TDS on Salary and Payments to Residents under the New Income-tax Act, 2025: Comprehensive Compliance Guide

India’s tax administration relies significantly on Tax Deducted at Source (TDS) as a mechanism to ensure timely collection of income tax. Under the New Income-tax Act, 2025, the TDS framework has been reorganized with renumbered provisions, including Section 392 TDS on salary and Section 393 covering TDS on payments to residents.

For corporates, finance teams, and professional firms, understanding the scope of these provisions is essential for maintaining TDS compliance for businesses and avoiding penalties. This article provides a structured overview of TDS on salary under Income-tax Act 2025 and payments to residents, including professional fees, contractor payments, and rent, along with practical compliance considerations for businesses.

Introduction: TDS Framework for Salary and Resident Payments

Tax Deducted at Source (TDS) plays a crucial role in India’s taxation system by ensuring that tax is collected at the point where income is generated. Instead of taxpayers paying the entire tax liability at the end of the financial year, TDS enables the government to receive tax periodically throughout the year.

Under the New Income-tax Act, 2025, the TDS provisions have been rationalized and reorganized for clarity and better compliance. Among the important provisions are Section 392 TDS salary provisions and Section 393 relating to TDS on resident payments. These sections place the responsibility of tax deduction on employers and businesses making specified payments.

Employers must deduct TDS while paying salary to employees, whereas businesses must deduct TDS when making certain payments such as professional fees, contractor payments, rent, commission, and interest to residents.

For CFOs, finance managers, chartered accountants, and payroll professionals, proper understanding of these provisions is essential. Non-compliance can result in interest, penalties, and disallowance of expenses under tax laws. Therefore, businesses must implement robust TDS compliance systems for businesses to ensure accurate deduction, reporting, and deposit of tax.

TDS on Salary – Section 392

Section 392 of the New Income-tax Act, 2025 governs the deduction of tax at source on salary payments. The responsibility for deducting TDS under this provision lies with the employer who pays salary to employees under Section 392 TDS salary rules.

The employer is required to deduct tax on the estimated income of the employee under the head “Salaries” for the relevant financial year. The deduction must be made at the time of payment of salary.

Meaning of Salary for TDS Purposes

For TDS on salary under Income-tax Act 2025, salary includes several components such as:

• Basic salary
• Dearness allowance
• Allowances (HRA, transport allowance, special allowances)
• Perquisites provided by the employer
• Bonus and incentives
• Commission received by employees

All these components are aggregated to determine the employee’s gross taxable salary.

Adjustments and Deductions

Before computing TDS, employers must consider deductions and exemptions available to employees. These may include:

• Standard deduction available under the tax provisions
• House Rent Allowance (HRA) exemption where applicable
• Deductions under Chapter VI-A such as Section 80C, 80D, and others

Employees typically submit investment declarations at the beginning of the financial year and provide supporting documents later to validate their claims.

Computation and Deduction Process

The employer estimates the employee’s annual taxable income and computes the total tax liability based on applicable tax slabs. The tax amount is then divided across the remaining months of the financial year, resulting in monthly TDS deduction on salary payments.

Employers must ensure proper payroll documentation, accurate tax computation, and timely deposit of TDS with the government. Failure to deduct or deposit tax may lead to interest and penalties under the tax law.

TDS on Payments to Residents – Section 393 (Overview)

Section 393 of the New Income-tax Act, 2025 provides a broad framework for TDS on payments to residents. This provision applies to a wide range of business transactions where payments are made for services, contractual work, or use of assets.

The responsibility for deducting TDS under this section generally lies with:

• Companies
• Limited Liability Partnerships (LLPs)
• Partnership firms
• Businesses and professionals making specified payments

Payments covered under this provision include:

• Professional and technical services
• Contractor and sub-contractor payments
• Rent payments
• Commission and brokerage
• Interest payments

The key objective of Section 393 TDS on residents is to ensure that tax is collected at the source when income is generated by residents.

For businesses, one of the most critical compliance aspects is correct classification of payments. Incorrect classification can lead to deduction at an incorrect rate or failure to deduct tax altogether.

For example, a consultancy fee wrongly treated as a reimbursement or a contractor payment incorrectly treated as professional fees may result in TDS compliance issues.

In addition to tax liability, incorrect deduction or non-deduction of TDS can lead to:

• Interest on delayed deduction or deposit
• Penalties under the Income-tax Act
• Disallowance of expenses for tax purposes

Therefore, businesses must implement strong internal controls to correctly identify the nature of payments and ensure appropriate TDS deduction.

TDS on Professional Fees

TDS on professional fees is one of the most common withholding obligations faced by businesses. This applies when payments are made to professionals providing specialized services.

Examples of professionals covered under this category include:

• Chartered accountants
• Lawyers and legal consultants
• Management consultants
• Architects and engineers
• Doctors and medical practitioners
• IT professionals and software consultants

Whenever a business pays fees to such professionals exceeding the prescribed threshold limit, it must deduct TDS before making the payment.

Threshold Limits and Rates

TDS becomes applicable once the payment exceeds the specified threshold during the financial year. Once the threshold is crossed, tax must be deducted at the applicable rate on the payment amount.

The rate of deduction depends on the nature of services and applicable provisions under the tax law.

PAN Requirement

One of the most important compliance requirements is obtaining the Permanent Account Number (PAN) of the service provider.

If the recipient fails to provide PAN, the tax must be deducted at a higher rate as prescribed under the tax provisions.

Practical Business Scenarios

In practice, TDS on professional fees is commonly applicable in situations such as:

• Consultancy assignments for strategic or financial advisory
• Legal representation and litigation services
• Technology consulting or software development services
• Internal audit and compliance advisory

Businesses must carefully track cumulative payments to ensure the threshold is monitored and TDS is deducted once the limit is crossed.

TDS on Contractor Payments

Another major category of withholding tax under the TDS framework is TDS on contractor payments. This applies when payments are made for carrying out any work under a contract.

Typical examples of contracts include:

• Construction and infrastructure contracts
• Labour supply contracts
• Advertising contracts
• Transport contracts
• Outsourced operational services

Whenever a contractor performs work for a business entity and receives payment for such services, the payer may be required to deduct TDS.

Threshold Limits and Deduction Rates

TDS is applicable only when the payment exceeds prescribed thresholds during the financial year. Once the limit is crossed, the payer must deduct tax at the specified rate.

The rate of TDS on contractor payments may vary depending on whether the contractor is:

• An individual or HUF, or
• A firm, LLP, or company

Special Provision for Transport Contractors

Transport contractors often operate under special provisions where they may provide declarations stating that they own a limited number of vehicles. In such cases, TDS deduction requirements may be modified subject to applicable rules.

Compliance Responsibility

Businesses making contractor payments must maintain proper documentation such as:

• Contract agreements
• Invoices raised by contractors
• PAN details of contractors

Accurate classification and timely deduction of TDS are essential to ensure compliance and avoid disallowance of expenses during tax assessments.

TDS on Rent Payments

Another important withholding provision relates to TDS on rent payments in India. Businesses frequently pay rent for office spaces, warehouses, equipment, or machinery, which may attract TDS obligations.

Meaning of Rent

For TDS purposes, rent includes payments for the use of:

• Land or building
• Plant and machinery
• Equipment and other assets

Any payment made under a lease, tenancy, or similar arrangement may fall under the definition of rent.

Threshold Limits

TDS becomes applicable only when the total rent paid during the financial year exceeds the prescribed threshold.

Once the threshold is crossed, the payer must deduct tax before making payment to the landlord.

Deduction Rates

The applicable rate of TDS on rent payments India may differ depending on the nature of the asset being rented, such as:

• Rent for land and building
• Rent for plant and machinery or equipment

Practical Issues in Commercial Leasing

Commercial lease arrangements often include components such as maintenance charges, parking charges, and service charges. Businesses must carefully determine whether these components form part of rent for TDS purposes.

Interaction with GST

Rent payments may also attract GST if the landlord is registered under GST. Businesses must therefore manage both GST compliance and TDS deduction simultaneously, ensuring accurate accounting and tax reporting.

Common Errors in TDS Deduction on Salary and Resident Payments

Businesses often encounter compliance issues due to common mistakes in TDS deduction on salary and resident payments. Some of the most frequent errors include:

• Incorrect classification of payments leading to deduction under the wrong section
• Failure to deduct TDS due to misunderstanding of threshold limits
• Deducting tax at incorrect rates
• Non-availability of PAN leading to higher TDS liability
• Delays in depositing TDS with the government

Such errors can trigger interest, penalties, and increased scrutiny during tax assessments.

Conclusion: Strengthening TDS Compliance for Businesses

TDS provisions under the New Income-tax Act, 2025 place significant compliance responsibilities on employers and businesses. From salary payments under Section 392 TDS salary provisions to resident payments under Section 393 TDS residents, organizations must ensure accurate tax deduction and reporting.

Finance teams should establish strong internal controls, periodic compliance reviews, and automated payroll and accounting systems to manage TDS compliance for businesses efficiently.

By maintaining proper documentation and seeking professional advisory support when required, businesses can minimize compliance risks and avoid interest, penalties, and litigation arising from TDS defaults.