Quick Facts
What TDS is
TDS (Tax Deducted at Source) is a tax mechanism under the Income Tax Act where the payer of specified services deducts a percentage of the payment as tax and deposits it with the government. The service provider (recipient of payment) receives credit for TDS when filing their annual income tax return.
The mechanism serves two purposes:
Improves tax collection: Government receives tax at the time of payment rather than at year-end.
Tracks income: TDS provides tax authorities with data on income flows to taxpayers.
For solar projects, TDS applies to various service payments:
EPC contracts under Section 194C: 2% TDS rate.
Technical services under Section 194J: 10% TDS rate.
Professional services under Section 194J: 2% TDS rate.
Rent payments under Section 194I.
Interest payments under various sections.
The TDS rate varies by service category. PAN-holders benefit from standard rates; non-PAN holders face higher rates.
TDS in solar EPC contracts
For solar EPC contracts (Engineering, Procurement, and Construction):
Section 194C (contract work) typically applies.
Standard TDS rate: 2%.
Threshold: Rs 1 lakh per single contract or Rs 1 lakh aggregate per year per payer.
Above the threshold, TDS is deducted on the entire contract amount.
For a Rs 5 crore EPC contract:
TDS deductible: Rs 5,00,00,000 × 2% = Rs 10,00,000.
The buyer pays Rs 4.90 crore to the EPC contractor.
Rs 10 lakh is deposited with the government on the EPC contractor’s account.
The EPC contractor claims credit of Rs 10 lakh in their income tax return.
TDS is essentially an advance payment of income tax for the EPC contractor.
TDS in solar O&M and AMC
O&M and AMC services for solar:
Section 194C (contract work) typically applies for routine maintenance.
Standard TDS rate: 2%.
Section 194J (technical services) may apply for specialised technical work.
Rate: 10% for technical services.
For an annual O&M contract of Rs 5 lakh:
Under Section 194C: TDS Rs 10,000 (2%).
Under Section 194J for technical: TDS Rs 50,000 (10%).
The classification matters significantly. Most routine O&M falls under Section 194C; specialised technical work falls under Section 194J.
For AMC for residential rooftop solar:
Residential consumer (typically not a business): TDS thresholds may not apply because the consumer is not a tax-deducting entity for low-value transactions.
Commercial AMC: TDS applies above thresholds.
TDS in professional services
Solar projects often involve professional services:
Solar design consultancy.
Lender’s technical advisor work.
Independent engineering review.
Performance verification.
Insurance broker services.
Legal services.
Most professional services fall under Section 194J:
Professional services: 2% TDS.
Technical services: 10% TDS.
The distinction between “professional” and “technical” is subtle. CBDT clarifications help but interpretation can vary.
TDS thresholds
Section 194C (contracts):
Single payment: Rs 1 lakh threshold.
Aggregate annual: Rs 1 lakh threshold.
Once either threshold is reached, TDS applies on the entire payment.
Section 194J (technical/professional services):
Single payment: Rs 50,000 threshold for technical.
Aggregate annual: Rs 1 lakh threshold.
These thresholds determine when TDS deduction kicks in. Below threshold, no TDS deduction.
TDS process
For payers (TDS deductors):
Verify the service category and applicable section.
Calculate TDS amount per applicable rate.
Deduct TDS from payment.
Pay the recipient the net amount.
Deposit TDS with government within 7 days of month-end.
Issue TDS certificate (Form 16A) to recipient.
File quarterly TDS return (Form 26Q for non-salary).
For recipients (deductees):
Verify TDS certificate from each payer.
Compile TDS records throughout the year.
Use TDS as credit in annual income tax return.
The TDS is essentially advance income tax payment.
TDS for solar developers
For solar EPC contractors, O&M providers, and service vendors:
Plan cash flow considering TDS deductions.
Track TDS deductions per client.
Collect TDS certificates promptly.
Use Form 26AS (taxpayer’s TDS statement from Income Tax Department) to verify TDS credits.
Reconcile TDS records before income tax filing.
For larger solar developers, TDS is a regular cash flow consideration. The 2% TDS on Rs 5 crore contracts is Rs 10 lakh of cash tied up until year-end.
Common TDS mistakes
Confusing TDS with TCS. TDS is on income payments; TCS is on goods sales.
Wrong section application. Misclassifying as 194C versus 194J affects rate by 8%.
Missing thresholds. Some payers don’t deduct because they think threshold not reached, but aggregate may exceed.
Late deposit. TDS must be deposited within 7 days of month-end. Late deposit attracts interest.
Missing TDS certificates. Without Form 16A, recipients can’t claim credit.
Mismatched amounts. TDS in books, TDS in returns, and TDS in deductee’s Form 26AS must all match.
Best practices
For solar EPC contractors:
Maintain detailed records of contracts and payments.
Track TDS deductions by client.
Collect Form 16A from clients promptly.
Reconcile TDS records monthly.
Use accounting software with TDS modules.
For project buyers:
Identify applicable TDS sections for each contract.
Set up TDS deduction procedures.
Comply with deposit and return filing deadlines.
Issue TDS certificates timely.
For tax planning:
Consult chartered accountants for company-specific TDS implications.
For complex contracts (turnkey EPC with services), structure carefully for clear TDS treatment.
Standards and references
TDS is governed by various sections of the Income Tax Act 1961 (especially Sections 194C, 194I, 194J). CBDT issues notifications and clarifications. Form 16A is the prescribed TDS certificate. Form 26Q is the quarterly return for non-salary TDS. The TDS portal handles electronic filing.
Related glossary terms
- TCS on Solar
- Accelerated Depreciation
- MAT Credit
- GST Input Credit
- AMC
- O&M in Solar
- Power Purchase Agreement
Key takeaways
TDS (Tax Deducted at Source) under the Income Tax Act applies to payments for solar services. Standard rates: 2% for contracts (Section 194C), 10% for technical services (Section 194J), 2% for professional services. TDS thresholds vary by section. The payer deducts TDS, pays net amount to recipient, and deposits TDS with government. The recipient claims TDS credit in their annual income tax return. TDS is essentially advance income tax payment. For solar EPC contractors and service providers, TDS is a significant cash flow consideration. Proper section classification, threshold tracking, and timely compliance are essential.