Before we get onto tax deduction at source (TDS) for startups that hire contractors or professionals, let’s recap a little bit about TDS itself.
TDS is a method by which the government makes sure that tax is paid on every income that is earned. Based on the pay-as-you-earn philosophy, TDS is taken from the incomes before the payments are made. From the perspective of a startup, it is mandatory for the company to deduct TDS on the payments they make to not only their employees but to the external contractors or professionals they hire as well.
This TDS has to be collected and deposited every month with the government. And a statement of the TDS deposited--called TDS Return--has to be filed every quarter. You can read more about the basics of TDS for startups in this article published earlier.
Now, let’s see how TDS applies to startups when payments are made to contractors and professionals.
TDS on contractor payments
A startup often hires contractors to do some specific work. These contractors can be in the form of building contractors, utility workers or works contractors. These contractors could be carpenters who work on your office furniture or the building contractor you hire to make modifications to your office or maybe you hire someone to fix the chairs in your office. Basically, anyone who does physical or labour work for you is a contractor or a sub-contractor.
The payments you make to the contractors or sub-contractors are subject to one-percent TDS in case of individuals and Hindu Undivided Families (HUFs), and two percent in case the contractor is a firm, company or organisation.
Do note that TDS does not have to be deducted if a single payment is of less than Rs 30,000 and until the accumulated annual payment exceeds Rs 75,000. Once the annual payment goes beyond Rs 75,000, then TDS has to be deducted for the entire amount paid through the year.
TDS on professional services
Whenever a startup has few employees, they will hire professionals to do some work for them. These professionals can be lawyers, CAs, doctors, engineers, designers, writers etc. The TDS that is deducted on payments made for these professional or technical services is 10 percent. Similarly, a startup also has to deduct tax at source if they have to pay royalties to artists, writers or musicians.
In case of professional and technical services, the TDS does not have to be deducted for bills that don’t exceed Rs 30,000.
TDS on rent
This is another payment head where some startups would need to deduct tax at source. Startups in some industries often have to make payments on the plant or machinery they rent. In these cases, the TDS that needs to be deducted is to the tune of two percent. If the startup rents land, building, furniture or fittings, then the payment is subject to 10 percent TDS.
The TDS on rent payments does not have to be deducted if the payment does not exceed Rs 1,80,000.