Freelancers and Agency Owners: Understand The TDS Implications in the Easiest Possible Way

Article explains TDS provisions for Freelancers and Agency Owners in the Easiest Possible Way. It explains What is TDS, What happens to the deducted TDS amount, Can I check if the deductor actually filed the TDS return, If the client/Deductore has deducted tax, can I get that Same refunded from the Government, TDS provisions related to payment of professional services, threshold limit for deducting TDS, Why some clients don’t deduct TDS while others do etc.

6 months ago, when Anushree began her freelancing writing career, she was surrounded by fear of uncertainties.

Her elder brother, Nakul, told her to be wary of fraudulent people who could cheat her. 

In these 6 months, Anushree signed every deal and completed every project with extra caution. She received the full payment from every project on a timely basis. It restored her faith in humanity. 

However, today, the reality hit her hard.

Anushree was expecting a payment of Rs 50,000 from a client for whom she had written 30 blogs. However, she received Rs 45,000 in her bank account.

“How can he not pay me Rs 5,000? I worked tirelessly to submit the best work on time.”

Anushree discussed the matter with her brother, “Bhaiya, you were right. See, this client hasn’t paid me Rs 5,000. What should I do?”

Nakul knew the reason for the short payment and told her, “Anushree, the client has deducted TDS before making the payment.”

TDS? Does it sound a familiar-yet-lesser-understood term to you also?

Yes, if you are a freelancer, solopreneur or founder of an agency, you might have come across this term before. Whenever you provide services to a company (writing, designing, web development or any other professional service), the company deducts TDS at 10 percent from the payment amount. 

But, why do companies sometimes deduct more than 10% TDS? If the company has deducted TDS, should you still file the returns?

If you also have similar questions or concerns in your mind, keep reading this article. Today, I’m going to demystify all the TDS related queries and confusions through this article. 

Vector of a business man chained to big heavy tax debt

1. What is TDS?

When a person earns any income, it is his responsibility to deposit tax on such income with the Government. However, in certain cases, the Income Tax Department requires the payer (person making the payment) to deposit tax on behalf of the person who has earned the income (person to whom payment has been made).

The payer has to deduct this tax while making a payment or crediting the other person’s account whichever is earlier.  Since this tax is deducted at the source, it is called Tax Deducted at Source (TDS).

TDS is not deducted at the time of every payment or by every person who’s making the payment. There are rules and specific cases related to the deduction of TDS which have to be complied with.  

2. What happens to the deducted TDS amount?

The deductor (person deducting TDS while making the payment) has to deposit the TDS amount with the Government and file TDS return also. 

For this purpose, the clients ask the freelancers and companies to submit their PAN numbers. 

While filing the TDS return, the deductor has to mention the deductee’s name, PAN number, date of payment, amount of payment, and TDS amount. 

3. Can I check if the client actually filed the TDS return?

While you can’t check if the client has filed the TDS return, you can definitely check and ensure that the TDS amount deducted by the client has been marked against your PAN number. 

15-20 days after the return has been filed, you can ask your client to send you TDS certificate (Form-16A). It will contain all the details which have been filed in the TDS return against your PAN number.

Alternatively, you can check Form 26AS statement also. Form 26AS is a tax credit statement which can be downloaded from the Income Tax Website. It shows the TDS amounts marked against your PAN number in an entire Financial year, apart from showing other necessary information also.

4. If the client has deducted tax, can I get that tax refunded from the Government?

Yes, if the client has deducted TDS but your income is below the tax slab, you can ask for a refund from the Government (And the Government gives it happily :p).

But, for asking for a refund, you have to file your income tax return COMPULSORILY. You can’t claim the refund without filing your income tax return (One of the reasons why you should file your income tax return).

5. I don’t want a refund but I don’t want to file my return either. Is that possible because the tax has already been paid?

No, if your total income for a financial year is above the basic exemption limit (Rs 2,50,000 for FY 2019-20), you have to MANDATORILY file your income tax return. From the final tax liability, you can reduce the TDS amount already deposited by your client.

If additional tax has to be paid, you can pay it and file the return. If the net tax payable (after deducting the TDS amount) becomes zero, you can just go ahead and file your returns.

But, remember, return filing is mandatory if the income is above the exemption limit. 

6. What are the TDS provisions related to payment of professional services?

If you are a freelancer, solopreneur or agency owner, you’ll come across these TDS provisions mainly. 

While making payment for professional or technical services or royalty, the payer (the person making the payment) has to deduct TDS at the rate of 10 percent under Section 194J. However, if the payee (person receiving the payment) doesn’t submit his PAN number, the tax rate will be 20 percent.

7. Is there any threshold limit for deducting the TDS amount? 

Yes, If the one-time payment or the aggregate payment during an FY is less than Rs 30,000, then the payer won’t deduct the TDS. But, this limit has a trick inside it.

Let’s understand it with the help of an example – 

Reliance Industries Ltd paid Shruti a one-time payment of Rs 20,000 for her content writing services – NO TDS to be charged.

Reliance Industries also paid Namit the following payment during the FY 2019-20 for his graphic designing services – 

1st Payment – Rs 20,000

2nd Payment – Rs 5,000

3rd Payment – Rs 10,000

4th Payment – Rs 55,000

TDS implications will be as follows – 

  • No TDS to be deducted on the first payment because aggregate/ one-time payment is less than Rs 30,000.
  • No TDS to be deducted on the second payment also since aggregate/ one-time payment is less than Rs 30,000. 
  • TDS to be deducted since aggregate payment is more than Rs 30,000 now [20,000+5,000+10,000] = Rs 35,000.

Also, the TDS amount to be deducted will be 10% of 35,000 i.e. Rs 3,500. 

  • TDS to be deducted since aggregate and one-time payment are both more than Rs 30,000.

TDS amount will be 10% of 55,000 = Rs 5,500.

Because of this reason, sometimes, it looks as if the company has deducted more than 10% TDS. But, in reality, the company accounts for all the previous payments made in a Financial Year.

In the case of third payment, Namit would be paid 10,000 [-] 3,500 = Rs 6,500. 

8. Why do some of my clients don’t deduct TDS while others do?

Individual taxpayers are not required to deduct TDS while making the payment unless their turnover or gross receipts exceed the amount mentioned in Section 44AB.

In simple words, generally, if the client is an individual firm (proprietorship), they won’t deduct TDS even while making payment of more than Rs 30,000.

9. Bottomline

Taxes are not as difficult as they seem. With a little bit of understanding and prudence, you can deal with the basic aspects of taxation easily. TDS is surely one of those concepts!

You should focus on 26AS Statement and your bank account while filing the income tax return to account for all the TDS deductions correctly. 

This article was originally published on Compliance Calendar Blog.


Author Bio

Qualification: Graduate
Company: Content Flavour
Location: Jaipur, Rajasthan, IN
Member Since: 31 Oct 2017 | Total Posts: 18
Creating articles on GST, Income Tax, Business Compliances and other related topics for top fintech startups as well as companies in India. View Full Profile

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One Comment

  1. Sreenivas says:

    I learnt that the tax will be 2% of the Technical services and consultancies. So it means the TDS deducted for such services should be 2% right? If this understanding is true, can we update the same here.


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May 2021