TDS: what NGOs must deduct and deposit

Every NGO that pays salaries, contractors, professionals or rent above the limits must deduct tax at source (TDS) and pay it to the government, whatever its legal form, and even though its own income is exempt. Under the Income-tax Act, 2025 the rules start at Section 392, with new form numbers: the TAN application is Form 135, the quarterly statements are Forms 138 and 140, and the certificates are Forms 130 and 131.

This guide sets out which payments an NGO deducts on, the rates and thresholds from 1 April 2026, when to pay the tax and file the statements, the certificates to issue, what mistakes cost, and when tax is deducted from payments made to an NGO. It is for NGO finance teams, administrators and their chartered accountants (CAs).

Why NGOs deduct tax at source

TDS is a way of collecting the payee’s income tax: the payer deducts a percentage of certain payments, pays it to the government and gives the payee credit for it. An NGO’s own exemption doesn’t matter, because the tax belongs to the person being paid.

The Act names NGOs as deductors in plain terms. For payments to contractors, the payers it lists include any society registered under the Societies Registration Act, 1860 or a corresponding law, any trust and any company (Section 402(11)). For rent and professional fees, the payer is a “specified person”, which covers anyone other than an individual or a Hindu undivided family (HUF), and larger individuals and HUFs too (Section 402(37)).

Get a TAN first. Every deductor needs a Tax Deduction and Collection Account Number and must quote it in payments, statements and certificates (Section 397(1)(a), formerly section 203A). NGOs apply in Form 135 (formerly Form 49B); Form 134 is for government deductors. A Section 8 company gets its TAN when it is incorporated through SPICe+.

The main payments, rates and thresholds

These are the rates in the 2025 Act as enacted; the Finance Act, 2026 didn’t change them.

Manpower agencies are contractors. From 1 April 2026, “work” for contractor TDS includes supplying people to work under the payer’s supervision, control or direction (Section 402(47)(f), inserted by the Finance Act, 2026). So security guards, drivers or field staff supplied by an agency are contractor payments.

Directors’ fees matter to Section 8 companies: sitting fees and commission paid to directors are taxed at 10% with no threshold.

Paying the tax and filing statements

Pay the tax every month. Under the old rules, tax deducted in a month was paid to the government by the 7th of the next month, and tax deducted in March by 30 April. Tax guides such as ClearTax give the same dates under the Income-tax Rules, 2026 (Rule 218), but we couldn’t check the official text, so confirm them with your CA.

File quarterly statements. Report what you deducted in Form 138 for salaries (formerly Form 24Q) and Form 140 for other payments to residents (formerly Form 26Q).

Issue certificates. Employees get Form 130 (formerly Form 16) by 15 June after the tax year. Other payees get Form 131 (formerly Form 16A) for each quarter. Form 16A was due within 15 days of the statement’s due date; check the 2026 Rules’ date for Form 131 with your CA.

What mistakes cost

• Interest (Section 398(3), formerly section 201(1A)): tax guides give the old rates, 1% a month on tax you should have deducted but didn’t, and 1.5% a month on tax you deducted but didn’t pay on time.
• Late fee (Section 427, formerly section 234E): ₹200 for every day a statement is late, up to the amount of tax deductible.
• Penalty (Section 461, formerly section 271H): ₹10,000 to ₹1,00,000 for a late or incorrect statement. It doesn’t apply if the tax, fee and interest are paid and the statement is filed within one month of the due date.
• Lost application of income. For a registered NGO, 30% of a payment on which TDS wasn’t deducted, or wasn’t paid by the deadline in Section 35(b)(i), doesn’t count as application of income until the tax is paid (Section 341). See the 85% rule.

When tax is deducted from an NGO

Grants and donations. TDS applies to the kinds of payment the Act lists: salaries, contract work, professional and technical fees, rent, interest, commission and others. A donation or grant for which the funder gets nothing in return is none of these, so funders don’t normally deduct TDS from it. Some still do, treating a grant as a contract or a fee.

In Aroh Foundation v. Commissioner of Income Tax (Exemption), decided under the 1961 Act, an NGO’s donors had deducted TDS on its grants under the contractor and professional-fee sections, and the tax officer had treated the grants as fees. The Delhi High Court held that the donors’ deduction didn’t turn the grants into business or professional receipts, and allowed the NGO’s exemption. If a funder deducts TDS anyway, the NGO claims credit for it in its return and gets any excess refunded.

Payments for services. Where an NGO is genuinely paid for a service, such as a training contract or a research study for a company, TDS can apply to it like any other payee.

Bank interest. Banks may deduct TDS on interest they pay an NGO on its deposits. The NGO can claim credit for it in its return, or apply in advance for a certificate of lower or nil deduction in Form 128 (formerly Form 13) under Section 395. Check the tax credits shown for your PAN on the e-filing portal before you file the return.

A TDS checklist for NGOs

1. Before the first payment: get a TAN (Form 135), set up payroll, and collect payees’ PANs.
2. At each payment: check which section applies and both thresholds, a single payment and the year’s total, then deduct.
3. Each month: pay last month’s TDS by the deposit date your CA confirms (the 7th, and 30 April for March, under the old rules).
4. Each quarter: file Forms 138 and 140, then issue Form 131 certificates.
5. By 15 June: give employees their Form 130.
6. At the year end: reconcile the TDS paid with your books. The auditor reports on TDS compliance in the audit report: see filing the return and audit report.

Common mistakes

• Assuming an exempt NGO needn’t deduct. The exemption covers the NGO’s income, not its duties as a payer.
• Missing the ₹1 lakh contractor total built up from many small bills from the same supplier.
• Forgetting rent above ₹50,000 a month, or manpower agencies.
• Deducting TDS from grants to partner NGOs, which are grants, not fees.
• Paying late, which brings interest and can reduce your application of income.

Employment brings other duties too, such as provident fund and gratuity: see the labour codes for NGOs. TDS errors are cheap to prevent and expensive to fix, so ask your CA to check your first quarter’s deductions and statements under the new forms.