn from 1 April 2025. The buyer side TDS on purchase of goods (0.1%) continues. Suppliers who were collecting TCS should have stopped.

35.10 Consequences of TDS default

Default	Consequence
Failure to deduct	Deductor is an "assessee in default" for the tax not deducted; interest 1% a month; disallowance of 30% (residents) or 100% (non-residents) of the expense; penalty up to the tax not deducted
Deducted but not paid	Interest 1.5% a month; recovery with interest; possible prosecution (with safe harbour if paid before the statement due date, as per recent amendments)
Late statement	Fee of Rs. 200 a day; penalty of Rs. 10,000 to Rs. 1,00,000 if delay exceeds one year or statement is incorrect
Payee has paid tax on the income	Deductor is not treated as assessee in default for the tax, if the payee has filed a return including the income and paid tax, supported by an accountant's certificate (old Form 26A); interest still payable up to the date of the payee's return

Judicial view: Recovery when the payee has paid tax

Hindustan Coca Cola Beverage Pvt. Ltd. v. CIT (Supreme Court, 2007): where the payee has already paid tax on the income, the tax cannot be recovered again from the deductor, though interest for the period of default remains payable.

35.11 Quarterly statements, corrections and reconciliation

Statements are prepared in the prescribed format and validated through the File Validation Utility before upload.
Errors in PAN, challan details or amounts are corrected through correction statements on the TRACES portal.
Payees see their TDS in Form 168 (old 26AS) and AIS; mismatches lead to denial of credit in their returns. Deductors should reconcile their books with Form 168 of their own TAN and with the challan status every quarter.
Short deduction and late payment notices from TRACES should be reviewed promptly; many arise from wrong PANs or challan tagging and can be cleared by corrections.

Practice note

A quarterly TDS reconciliation (books versus challans versus statements versus Form 168 credits shown to payees) catches most problems before they become demands. For vendors, a Form 168 versus books reconciliation at year-end helps recover missed credits.

35.12 Withholding rates for payments to non-residents under the Act

Where no treaty applies (or the treaty rate is higher), the rates in force under the Act for withholding under section 393(2) are broadly as follows, plus applicable surcharge and cess.

Nature of income	Non-resident individual	Foreign company
Interest (general)	20%	20%
Dividends	20%	20%
Royalty and fees for technical services	20%	20%
LTCG on listed equity (section 198)	12.5% above Rs. 1,25,000	12.5% above Rs. 1,25,000
LTCG on other assets	12.5%	12.5%
STCG on listed equity (section 196)	20%	20%
Other STCG	30% (slab rates apply on assessment)	35%
Any other income	30%	35%
Winnings from lottery and games	30%	30%

Chapter summary

• Section 392 for salary, 393 for other payments with tables and payment codes, 394 for TCS.

• Deduct at the earlier of credit or payment; exclude GST shown separately.

• Defaults bring interest, disallowance, penalty and possible prosecution.

• Reconcile books, challans, statements and Form 168 every quarter.