Module 3: TDS Deduction – Key Principles
Understanding Time of Deduction, Thresholds & Practical TDS Rules
Introduction
One of the most common reasons for TDS defaults and notices is confusion around when TDS should be deducted. Many deductors believe TDS is required only when payment is made, while the law often mandates deduction at the earlier of credit or payment.
In Module 3 of our TDS Course, we focus on the core principles of TDS deduction—including time of deduction, treatment of advance payments, expense booking entries, grossing up of TDS, and threshold limits with exceptions. This module is critical to avoid interest, penalties, and disallowance of expenses.
Quick Summary (Module Snapshot)
- TDS is generally deducted at earlier of credit or payment
- Expense booking can trigger TDS even without payment
- Advance payments may attract TDS
- Grossing up applies when tax is borne by payer
- Threshold limits decide applicability but have exceptions
Table of Contents
- Time of TDS Deduction – Credit vs Payment
- TDS on Expense Booking vs Actual Payment
- TDS on Advance Payments
- Grossing Up of TDS
- Threshold Limits & Key Exceptions
- Conclusion
Time of TDS Deduction – Credit vs Payment
As per Income Tax Act, TDS is required to be deducted at the earlier of:
- Credit of amount to the account of the payee, or
- Actual payment (cash, cheque, transfer, etc.)
Example:
A company books professional fees of ₹1,00,000 on 31st March but pays it on 10th April.
👉 TDS must be deducted on 31st March, not April.
📌 Even if credited to a “Suspense Account”, TDS obligation arises.
TDS on Expense Booking vs Actual Payment
Many businesses follow accrual accounting and book expenses monthly.
Key Rule:
If an expense liable for TDS is booked in accounts, TDS must be deducted at the time of booking, even if payment is made later.
Common Expenses Where This Applies:
- Professional fees (194J)
- Contractor charges (194C)
- Rent (194I)
- Commission (194H)
Practical Impact:
- Month-end provisions trigger TDS
- Delay leads to interest @1% per month
- Expense may be disallowed if TDS not complied
TDS on Advance Payments
TDS is also applicable on advance payments, provided the payment falls under a TDS-covered section.
Example:
A business pays ₹2,00,000 advance to a contractor.
👉 TDS must be deducted at the time of advance payment.
Important Clarification:
- Advance payment = payment made before service completion
- TDS cannot be postponed till invoice generation
📌 Ignoring TDS on advances is a common compliance mistake.
Grossing Up of TDS
Grossing up applies when the deductor agrees to bear the tax liability instead of deducting it from the payee.
When Grossing Up is Required:
- Contract says “payment net of tax”
- Deductor agrees to pay tax on behalf of deductee
Example:
Agreed professional fee = ₹1,00,000 (net of tax)
TDS rate = 10%
Gross Amount = ₹1,00,000 ÷ (1 − 10%) = ₹1,11,111
- TDS = ₹11,111
- Net paid to professional = ₹1,00,000
📌 Grossing up increases actual cost to business and must be planned carefully.
Threshold Limits & Key Exceptions
TDS is applicable only if payment exceeds prescribed threshold limits, which vary by section.
Examples of Threshold Limits:
- 194C (Contractors): ₹30,000 per contract / ₹1,00,000 per year
- 194J (Professional fees): ₹30,000 per year
- 194I (Rent): ₹2,40,000 per year
- 194A (Interest – non-bank): ₹5,000 / ₹50,000 (senior citizens)
Important Exceptions:
- Threshold applies per deductee, not per invoice
- PAN not available → TDS @ 20%, even below threshold
- Section 194Q applies without lower threshold flexibility once conditions are met
- Salary TDS (192) has no fixed threshold, depends on taxable income
📌 Always track cumulative payments to avoid missing threshold breaches.
Conclusion
Correct understanding of time of deduction and threshold limits is the backbone of TDS compliance. Errors at this stage lead to cascading defaults—interest, penalties, return mismatches, and even expense disallowance.
This module ensures that you deduct TDS at the right time, on the right amount, and under the right section, setting a strong base for challan payment and return filing in upcoming modules.
Call to Action
Need help with:
Reviewing your TDS deduction process
Correcting past deduction mistakes
Setting up internal TDS controls
📞 Contact Verotus Finlegal Solutions LLP
for expert TDS compliance and advisory services.
🌐 Visit: www.verotusllp.com
