TDS on Supplier Payments

Two categories, two rates

From one manufacturer’s books across a full year:

• —Freight — TDS at 2%, applied twelve separate times across the year on a combined ex-GST amount of ₹2,05,209.67, withholding ₹4,104.18.
• —Professional fees — TDS at 10% on ₹35,000, withholding ₹3,500.

Note the base: TDS is computed on the ex-GST amount, not the gross invoice. Two categories, two rates, applied consistently every time that category of payment occurs.

“At source” means exactly that

The payer does not hand over the full invoiced amount and leave the supplier to settle their own tax later. The payer pays the invoice less the TDS, and separately remits that withheld amount to the government.

The supplier receives less cash upfront but gets credit for the tax already paid when they file their own return. The business is acting as the government’s collection point, at the moment of payment.

Why rates differ by category

The difference is not arbitrary. Categories carry different rates because they represent genuinely different kinds of income to the recipient. Freight is a lower-margin, high-volume service and attracts a lower withholding rate; professional fees typically carry higher margins and a correspondingly higher one.

Applying the wrong rate to a payment category is a compliance error, not a rounding issue — and because it repeats every time that category recurs, one misclassification becomes a year of wrong deductions.

Category decides, not the relationship

A one-off consulting engagement with a brand-new supplier for ₹20,000 — does TDS work the same way as it did for an established firm’s ₹35,000 fee?

Yes, assuming the amount crosses the applicable threshold for that category. Treatment follows the payment category and the threshold, not whether the supplier is a long-standing relationship or a first-time one. Being new is not an exemption.

The Income Tax Act, 2025 renumbering

Effective 1 April 2026, the Income Tax Act, 2025 replaces the Income Tax Act, 1961, with a complete renumbering of sections. What was widely known as “Section 194C” for contractor and freight-type payments and “Section 194J” for professional fees now sits under different section numbers.

The underlying rates and logic are expected to continue operating similarly. What changes is the citation — which matters a great deal to anyone referencing the law directly.

This guide deliberately does not state a new section number, because publishing one that is outdated or still being finalised would be worse than publishing none. Know the category and rate correctly; verify the current section reference against the applicable Finance Act or official notification whenever a formal citation is actually required.

Common mistakes

• —Deducting on the GST-inclusive amount instead of the taxable value.
• —Skipping deduction on a first or one-off payment to a new supplier.
• —Applying a single default rate across every supplier category.
• —Paying the supplier in full and trying to recover the TDS afterwards.
• —Withholding correctly but remitting late, which carries its own interest and fees.
• —Quoting an old section number in a formal document after the renumbering.