Importance of TDS in Cash Flow Management for Businesses

Why TDS Creates a Gap Between Profit and Bank Balance

Profit is based on income and expenses, but cash flow is based on when money actually comes into or leaves the bank account. This is where TDS makes a real-world gap. For example, a consulting business might send an invoice of ₹10,00,000, and if TDS is applicable at 10%, the business will receive ₹9,00,000 in its bank account. The remaining ₹1,00,000 is TDS credit. It is not available immediately for salaries, rent, vendor payments, or other working capital needs but may be adjusted against tax liability or refunded later .

This gap becomes more evident in businesses with high-value service invoices, thin margins, or long payment cycles. A company may appear profitable on paper but still struggle with short-term liquidity if large TDS credits are locked while salaries, GST, rent, vendor payments, and loan EMIs are due. A business that does not plan for this gap may face three common problems:

1. It may overestimate available cash by looking only at gross invoice value.
2. It may miss TDS deposit deadlines because the payable amount was not kept aside.
3. It may have paid excess advance tax because the available TDS credits were not properly considered.

Current TDS Updates Businesses Should Know

From 1 April 2026, TDS treatment depends on whether the relevant payment or credit is subject to the Income Tax Act, 2025. For transactions governed by the new Act, businesses should not rely only on old section numbers such as 194C, 194J, 194H or 194I. Many non-salary TDS categories are now arranged under Section 393 in a table-based format , and deductors should use the relevant Section 393 table item while reporting FY 2026-27 transactions. The Income Tax Department’s transition guidance also clarifies that the 2025 Act applies from 1 April 2026.

Professional, Technical and Contractor Payments

Under Section 393 of the Income Tax Act, 2025, payments such as contractor payments, professional fees, technical fees, commission, brokerage, rent and similar resident payments are covered in table form . For professional and technical service payments, the earlier ₹30,000 threshold should not be used for FY 2026-27. 

The threshold is ₹50,000, with 2% applying to specified technical services, certain royalty and call centre related cases, and 10% applying to other professional service cases. This matters for cash flow because the difference between 2% and 10% TDS can materially change the cash that reaches your bank account.

TDS on Partner Payments

Section 194T was introduced with effect from 1 April 2025 for payments by partnership firms and LLPs to their partners . However, for FY 2026-27 reporting under the Income Tax Act, 2025, partner remuneration, salary, commission, bonus, and interest should be mapped to the relevant item under Section 393, rather than presented only under Section 194T. The rate is 10%, and the threshold is ₹20,000 during the financial year.

This is important for LLPs and partnership firms because partner payouts now need proper monthly cash planning. The firm must plan the TDS deposit, and the partner should plan personal cash flow based on the net amount received after TDS.

Rent Withholding Threshold

For FY 2026-27, do not use the old ₹2,40,000 annual rent threshold . The rent threshold under Section 393 is ₹50,000 per month or part of a month. The rate depends on the nature of rent. Rent for plant, machinery or equipment is generally covered at 2%, while rent for land, building, furniture or fittings is generally covered at 10%. This mainly helps businesses with rent commitments of up to ₹50,000 per month, for which TDS may not apply under the revised threshold.

Lower or Nil TDS Application

Under the Income Tax Act, 2025 framework, applications for lower or nil deduction are covered under Form No. 128 read with Section 395(1). Applications for lower collection are covered separately under Section 395(3).

The Income Tax Department describes Form No. 128 as the form used to apply for a certificate authorizing lower or nil deduction or lower collection. This means references to Form 13 should be treated as legacy wording under the earlier Act.

 Self Declaration for Nil TDS

Do not mention Forms 15G and 15H as the active FY 2026-27 declaration forms without context. Form No. 121 is the consolidated form linked to the earlier Forms 15G and 15H for eligible declarations under Section 393(6) and Rule 211.

This form applies only when the taxpayer meets the required conditions to receive specified income without TDS. It should not be treated as a declaration that every individual or HUF can file automatically. Eligibility still depends on the income type and the taxpayer’s final tax liability.

TDS on E-Commerce Marketplace Sales

For marketplace sellers, the 0.1% TDS rate helps reduce the amount withheld from platform settlements. Under Section 393, this rate applies to the sale of goods or services by an e-commerce participant through an e-commerce operator.

For example, if a seller records ₹1 crore in annual marketplace sales, TDS at 0.1% would be ₹10,000. At 1%, the withheld amount would have been ₹1,00,000.

Removal of Higher TDS for Non-Filers

For FY 2026-27, deductors should not apply the earlier specified non-filer check under Section 206AB. Section 206AB and Section 206CCA have been omitted, so this specific non-filer verification is no longer required .

However, vendor PAN collection remains important because higher deduction rules may still apply when PAN is unavailable or invalid.

Practical Examples of TDS Impact on Cash Flow

Example 1: Professional Services Business

A software consulting firm raises invoices of ₹45,00,000 in a quarter for professional services. If TDS applies at 10%, clients deduct ₹4,50,000.

If the actual tax liability for the year is only ₹11,00,000, then ₹7,00,000 is excess TDS. That excess is recoverable, but not immediately available for salaries, software costs, rent or marketing. A better approach is to estimate tax liability early and check whether the business is eligible for lower or nil deduction , instead of waiting for a refund after ITR filing.

Example 2: Contractor Receiving Monthly Payments

A company pays a contractor ₹20,00,000 per month for contract work. If TDS is applicable at 2%, then ₹40,000 is deducted every month. For a contractor with slim margins and regular labour/material payments, even ₹40,000 per month can affect liquidity. Which is why contractors should estimate collections net of TDS and not on gross bill amount.

Example 3: LLP Paying Partner Remuneration

An LLP pays a working partner ₹2,00,000 per month as remuneration. Since covered partner payments cross the ₹20,000 annual threshold, the firm deducts TDS at 10%. This affects both the LLP and the partner. The LLP must deposit TDS on time, and the partner must plan personal cash flow based on ₹1,80,000 per month, not ₹2,00,000.

How Businesses Can Manage TDS Without Blocking Cash

Forecast Cash Inflow Net of TDS

Prepare cash flow forecasts based on the net amount expected in the bank, not just gross invoice value. For each major customer or payment category, note down the expected billing, probable TDS deduction, and expected bank receipt . This makes monthly cash planning more realistic and reduces surprises when large invoices are settled after TDS deduction.

Track TDS Credit Separately

Maintain a separate TDS credit tracker for each client deduction. This lets you match the deducted amounts to the AIS/Form 26AS entries and identify any missing or incorrectly reported credits before you file your return.

Apply for Lower or Nil Deduction Where Needed

If your business regularly gets more TDS deducted than its actual tax liability, you should evaluate whether a lower or nil deduction certificate can help. For FY 2026-27 under the Income Tax Act, 2025, this application should be made through Form No. 128 under Section 395(1).

This is useful for businesses in which the standard TDS rate exceeds the effective tax liability. For example, a professional services business may face 10% TDS on receipts, but its actual taxable profit may be much lower after salaries, rent, software costs, and other expenses. A practical process is:

1. Estimate full-year revenue, expenses, and expected tax liability.
2. Check how much TDS clients are likely to deduct during the year.
3. If the expected TDS is higher than the expected tax liability, apply through Form No. 128.
4. Once approved, share the certificate with clients so they deduct TDS at the approved lower or nil rate.

Use this carefully. The estimate should be realistic and supported by proper books, projected income, tax already paid and expected receipts. If the business underestimates tax too aggressively, it may face advance tax or self-assessment tax pressure later.

Reconcile AIS and Form 26AS Monthly

Many businesses check TDS credits only while filing the ITR. That is too late. If a client deducts TDS but reports the wrong PAN, wrong amount , or wrong section, your credit may not match. Getting the deductor to revise their TDS return can take time. Monthly reconciliation helps you fix mismatches before year-end.

Keep a TDS Deposit Buffer

As a deductor, your business must deposit TDS within the prescribed timeline. This is a scheduled cash outflow and should be part of the monthly cash plan. A practical rule is to keep a small buffer before the 7th of every month. If your average monthly TDS deposit is ₹1,00,000, do not wait until the last day to arrange funds. Keep the amount ready before the due date so tax payment does not clash with salaries, rent, GST payment, or vendor payouts.

Late deduction or late deposit can become expensive. The Income Tax Department explains that failure to deduct can attract interest at 1% per month, while failure to deposit the deducted tax can attract 1.5% per month. 

Collect Vendor PAN and Entity Details Before First Payment

Vendor onboarding should not be limited to name, bank details, and GSTIN. For TDS, you should also collect PAN, entity type, nature of service, and applicable section/category. This avoids three problems:

• Wrong TDS rate
• PAN-related higher deduction issues
• TDS return correction later

The Income Tax Department states that TAN must be obtained by persons responsible for deducting or collecting tax, and TAN is compulsory in TDS/TCS returns, challans, and certificates, except in specified cases where PAN may be used. 

Adjust Advance Tax After Considering TDS Credits

If clients are already deducting significant TDS from your receipts, consider those credits while calculating advance tax. Otherwise, you may pay tax twice during the year and wait for a refund later. This does not mean underpaying advance tax. It means correctly estimating the total tax liability and reducing available TDS credits when determining the advance tax amount.

Use Accounting Software to Avoid Manual Misses

TDS errors often happen because deduction, deposit, certificate tracking, and reconciliation are handled manually. For growing businesses, this creates avoidable cash-flow and compliance risks.  

Manual TDS tracking can lead to missed deductions, wrong challans, delayed reconciliation and poor visibility of cash blocked through TDS. BUSY Accounting Software helps businesses manage accounting, GST, billing, inventory and compliance workflows in one place, making it easier to track deductions and cash flow with better control.

Conclusion

For FY 2026-27, businesses should update their systems and processes to align with the Income Tax Act, 2025. Businesses should carefully review old references such as Form 13, Forms 15G/15H, and standalone section numbers such as 194C, 194J, or 194I. Applications for lower or nil deduction should be processed through Form No. 128. Eligible declarations for nil deduction should be processed through Form No. 121. Non-salary TDS transactions should be mapped to the appropriate item under section 393 in the table.

The best way is simple: forecast collections net of TDS, keep a monthly TDS deposit buffer, reconcile AIS/Form 26AS regularly, apply for lower deduction where justified, and ensure vendor details are correct before processing payments. This changes TDS from being a last minute compliance activity to planned cash flow control.