TDS is deducted by the payer, not shown as a tax on your invoice. From 1 April 2026 the Income-tax Act 2025 applies, and most non-salary TDS sits in section 393 (for example contractor payments, formerly section 194C, now sit at table item 6(i)), with rates and thresholds retained from the 1961 Act. You bill the full amount, receive it net of TDS, and claim the deducted tax using the payer's Form 131 certificate.
TDS (tax deducted at source) is one of the most common reasons an Indian invoice is paid "short". The customer pays you less than the invoice total, deposits the difference with the government against your PAN, and you claim it back as a credit against your own income tax.
From 1 April 2026, the Income-tax Act 2025 replaced the Income-tax Act 1961, and the familiar section numbers your customers quote have changed. This guide explains how TDS on invoices works under the new law, what to do in your billing and books, and how to make sure you actually get credit for every rupee deducted.
What is TDS on an invoice, in simple terms?
When a business pays you for certain services or contracts, the law may require it to deduct a percentage of the payment as tax and deposit it with the government. Three points matter for billing:
- TDS is the payer's obligation. You do not add it to the invoice as a tax line.
- Your invoice shows the full amount. The customer pays the invoice total minus TDS.
- The deducted amount is your money in tax form. It is credited against your PAN and reduces your own income-tax liability.
So, for accounting purposes, a customer who deducts TDS has still paid you in full: part in cash, part as a tax credit.
What changed with the Income-tax Act 2025?
The Income-tax Act 2025 applies from 1 April 2026. The Income Tax Department's TDS compliance FAQs explain the transition rule with a worked case of a contractor paid on 28 March 2026: if the earlier of credit or payment happens on or before 31 March 2026, the 1961 Act applies; if it happens on or after 1 April 2026, the 2025 Act applies.
Most non-salary TDS provisions are now consolidated in section 393. Section 393(1) deals with payments to residents, and section 393(2) with payments to non-residents. Instead of separate sections, each payment type is a numbered item in a table.
| Payment type | Income-tax Act 1961 | Income-tax Act 2025 |
|---|---|---|
| Contract work | Section 194C | Section 393(1), table item 6(i) |
| Professional / technical fees | Section 194J | Section 393(1), relevant table item |
| Purchase of goods | Section 194Q | Section 393(1), relevant table item |
| Quarterly non-salary TDS statement | Form 26Q | Form 140 |
| TDS certificate (non-salary) | Form 16A | Form 131 (issued from TRACES) |
| Challan-cum-statement for property, rent by individuals, certain contractor/professional payments, VDA | Forms 26QB/26QC/26QD/26QE | Form 141 |
Sources: the Income Tax Department's Form 140 manual, which describes Form 140 as earlier Form 26Q; its TDS compliance FAQs, which place contractor TDS at section 393(1) table item 6(i); and its Form 141 FAQs, which describe Form 141 as merging forms such as 26QB, 26QC, 26QD and 26QE and covering table items 2(i), 3(i), 6(ii) and 8(vi) of section 393(1).
Rates you will commonly meet
The Income Tax Department's TDS compliance FAQs state that the TDS rates and monetary thresholds for all categories of payments have been retained as they were under the Income-tax Act 1961; the consolidation into section 393 is a tabular re-presentation, not a policy change. So the rates suppliers most often meet are the familiar ones:
- Contract work (item 6(i)): 1% where the payee is an individual or HUF, 2% for others.
- Professional and technical fees (formerly 194J): 10% for professional services and 2% for technical services, depending on the nature of the payment.
- Purchase of goods (formerly 194Q): 0.1% on the amount above ₹50 lakh in the year, deducted by buyers who meet the turnover condition.
Always ask the customer which table item it is quoting, because the deductor must quote the item in its statement. Thresholds, exceptions and the exact classification of a payment depend on the table and its conditions. Confirm your specific case with your tax professional, because a customer's interpretation (for example, whether a job is "contract" or "professional") changes the rate you suffer.
How should you prepare invoices for customers who deduct TDS?
- Print your PAN clearly alongside your GSTIN. A missing PAN can push the deduction to a higher rate; the Income Tax Department notes that a higher rate can apply where section 397(2) applies.
- Describe the service precisely. "Annual maintenance of CNC machines – labour" is easier to classify than "Services".
- Show taxable value and GST separately. The base for TDS and the GST amount should be easy to read on the face of the invoice.
- Add a neutral note such as: "TDS, if applicable, may be deducted under section 393 of the Income-tax Act 2025. Kindly share Form 131."
- Ask for a payment advice listing invoices paid and TDS deducted on each.
- If you hold a lower or nil deduction certificate, share a copy with the customer before they pay. The Form 141 FAQs mention certificates issued under section 395.
For help with the other mandatory fields, see mandatory fields on a GST invoice.
Worked example: recording TDS on a service invoice
A Pune IT support firm (a company) raises an invoice for technical support to a manufacturing client in November 2026. Assume the client treats it as fees for technical services at 2% and deducts TDS on the value excluding GST.
| Item | Amount |
|---|---|
| Taxable value | ₹1,00,000 |
| GST at 18% | ₹18,000 |
| Invoice total | ₹1,18,000 |
| TDS at 2% on ₹1,00,000 | ₹2,000 |
| Cash received | ₹1,16,000 |
Accounting entries in the supplier's books:
- On invoicing: Debit customer ₹1,18,000; Credit sales ₹1,00,000; Credit output GST ₹18,000.
- On receipt: Debit bank ₹1,16,000; Debit TDS receivable ₹2,000; Credit customer ₹1,18,000.
The customer ledger closes at zero. The ₹2,000 sits as TDS receivable until you match it with the customer's Form 131 and your tax credit statement, and then use it against your income tax.
Whether TDS is calculated on the value including or excluding GST depends on how the payment is shown and on current guidance; confirm with your adviser and with the customer, and do not argue the point invoice by invoice.
If the customer had treated it as professional fees
At 10%, TDS would be ₹10,000 and cash received ₹1,08,000. Over a year of monthly invoices, that is ₹96,000 more locked up as TDS receivable than at 2%, which is a real cash-flow cost. That is why the description on the invoice matters. See cash flow management for small businesses.
How do you make sure you get credit for TDS deducted?
- Track TDS receivable per customer, per invoice in your receivables ledger.
- Collect Form 131 certificates each quarter. Certificates are generated from the deductor's quarterly statement, so they can only be issued after Form 140 has been filed.
- Know your customers' Form 140 due dates. The Form 140 manual lists quarterly due dates of 31 July (April–June), 31 October, 31 January and 31 May for the following quarters.
- Compare with your tax credit statement on the income-tax portal before filing your own return.
- Chase mismatches early. Wrong PAN, wrong amount or a missing deposit can only be fixed by the customer filing a correction.
What is TDS under GST, and how is it different?
Separately from income tax, section 51 of the CGST Act requires notified deductors, mainly government departments, local authorities, government agencies and other notified bodies, to deduct GST TDS of 2% (1% CGST + 1% SGST, or 2% IGST) when paying suppliers under contracts above the specified value. This deduction:
- Is credited to the supplier's electronic cash ledger on the GST portal, not their income-tax account.
- Must be accepted by the supplier on the portal before it can be used.
- Is completely separate from income-tax TDS; a government payment can carry both.
If you sell to government bodies, show both on your payment reconciliation so neither is mistaken for an unpaid balance.
How do you reconcile TDS each quarter?
A quarterly routine keeps TDS from becoming a year-end headache.
- Export a TDS receivable list from your books by customer and invoice.
- Download your tax credit statement from the income-tax portal.
- Match line by line on customer name, PAN or TAN, amount and quarter.
- Mark differences as: not yet deposited, deposited under wrong PAN, wrong amount, or timing (deducted in one quarter, reported in another).
- Write to the customer with a short table of differences and ask for a correction to their Form 140.
- Collect missing Form 131 certificates soon after each quarterly Form 140 due date (31 July, 31 October, 31 January and 31 May).
- Carry forward unresolved items to next quarter's list rather than writing them off.
| Status | Action |
|---|---|
| Matched | Close in your receivable list |
| Customer deducted, not deposited | Ask for deposit proof and correction |
| Shown under wrong PAN | Ask customer to correct the statement |
| Amount differs | Compare with payment advice; agree the right figure |
| In books, not on portal yet | Recheck after the Form 140 due date |
Transition-year items
Invoices raised around March 2026 may fall under either Act depending on whether the payer credited or paid first. Your customers may therefore report some invoices under the 1961 Act forms and others under the 2025 Act forms. The Income Tax Department notes that corrections for earlier periods can still be filed under the old Act, so keep both sets of references until every March 2026 invoice is matched.
Does TDS change your invoice or GST return?
No. TDS is an income-tax matter between your customer and the government. Your GST invoice shows the taxable value and GST in full, and your GSTR-1 reports the full taxable value. The only place TDS appears is in your receipt entry and your income-tax records. For the invoice side, see GST invoice format.
Common mistakes with TDS on invoices
- Writing off TDS as a discount instead of recording it as TDS receivable.
- Leaving customer ledgers open with small "short payment" balances that are really TDS.
- Quoting old 1961 sections on new invoices; from 1 April 2026, refer to the 2025 Act.
- Not printing PAN, inviting a higher deduction.
- Not collecting Form 131, then discovering at return-filing time that credits are missing.
- Confusing GST TDS with income-tax TDS and claiming it in the wrong place.
- Mixing TDS with TCS. TCS on e-commerce sales is different; see TCS under GST for e-commerce.
Billing Software by Betterwork lets you record a receipt with TDS deducted so the invoice closes correctly and the TDS amount appears in reports for matching. For the wider ledger process, see accounts receivable management.
Key takeaways
- TDS is deducted by the payer; your invoice shows the full amount.
- From 1 April 2026, the Income-tax Act 2025 applies, with most non-salary TDS in section 393 (contract payments at table item 6(i)), and rates and thresholds are unchanged from the 1961 Act.
- Form 140 replaces Form 26Q for quarterly non-salary TDS statements, and Form 131 is the non-salary TDS certificate.
- Record TDS as a receivable, collect Form 131 and match it to your tax credit statement.
- GST TDS under section 51 is separate and goes to your electronic cash ledger.
This guide is general information, not tax advice. Rules last checked on 20 October 2026; confirm with your tax professional for your situation.