What is TDS?
TDS, Tax Deducted at Source, is the Indian Income Tax mechanism that requires the payer of certain payments to deduct tax from the payment and deposit it directly with the government. The recipient receives the payment minus the deducted tax and gets credit for the deducted amount against their final tax liability. The mechanism exists to ensure tax collection at the point of payment rather than relying solely on year-end self-assessment.
For solar EPCs, TDS most commonly applies under section 393(1) Table Sl. No. 6(i) of the Income-tax Act, 2025 (formerly Section 194C, contractor payments) when a company, firm, trust or other designated person pays for project work. Professional fees are Sl. No. 6(iii) (formerly 194J). The rate depends on the entry and the payee: 1 percent (individual/HUF contractor) or 2 percent (others) for contract work; 10 percent for professional fees. Higher rates apply if PAN is not provided. The Act replaced the 1961 Act from 1 April 2026; payments credited or paid on or before 31 March 2026 stay under the old sections.
TDS is distinct from GST. GST is an indirect tax on supplies; TDS is income tax. The same invoice can have both: GST charged on the supply and TDS deducted on the payment. Mechanically and operationally they are separate, governed by different statutes, and EPCs should keep a clear handle on GST rates and registration thresholds alongside their TDS obligations.
Why TDS matters for solar businesses
For solar EPCs working with corporate customers, TDS affects cash flow. The customer pays the invoice minus TDS. The EPC receives less cash immediately and must recover the TDS as tax credit later. For an EPC with significant corporate customer base, the cumulative cash withheld can be substantial, compounding the effect of payment collection delays on commercial projects.
For customers, TDS is a compliance obligation. Designated payers must deduct TDS, deposit it, file quarterly returns (Form 140) and issue the certificate (Form 131). Failure to deduct or deposit attracts interest, penalty, and disallowance of the related expense, which is why hiring a CA during EPC setup is worth the cost from day one.
For tax compliance, TDS is one of the foundational mechanisms ensuring income tax collection in India. The Annual Information Statement (AIS) consolidates TDS data alongside other income flows for taxpayers.
For working capital management, EPCs need to plan around TDS-related cash-flow timing. Corporate-heavy customer mix means more TDS withheld; SME and residential customer mix means less, which is one reason many MSME-registered EPCs face a comparatively lighter TDS burden.
How TDS works on a solar EPC payment
- Contract execution. EPC and customer sign contract for solar project.
- Project work and invoice. EPC delivers and invoices for the work.
- Customer payment due. Customer prepares to pay the invoice.
- TDS deduction. If customer is required to deduct TDS, deducts at applicable rate.
- Payment to EPC. Customer pays the EPC the invoice amount minus TDS.
- TDS deposit. Customer deposits the deducted TDS with the government by the due date (7th of the following month; 30 April for March).
- TDS certificate. Customer issues Form 131 (earlier Form 16A) to the EPC documenting the deduction.
- EPC tax credit. EPC's income tax computation includes the TDS as advance tax credit.
- Quarterly TDS return. Customer files the quarterly statement (Form 140, earlier Form 26Q).
- EPC's annual return. EPC files annual income tax return claiming TDS credit; net tax payable or refund as applicable.
Illustrative example: TDS on a corporate solar contract
Contract. An illustrative 100 kWp commercial rooftop project for a manufacturing company (not a real customer). Contract value ₹50 lakh + ₹4.45 lakh GST (8.9 percent effective: 5 percent on the 70 percent goods share and 18 percent on the 30 percent service share, per the 70:30 rule and entry 38) = ₹54.45 lakh. See GST on solar systems in India for how the split works.
TDS applicability. Customer is a company, so a designated person; project work falls under section 393(1) Table Sl. No. 6(i). TDS rate: 2 percent. This example assumes TDS on the value excluding GST, which is the usual practice when GST is shown separately on the invoice (CBDT Circular 23/2017 under the old Act; we could not open the circular text, so agree the base in writing and confirm with your CA).
TDS calculation. 2 percent of ₹50 lakh = ₹1 lakh.
Net payment to EPC. ₹54.45 lakh minus ₹1 lakh = ₹53.45 lakh paid to EPC.
TDS deposit and credit. Customer deposits ₹1 lakh with government, issues the TDS certificate (Form 131). EPC includes ₹1 lakh as tax credit in its income tax computation.
EPC's net tax impact. If EPC's annual tax liability is say ₹15 lakh, the ₹1 lakh TDS reduces the additional tax payable to ₹14 lakh. Net result: same total tax, different cash-flow timing.
Benefits of the TDS mechanism
- Ensures tax collection. Point-of-payment deduction reduces evasion risk.
- Government cash flow. Tax revenue flows continuously.
- Cleaner compliance. Annual reconciliation through AIS.
- Transparent records. AIS shows all deductions.
- Standardised rates. Predictable structure for compliance.
- Cross-checks. Recipient and payer side filings reconcile.
Limitations and challenges
Cash-flow lag for recipient. Money withheld before recipient's tax liability is determined.
Compliance burden on deductor. Companies and audit-required customers carry deduction overhead.
Certificate delays. Late issuance of the TDS certificate affects the recipient's records.
Mismatch risk. Recipient and deductor side mismatches need reconciliation.
Higher rates for non-PAN. Penalty rate without PAN.
Cross-border complexity. Different rules for non-resident recipients.
Sectoral nuance. Different sections, rates, thresholds.
TDS in solar EPC contracts
| Scenario | Likely TDS section | Rate |
|---|---|---|
| EPC contract with a company, firm or other designated customer | 393(1) Table Sl. 6(i) (formerly 194C) | 1 percent (individual/HUF contractor) or 2 percent (others) |
| Pure consulting / professional services | 393(1) Table Sl. 6(iii) (formerly 194J) | 10 percent (technical fees 2 percent) |
| EPC contract with individual residential customer (personal purpose) | Not applicable | Nil |
| EPC contract with an individual or HUF below the turnover limits (INR 1 crore business, INR 50 lakh profession) | Usually not applicable | Nil |
| Pure goods supply | Generally not under 6(i); Sl. 8(ii) only if buyer turnover exceeds INR 10 crore and the sum exceeds INR 50 lakh | Nil, or 0.1 percent on the amount above INR 50 lakh |
| GST TDS (Section 51 CGST) | For notified government deductors | 1 percent (CGST) if supply under a contract exceeds ₹2.5 lakh |
| Higher rate (no PAN) | Penalty regime | Higher of normal rate or 20 percent |
Quick facts
| Full form | Tax Deducted at Source |
|---|---|
| Statute | Income-tax Act, 2025 (in force from 1 April 2026; replaced the 1961 Act) |
| Common entries for solar EPC | s.393(1) Table Sl. 6(i) (formerly 194C), Sl. 6(iii) (formerly 194J) |
| Contract work rate | 1 percent (individual/HUF contractor) or 2 percent (others); thresholds INR 30,000 per sum, INR 1,00,000 aggregate |
| Professional fees rate | 10 percent (technical fees 2 percent) |
| Higher rate (no PAN) | Higher of normal rate or 20 percent |
| Deposit due date | 7th of the following month (30 April for March) |
| Forms (Rules 2026) | Form 140 quarterly statement, Form 131 certificate, Form 141 challan-cum-statement |
| Reference statement | AIS |
Common mistakes about TDS
- Confusing income tax TDS with GST TDS. Different statutes, different mechanisms.
- Missing TDS deduction obligation. Corporate customers required to deduct.
- Late deposit. Interest and penalty.
- Not providing PAN. Higher TDS rate.
- Failing to file quarterly return. Form 140 for non-salary payments.
- Skipping the TDS certificate. Recipient needs Form 131 for credit.
- Quoting old section numbers. After 1 April 2026 the portal warns this can cause processing errors and credit mismatches.
- Treating residential customer as required to deduct. Most residential not under TDS obligation.
- Forgetting that pure goods supply usually not under TDS. Service component triggers it.
Key takeaways
- TDS is the income tax mechanism where the payer deducts tax at source and deposits it with the government.
- For solar EPCs with company or firm customers, TDS typically applies under section 393(1) Sl. 6(i) or 6(iii) of the Income-tax Act, 2025 (formerly 194C or 194J).
- Rates: 1 to 2 percent (contract work), 10 percent (professional fees), higher without PAN.
- Distinct from GST TDS (1 percent under CGST s.51, notified government deductors only).
- AIS consolidates all TDS for the recipient.
- Cash-flow lag between TDS deduction and tax credit utilisation.
- Compliance via deductor's quarterly TDS return (Form 140).
Frequently Asked Questions
What is TDS?
TDS stands for Tax Deducted at Source. It is the mechanism under Indian Income Tax law (now the Income-tax Act, 2025, in force from 1 April 2026) that requires the payer of certain payments (salaries, contractor payments, professional fees, rent above thresholds, etc.) to deduct tax from the payment and deposit it with the government. The recipient gets credit for the deducted tax against their final tax liability.
Does TDS apply to solar EPC payments?
Yes, in specific scenarios. When a customer (often a company or large entity) pays an EPC for solar project work, TDS may apply under section 393(1) of the Income-tax Act, 2025, Table Sl. No. 6(i) (payments for work under a contract; formerly section 194C). Professional or technical fees fall under Sl. No. 6(iii) (formerly 194J). The applicable entry and rate depend on the contract structure and the payer's category. The e-filing portal FAQ says rates and thresholds were carried over unchanged from the 1961 Act.
What is the TDS rate for solar EPC contracts?
Under section 393(1) Table Sl. No. 6(i) (formerly 194C): 1 percent if the contractor is an individual or HUF, 2 percent for any other contractor, with a threshold of INR 30,000 for a single sum and INR 1,00,000 in aggregate. Higher rates apply if PAN is not provided (higher of the normal rate or 20 percent). Professional fees under Sl. No. 6(iii) (formerly 194J) are 10 percent, and technical fees are 2 percent (threshold INR 50,000).
Is TDS the same as GST?
No. TDS is under Income Tax. GST is a separate indirect tax. The two operate on different bases and serve different purposes. A solar EPC may face both TDS deduction by customer (income tax) and GST on the same invoice (indirect tax).
Who has to deduct TDS?
For contract payments under Sl. No. 6(i), the payer must be a "designated person" (section 402(11)): government, local authorities, companies, firms including LLPs, co-operative societies, trusts and similar bodies, plus an individual, HUF, AOP or BOI whose turnover in the preceding year exceeded INR 1 crore (business) or INR 50 lakh (profession). A payment made by an individual or HUF exclusively for personal purposes is not subject to deduction, so a household paying for its own rooftop system typically does not deduct TDS.
How does the EPC get credit for TDS?
The customer deducts TDS, deposits it with the government, and issues a TDS certificate (Form 131 under the Income-tax Rules, 2026; earlier Form 16A). The EPC claims credit against its final tax liability. The credit shows in the Annual Information Statement (AIS), and for tax year 2026-27 under the new Act it appears in Form 168.
What is Form 26AS?
Form 26AS is the older consolidated annual tax statement showing TDS deducted, TCS collected, advance tax and other payments. The Annual Information Statement (AIS) is now the reference for checking TDS credit. If a deductor quotes an old section number or the wrong year, the credit can mismatch and the deductor has to file a corrected return.
Is TDS deducted on goods supply?
Generally no under the work-contract entry, which covers work and labour. A separate entry, section 393(1) Table Sl. No. 8(ii), deducts 0.1 percent on the part of goods purchases above INR 50 lakh, but only where the buyer's turnover in the previous year exceeded INR 10 crore (section 402(6)), and not where tax is deductible under another provision. Mixed contracts (goods plus installation) need careful structuring and a CA's view.
What is TDS under GST (CGST/SGST TDS)?
Separate from income tax TDS. GST also has its own TDS under Section 51 of the CGST Act. It applies only to departments or establishments of the Central or State Government, local authorities, governmental agencies and other notified persons, at 1 percent (CGST) of the value excluding GST, where the value of supply under a contract exceeds ₹2.5 lakh. A matching State GST deduction is separate; confirm the combined position with your CA. It is separate from income tax TDS.
When is TDS deposited with the government?
Under rule 218 of the Income-tax Rules, 2026, by the 7th of the month after the month of deduction, except that tax deducted in March is due by 30 April. Where an individual or HUF deducts under Table Sl. No. 2(i), 3(i) or 6(ii), deposit is within 30 days from the end of the month with a challan-cum-statement in Form 141 (replacing Forms 26QB, 26QC, 26QD and 26QE). Late deposit attracts interest of 1.5 percent per month, and late deduction 1 percent per month (section 398).
What is the TDS return?
Quarterly statements filed by the deductor: Form 140 for payments other than salary under the Income-tax Rules, 2026 (earlier Form 26Q). Due dates are 31 July, 31 October, 31 January and 31 May. The EPC's TDS credit is generated based on these filings.
How does TDS affect cash flow for solar EPCs?
The TDS is withheld at the time of customer payment. The EPC receives less cash immediately and recovers it through tax credit later. For EPCs working with companies that deduct TDS, this creates a working capital lag between TDS deduction and tax credit utilisation.
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- Income-tax Act, 2025. Section 393 (TDS table), 394, 395, 397, 398, 402, in force from 1 April 2026 (PIB, 1 April 2026). Formerly Sections 194C, 194J and others of the 1961 Act. wm.incometaxindia.gov.in
- Income-tax Rules, 2026. Rules 213, 215, 218, 219 and the forms mapping (Forms 128, 131, 140, 141, 143).
- Central Board of Direct Taxes (CBDT). TDS rules and notifications. incometax.gov.in
- Income Tax e-filing portal. TDS Compliance FAQs on the transition to the 2025 Act. incometax.gov.in
- CGST Act Section 51. GST TDS provisions (separate from income tax TDS), CBIC copy of the Act amended to 1 January 2022; later changes not checked.
- Chartered accountancy guidance. How TDS applies to your own solar EPC contract.
Written by Parth Maru, Sales & Operations Lead, Quickest Solar CRM (Surat).
Last updated: 31 October 2026.