Tax Deducted at Source (TDS) is a routine compliance requirement for businesses in India. Yet for many startups, it often becomes a trap that leads to unnecessary penalties, cash flow issues, and scrutiny from the Income Tax Department.
Why? Because TDS is deceptively simple—small errors in reporting, depositing, or filing can snowball into significant financial setbacks.
Here are the five most common TDS mistakes startups make and how you can avoid them.
Common TDS Mistakes Startups Make — and How to Avoid Them
1. Incorrect PAN Reporting
One of the most frequent mistakes is entering invalid or mismatched Permanent Account Numbers (PANs) while deducting or filing TDS.
- If the PAN is incorrect or not quoted, TDS must be deducted at a higher rate of 20%, even if the applicable rate is lower.
- This not only hurts your vendor relationships but also attracts IT notices.
Smart fix:
.Always validate PANs through the TRACES portal before deduction and filing.
.Maintain a proper vendor master file with verified PANs.
2. Late TDS Deposits
Many startups focus on operations and fundraising but miss critical deadlines. Depositing TDS after the due date results in:
- Interest at 1.5% per month (or part thereof).
- Additional late payment penalties.
For a bootstrapped business, these costs can quickly pile up.
Smart fix:
.Set up automated reminders for due dates.
.Use online banking facilities to deposit TDS well before the deadline.
3. Wrong Section Code Selection
TDS is governed by multiple sections under the Income Tax Act, each applicable to different types of payments—salaries, contractors, rent, professional fees, and more.
Reporting deductions under the wrong section code during filing can trigger defaults and penalties.
Example: Deducting under section 194J (professional fees) but reporting under 194C (contractor payments).
Smart fix:
.Create a TDS mapping sheet that links each payment type with its correct section code.
.Train your finance team or use compliance software to reduce manual errors.
4. Short / Non-Deduction of TDS
Sometimes startups deduct TDS at lower rates than prescribed or fail to deduct altogether, often due to cash flow pressure or oversight.
But here’s the catch:
- The liability falls on the startup, not the vendor.
- In case of default, you may need to pay the TDS amount plus interest and penalties.
Smart fix:
.Stay updated on the latest TDS rates and circulars.
.Use automated compliance tools that apply the right rates by default.
5. Delayed / Incorrect Return Filing
Even if TDS is deducted and deposited correctly, many startups falter at the final step: filing TDS returns (24Q/26Q).
Common errors include:
- Wrong challan details
- Incorrect PAN mapping
- Late filing of returns
These mistakes attract:
- Late filing fees under section 234E (₹200 per day of delay).
- Penalties under section 271H for incorrect returns.
Smart fix:
.Use compliance software with built-in validations.
.Get an expert review before filing to ensure accuracy.
The Cost of Getting It Wrong
For startups, every rupee counts. Frequent TDS mistakes lead to:
- Cash flow crunches (due to interest, penalties, and higher deductions).
- Operational inefficiency (time wasted on notices and corrections).
- Reduced investor confidence (due to weak compliance culture).
The good news? With the right systems and expert support, TDS compliance can be smooth, cost-efficient, and penalty-free.
TDS Mistakes Startups Make – Final Word
TDS may look like a routine back-office task, but for startups, it can make or break financial stability. By validating PANs, depositing on time, selecting correct codes, applying the right rates, and filing accurate returns—you safeguard your cash flow and reduce compliance risks.
👉 Want to ensure your startup is 100% TDS compliant?
Book your FREE TDS compliance health check today. Get in touch with Pitchers Global today!