TDS for small businesses: Sections 194C, 194J and 194H explained with rates and due dates

A small business must deduct TDS on contractor, professional, commission and rent payments only once it is a company, firm or LLP, or an individual or HUF whose business was under tax audit in the previous year. When it applies, the rates are 1% or 2% under 194C, 10% under 194J, 2% under 194H and 10% under 194I, deposited by the 7th of the next month and reported quarterly in Form 26Q. Missing it costs 30% of the expense as a disallowance plus interest and late fees.

Are you required to deduct at all?

Tax deduction at source under Chapter XVII-B is an obligation of the payer. Companies, partnership firms, LLPs, trusts and co-operative societies must deduct from day one. Individuals and HUFs are treated more gently: for Sections 194C, 194H, 194I and 194J, an individual or HUF has to deduct only if their total sales, turnover or gross receipts in the immediately preceding financial year exceeded ₹1 crore (business) or ₹50 lakh (profession), which is the tax audit threshold under Section 44AB. So a proprietor with turnover of ₹80 lakh last year does not deduct TDS on contractor or professional payments this year.

Two exceptions catch individuals anyway. Section 194M requires any individual or HUF not otherwise liable to deduct to deduct 2% when the total paid to one resident contractor, commission agent or professional in a year exceeds ₹50 lakh; no TAN is needed, the deposit is made with PAN through Form 26QD within 30 days of the month end. And Section 194-IB requires an individual or HUF paying rent above ₹50,000 a month to deduct 2% once a year, again PAN-based through Form 26QC.

Also note that turnover for this test is the previous year's, so the year after you cross ₹1 crore is the year the obligation starts. If you are unsure whether you crossed the line, read the tax audit guide.

Sections, rates and thresholds for FY 2026-27

The 194J and 194H thresholds were raised to ₹50,000 and ₹20,000 from FY 2025-26, and the 194I threshold to ₹6 lakh a year. Thresholds change in most budgets; confirm on the income tax portal before applying them. Under 194C, a transporter who owns 10 or fewer goods carriages and gives you a declaration with PAN is exempt from TDS under Section 194C(6), but you still report the payment in Form 26Q.

TDS is deducted on the amount excluding GST when GST is shown separately (CBDT Circular 23/2017). It is deducted at the time of credit or payment, whichever is earlier, so booking a vendor invoice in your ledger triggers the deduction even if you pay 60 days later.

Getting a TAN

You need a Tax Deduction and Collection Account Number before you deduct. Apply online in Form 49B through the Protean (NSDL) TIN portal or the income tax e-filing portal; the fee is nominal and the number arrives in about a week. One TAN per business; branches can have separate TANs but a small business rarely needs that. Quote the TAN on every challan, return and Form 16A. Deducting without a TAN attracts a penalty of ₹10,000 under Section 272BB. If you employ staff with taxable salaries you will need the same TAN for TDS on salary under Section 192.

The monthly and quarterly routine

Deduct at the time of credit or payment. Record the gross amount, TDS and net paid on the payment voucher so that the vendor ledger shows the full expense.

Deposit the TDS through challan ITNS 281 (e-Pay Tax on the income tax portal, net banking, UPI or at an authorised bank) by the 7th of the following month. TDS deducted in March is due by 30 April. Use nature-of-payment code 94C, 94J, 94H or 94I as applicable, and select "company deductee" or "non-company deductee" correctly.

File Form 26Q every quarter with the deductee's PAN, amount, section, date and challan details.

Issue Form 16A, downloaded from TRACES, to each vendor within 15 days of the return due date. Vendors need it to match the credit in their Form 26AS, so late or missing certificates strain relationships and lead to calls.

Filing needs a registered DSC or EVC on the e-filing portal or the TIN-FC route through your CA. Many small businesses hand the quarterly filing to their CA and keep the deduction and deposit in-house.

What happens if you do not deduct or deposit

The consequences stack, and each applies independently.

• Disallowance under Section 40(a)(ia). If you fail to deduct, or deduct but do not deposit before the ITR due date, 30% of the expense is disallowed in computing business income. A ₹5,00,000 contractor bill with no TDS adds ₹1,50,000 to your taxable income. The disallowance reverses in the year you finally deposit. It does not apply if the payee has included the amount in their return and paid tax, and you get a CA certificate in Form 26A.
• Interest under Section 201(1A). 1% per month or part month from the date TDS was deductible to the date it is deducted, for failure to deduct; 1.5% per month or part month from the date of deduction to the date of deposit, for deducted-but-not-deposited. Part of a month counts as a full month.
• Late filing fee under Section 234E. ₹200 per day of delay in filing Form 26Q, capped at the TDS amount in the statement. It must be paid before the return is accepted.
• Penalty under Section 271H. ₹10,000 to ₹1,00,000 for failing to file the statement within one year of the due date or for incorrect information. Not levied if TDS with interest and fee is paid and the return is filed within one year.
• Prosecution under Section 276B for deducted-but-not-deposited amounts in serious cases, with rigorous imprisonment of three months to seven years. Rarely used against small businesses that regularise, but it exists.
• Assessee in default under Section 201: the department can recover the TDS from you along with interest.

Worked example: a Jaipur handicrafts exporter

A Jaipur handicrafts exporter is a partnership firm, so it must deduct TDS regardless of turnover. In August 2026 it makes these payments:

1. CA's annual fee ₹60,000 plus 18% GST (invoice total ₹70,800). Professional fee under 194J(b), above ₹50,000: TDS 10% on ₹60,000 = ₹6,000. Net paid ₹64,800.
2. Packaging contractor (individual) sends three bills in the year: ₹45,000 in May, ₹35,000 in July and ₹40,000 in August. Each exceeds ₹30,000, so 194C applies to each bill: 1% of ₹45,000 = ₹450, 1% of ₹35,000 = ₹350, 1% of ₹40,000 = ₹400. Even if each bill had been ₹28,000, the aggregate of ₹84,000 would still be under ₹1,00,000 and no TDS would apply until the aggregate crossed it, at which point TDS applies to the whole aggregate.
3. Sales agent commission ₹25,000. Above ₹20,000 under 194H: TDS 2% = ₹500.
4. Warehouse rent ₹40,000 a month, ₹4,80,000 a year. Below the ₹6,00,000 threshold under 194I: no TDS. If rent rises to ₹55,000 a month (₹6,60,000 a year), TDS at 10% applies on the whole amount from the month the annual figure is expected to exceed the threshold.
5. Transporter with 4 trucks gives a PAN declaration: no TDS under 194C(6); report in 26Q.

Total TDS for August: ₹6,000 + ₹400 + ₹500 = ₹6,900, due by 7 September 2026 through ITNS 281.

Suppose the firm deposits it late on 20 October 2026. Interest under 201(1A) at 1.5% per month from the date of deduction (August) to the date of deposit (October): three months (August, September, October, since parts count as full) × 1.5% × ₹6,900 = ₹311 (rounded). If the Q2 Form 26Q due on 31 October is filed on 20 November, the 234E fee is 20 days × ₹200 = ₹4,000, but capped at the TDS in the statement. Small numbers, but they repeat every quarter you are careless.

Common mistakes

• Checking the threshold per invoice only. 194C has both a single-payment (₹30,000) and an aggregate (₹1,00,000) test; 194J, 194H and 194I are annual aggregates.
• Deducting on the GST-inclusive amount. Deduct on the taxable value when GST is shown separately.
• Deducting at payment instead of at credit. Booking the bill triggers TDS; a bill booked on 28 March and paid in May belongs to the March deduction due 30 April.
• Treating a designer or consultant as a contractor (1%) to save the vendor money. Professional services are 10% under 194J; the wrong section is a short deduction with interest.
• Forgetting 194M. A proprietor below the audit threshold who pays a contractor ₹60 lakh for a factory shed must deduct 2% through Form 26QD.
• Not collecting PAN before the first payment. Without PAN the rate is 20% and the vendor gets no credit.
• Paying vendors from a personal account, which breaks the TDS trail and the cash transaction limits rules.

How VyaparKit helps

VyaparKit records the deduction where it happens. When you settle a bill through vendor payment, record the gross amount, the TDS withheld and the net transfer, and the vendor ledger then shows the vendor's full expense and the TDS balance you owe the government. Use a payment voucher or expense voucher for each payment so that your CA has section-wise detail at quarter end. VyaparKit does not file Form 26Q; export the ledger and share it with your CA or enter it on the portal.

Next steps

• Check last year's turnover to confirm whether you must deduct under 194C, 194J, 194H and 194I this year.
• Apply for a TAN if you are liable and do not have one.
• List your regular vendors with PAN, entity type and the section that applies to each.
• Set a reminder for the 7th of every month for deposit and for the four Form 26Q dates.
• Start recording gross, TDS and net on every vendor payment from this month.