Introduction to TDS — TAN, Legal Basis, and Who Must Deduct

Learning Objectives

• Understand TDS as an advance tax collection mechanism and why it exists
• Identify the legal basis of TDS under Chapter XVII-B of the Income Tax Act
• Know the structure of a TAN and how it differs from PAN
• Determine which businesses and individuals are required to deduct TDS
• Understand Sunrise Retail's obligations as a private limited company

What Is TDS?

Tax Deducted at Source (TDS) is a mechanism under which the payer of income is required to deduct a specified percentage of tax from the payment and deposit it with the government on behalf of the payee.

The core idea is simple: instead of waiting until the end of the financial year for the payee to file their return and pay tax, the government collects a portion of the tax at the time of payment itself. This is called "deduction at source."

The Problem TDS Solves

Before TDS, the government faced two problems:

1. Cash flow problem — Tax was collected once a year through advance tax and final assessment. The government received money in lumps rather than steadily.
2. Compliance problem — Assesses could underreport income or delay payment. By the time the government caught discrepancies, the money was gone.

TDS solves both. A company paying salary to an employee deducts tax every month. A firm paying professional fees deducts 10% before releasing the payment. The payee receives only the net amount — the tax has already been sent to the government. Whether the payee files their return promptly or not, the government has already received something.

TDS Is Not a Separate Tax

A common misconception: TDS is not an additional tax. It is a method of collecting income tax. The TDS deducted is credited against the payee's final income tax liability. If the payee's annual tax liability is ₹80,000 and TDS of ₹30,000 was deducted during the year, the payee pays only ₹50,000 more (or gets a refund if TDS exceeds liability).

Legal Basis — Chapter XVII-B of the Income Tax Act

TDS is governed by Chapter XVII-B of the Income Tax Act, 1961, titled "Collection and Recovery of Tax — Deduction at Source."

The key sections are:

The Central Board of Direct Taxes (CBDT) issues circulars and notifications under these sections. Always check the CBDT website for the current rates — Budget announcements can change rates from April 1 each year.

TAN — Tax Deduction and Collection Account Number

Before deducting any TDS, a person must obtain a TAN (Tax Deduction and Collection Account Number). This is mandatory under Section 203A of the Income Tax Act.

What Is TAN?

TAN is a 10-character alphanumeric identifier assigned to every person responsible for deducting or collecting tax at source.

Structure of TAN:

M  U  M  C  1  2  3  4  5  E
└─ ─┘  └┘  └─ ─ ─ ─ ─┘  └┘
State  City  Sequence     Check
code   code  number      digit

• First 4 characters: alphabetic — first 3 are the jurisdiction code (state + city), 4th is the first letter of the deductor's name
• Next 5 characters: numeric — sequential number assigned by the tax department
• Last character: alphabetic check digit

Example TAN for Sunrise Retail: HYDS12345A

• HYD — Hyderabad jurisdiction
• S — first letter of "Sunrise"
• 12345 — sequential number
• A — check digit

Applying for TAN — Form 49B

TAN is applied for using Form 49B, available on the NSDL/Protean portal (onlineservices.nsdl.com).

Process:

1. Fill Form 49B online — provide business name, address, PAN of the entity, contact details, and the nature of payments for which TDS will be deducted.
2. Pay the application fee (currently ₹65 + GST).
3. Receive TAN acknowledgment number immediately.
4. TAN is issued within 7–10 working days and sent to the registered address.
5. TAN is also visible in the TRACES portal once issued.

Important: Once obtained, TAN does not expire and does not need renewal. A single TAN covers all TDS deductions — salary, contractors, rent, everything.

TAN vs PAN — Key Differences

Rule: TAN must be quoted on every TDS return, TDS certificate, and TDS challan. Quoting wrong TAN or PAN in place of TAN attracts a penalty of ₹10,000 under Section 272BB.

Who Must Deduct TDS?

Mandatory Deductors

The following categories are required by law to deduct TDS:

1. Companies (private limited, public limited, OPC) All companies incorporated under the Companies Act are required to deduct TDS on all applicable payments — salaries, contractor fees, rent, professional charges. No turnover or size threshold applies. Sunrise Retail Pvt Ltd falls squarely in this category.

2. Firms (partnership and LLP) All partnership firms and LLPs must deduct TDS on applicable payments.

3. HUF (Hindu Undivided Family) — above audit threshold An HUF must deduct TDS if its accounts are required to be audited under Section 44AB, which means turnover exceeds ₹1 crore (business) or ₹50 lakh (profession) in the preceding financial year.

4. Individuals — above the ₹1 crore / ₹50 lakh threshold Individual proprietors must deduct TDS if their business turnover exceeded ₹1 crore or professional receipts exceeded ₹50 lakh in the immediately preceding financial year. Below this threshold, individuals are exempt from most TDS obligations (except Section 194IB for rent above ₹50,000/month and Section 194M for contractors/professionals above ₹50 lakh aggregate).

5. Government deductors Central and state government offices, local authorities, and statutory bodies must deduct TDS. Government deductors follow special rules for deposit timelines.

Who Is Exempt from TDS?

• Individuals and HUFs below the audit threshold (with the narrow exceptions of 194IB and 194M noted above)
• Payments below the threshold limits specified in each section (e.g., contractor payments below ₹30,000 per contract and ₹1 lakh aggregate per year)
• Payments to certain specified persons — for example, payments to the Reserve Bank of India, LIC, EPFO on provident fund payments, and some government bodies
• Interest paid by co-operative societies to members in some situations

Consequences of Not Obtaining TAN or Deducting TDS

Disallowance Under Section 40(a)(ia)

If a business deducts TDS but fails to deposit it, or fails to deduct TDS at all, the entire payment is disallowed as a business expense under Section 40(a)(ia). This means the gross amount paid (not just the TDS amount) is added back to taxable income.

Example: Sunrise Retail pays professional fees of ₹45,000 to a CA firm without deducting TDS. The ₹45,000 is disallowed entirely when computing Sunrise Retail's taxable business income. If the company's tax rate is 25%, the effective cost of the oversight is ₹11,250 in additional tax — more than the TDS they should have deducted (₹4,500).

Interest for Non-Deduction or Late Deposit

• Non-deduction: Interest at 1% per month from the date tax was deductible to the date it is actually deducted (Section 201(1A))
• Late deposit: Interest at 1.5% per month from the date of deduction to the date of actual deposit

Penalty Under Section 271C

Failure to deduct TDS can attract a penalty equal to the amount of TDS that should have been deducted.

Prosecution Under Section 276B

Willful failure to deduct and pay TDS can result in imprisonment of 3 months to 7 years, plus a fine.

TDS Rate Quick Reference — FY 2025-26

The table below covers the sections most relevant to a trading or services business. Rates apply to resident payees unless noted.

TDS Deduction Flow

A typical payment cycle for Sunrise Retail:

Vendor raises invoice (e.g., ₹45,000 professional fees)
          ↓
Sunrise Retail identifies applicable TDS section (194J — professional, 10%)
          ↓
TDS deducted from payment: ₹45,000 × 10% = ₹4,500
          ↓
Net payment released to vendor: ₹45,000 − ₹4,500 = ₹40,500
          ↓
TDS deposited to government via Challan ITNS 281 by 7th of next month
          ↓
TDS return filed quarterly (Form 26Q)
          ↓
TDS certificate (Form 16A) issued to vendor — credit appears in vendor's 26AS

Sunrise Retail Case Study

Sunrise Retail Pvt Ltd, incorporated in Hyderabad, is a private limited company trading in electronics (mobile phones, laptops, accessories). Its TAN is HYDS12345A, obtained when the company was incorporated.

As a private limited company, Sunrise Retail must deduct TDS on all applicable payments — no exceptions, regardless of turnover.

Key TDS obligations for Sunrise Retail in FY 2025-26:

The company's finance team deposits TDS to the government by the 7th of the following month for most months, and by 30 April for March deductions. Quarterly TDS returns are filed on Form 24Q (salary) and Form 26Q (non-salary).

Practice Exercises

Key Terms

Next up: Module 2 — Salary TDS — how to compute monthly TDS under Section 192 for Sunrise Retail's five employees, with full old-regime vs new-regime worked examples.