Guide to TDS for Startups Companies (Income Tax Act 2025)

You’ve registered your company, opened a bank account, and are ready to start paying vendors to build your business. But before you pay a single invoice, you must understand TDS (Tax Deducted at Source).

In simple terms: Before you pay a vendor, the government requires you to hold back a small percentage of their fee and deposit it directly with the tax department. If you forget, the government penalizes your company, not the vendor.

The good news? The new Income Tax Act 2025 has scrapped the old, confusing rulebook. Almost every payment you make now falls under one simplified master rule: Section 393.

Here is your straightforward, jargon-free guide to staying compliant from Day 1.

The 3 Non-Negotiable Rules of TDS

Before looking at rates, burn these three rules into your company’s operating procedure:

1. Get a TAN immediately: Just like a PAN card is for your identity, a TAN (Tax Deduction Number) is required to legally deduct and deposit tax.
   
2. No PAN = 20% Penalty Rate: Always collect your vendor’s PAN card before paying them. If they do not provide a PAN, the law legally forces you to deduct a massive 20% TDS instead of the standard 1% or 2%.
   
3. The “7th of the Month” Deadline: You cannot hold onto deducted tax. Any TDS you deduct during a month must be deposited to the government by the 7th of the following month.

When and How Much to Deduct on Services (Section 393)

You do not need to deduct tax on every small ₹500 expense. The law gives you annual thresholds. You only deduct TDS once a vendor crosses these limits:

• Consultants & Experts (Lawyers, CAs, Tech Consultants)
  • The Limit: When total payments cross ₹50,000 in a year.
  • The Rate: 10% for traditional professionals; 2% for technical/IT services.
    
• Contractors & Freelancers (Event managers, Agencies, Printers)
  • The Limit: If a single invoice is over ₹30,000 OR if total yearly payments cross ₹1,00,000.
  • The Rate: 1% if paying an individual/freelancer; 2% if paying a registered company.
    
• Sales Agents & Commission (Brokerage, referral fees)
  • The Limit: When total payments cross ₹20,000 in a year.
  • The Rate: 2%.
    
• Office & Equipment Rent (Co-working spaces, leased laptops)
  • The Limit: When rent crosses ₹50,000 per month.
  • The Rate: 10% for physical office/land; 2% for equipment/machinery.

What About Buying Physical Goods?

If you are buying raw materials, inventory, or bulk laptops, the rules are different.
The good news: Early-stage startups do not have to worry about this.

You are only required to deduct TDS on physical goods if:

1. You purchase more than ₹50 Lakhs worth of goods from a single supplier.

If you hit both conditions, you deduct a tiny 0.1% on the amount that exceeds ₹50 Lakhs. (If the supplier gives no PAN, it jumps to 5%).

The Ultimate Founder’s Cheat Sheet

Screenshot this table and give it to your accountant or billing team:

Make it a strict company policy to ask “Does TDS apply?” before processing any vendor invoice. Getting it right from the start takes five minutes; fixing tax defaults later takes months.