Most small Indian taxpayers believe that the provision of deduction of tax at source (TDS) is applicable only to large firms. However, in reality, even individuals, professionals, and small firms are liable for deducting tax at source while making payments—particularly for rent or contract remuneration. Non-adherence to these regulations can lead to penalties, interest, and even disallowance of business expenditures.
TDS is a mechanism under which tax is collected at the source of income. It ensures that tax is deducted before money changes hands. It is then deposited with the government. If you are a small taxpayer making rent payments above a certain amount or paying contractors for their services, it is important to understand when and how TDS will apply. The rules are more straightforward than they seem, but the penalties for ignoring them can be costly.
Let us consider an example of rent payments. Section 194-IB of the Income-tax Act, 1961 says that individuals or Hindu Undivided Families (HUFs) who do not need to obtain their accounts audited also need to deduct tax at source if they are paying rent in excess of Rs 50,000 per month. The TDS rate is 5 per cent, which should be deducted only once in a financial year, either during the payment or credit, whichever is earlier, at the end of the last month of tenancy or the financial year.
Also, one does not have to apply for a Tax Deduction and Collection Account Number (TAN) for deducting tax at source under this section. They are required to deposit the TDS by means of Form 26QC within 30 days from the end of the month when the deduction is made. Suppose you deducted tax at source in March 2025, you will have time till the end of April 2025 to file Form 26QC and deposit the tax.
Contract payments of small businesses are dictated by a different rule—Section 194C. If you are a businessman or professional whose books of accounts need to be audited in the last accounting year, then you need to deduct tax at source while paying to the contractors or subcontractors. It is here where most small businesses get confused. The important condition here is the audit requirement in the previous year.
If your payments to a contractor are more than Rs 30,000 for one contract or more than Rs 1 lakh in aggregate during the financial year, you need to deduct tax at source. The rate of deduction is 1 per cent if the contractor is an individual or HUF, and 2 per cent otherwise. In contrast to the case of rent, here you do require a TAN. You also have to deposit TDS on or before the 7th day of the next month. You also have to file quarterly TDS returns in Form 26Q.
Failure to meet deadlines or not depositing TDS can incur penalties. For instance, if you are late in deducting tax, you have to pay 1 per cent interest per month. If the deduction is made, but the tax payment is late, then the rate of interest increases to 1.5 per cent monthly. In addition, if you don't file the TDS return on the due date, you may have to pay a fine of Rs 200 per day until the return is submitted.
Another aspect most small taxpayers miss is the need to issue TDS certificates. For rent, you need to give Form 16C to the landlord. For contract payments, Form 16A needs to be given to the contractor. These certificates are proof that tax has been deducted and paid, and not issuing them within the due date may lead to additional penalties.
The income tax authority has broadened the net of TDS. As the slabs are not very high—Rs 50,000 monthly for rent and Rs 30,000 for one contract—taxpayers may often inadvertently miss out on deducting and depositing the tax, thus inviting penalties.
For instance, a person who is renting a flat in a metro city for Rs 55,000 a month may not know that they are required to deduct and deposit tax at source. Or a small enterprise engaging freelance professionals on several assignments may fail to notice the Rs 1 lakh annual limit for contract payments.
In either situation, lack of knowledge of the rule cannot be termed an excuse. Being compliant requires only a few key steps: keep up with thresholds, see whether you had undergone an audit last year (for contracts), utilise appropriate forms, deposit TDS promptly, and present the required certificates.
