A detailed guide to TDS reconciliation

Businesses in India are required to file tax returns, and they must handle the process with utmost caution and precision, as there is a lot of data involved. Any business entity, whether a corporation, small business, start-up, freelancer, employer, employee, client, or vendor, can fall in the category of deductor, deductee, or both. In either of the cases, filing accurate tax returns (income tax return/TDS returns) is the ultimate goal. To ensure an accurate return filing, it is vital to perform TDS reconciliation. Here's a guide to help you understand the reconciliation process in detail.
 

What is TDS?

TDS (Tax Deducted at Source) is a tax deducted by an entity (deductor) when a payment is made to another entity (deductee). The deductor will deduct tax when the amount paid is taxable in the hands of the deductee.
 

TDS reconciliation

TDS reconciliation is a process of comparing a business's TDS records with the official tax records available with the Income Tax Department. This is done to spot and correct any discrepancies among them, ensuring accurate tax return filings.
 

Why is TDS reconciliation important?

Before filing tax returns, a business must ensure they file their returns without any errors to avoid penalties and other legal consequences from the tax authorities. So reconciling business records with official tax documents becomes necessary.
 

Who performs reconciliation?

Generally, the term "TDS reconciliation" is used to describe the reconciliation performed by the deductee, but TDS reconciliation is also performed by the deductor. The difference lies in the purpose for which they carry out reconciliation.

TDS reconciliation by deductee

When your business is a deductee, performing reconciliation using Form 26AS and Form 16A becomes crucial to claim appropriate tax credit during ITR filing. Let us walk through the documents and steps involved in deductee reconciliation.

Documents required by the deductee to perform reconciliation

Form 26AS and the TDS certificate (Form 16A) are two important documents that
a deductee must have beforehand to perform TDS reconciliation. Here's a detailed overview of the documents.

a) Form 26AS

Form 26AS is a downloadable tax document available in the income tax portal containing tax details such as TDS, TCS, advance tax, and other taxpayer information. Consider a case where your business receives a payment from a client and your client deducts TDS on the payment made to you. The client will have to pay the deducted amount to the Income Tax Department via their quarterly TDS return. A consolidated tax document will be generated against your PAN based on the TDS returns filed by all your clients. Your business (deductee) can use this statement (Form 26AS) to perform TDS reconciliation while filing ITR.

How and where to download Form 26AS?

1. Click the following link, https://eportal.incometax.gov.in and log in using your income tax credentials.

2. Once logged in, go to e-File > Income Tax Returns > View Form 26AS.

3. Click Confirm on the Disclaimer dialogue box.

4. You will be redirected to the TRACES website, where an Attention Taxpayer dialogue box will appear. Select the checkbox to give consent to use and accept Form 26AS. Then click Proceed.

5. Click the View Tax Credit (Form 26AS) link at the bottom of the page.

6. Select the assessment year and file type to download your Form 26AS.
    

Components of Form 26AS

The structure of Form 26AS has been changed from the assessment year 2023–2024. The below table is the current structure of Form 26AS, according to the TRACES website.

b) TDS certificate

Form 16A is a TDS certificate issued by the deductor to the deductee for deducting TDS on non-salary payments. You can request Form 16A from your deductors. Please note that this certificate is different from Form 16, which is issued to salaried employees (not businesses) by the deductor.
 

Procedure for TDS reconciliation by deductee

1. Download Form 26AS as per the steps mentioned above.  Note that Form 26AS will display the TDS details of your business only after the deductor files their TDS return. Therefore, schedule your TDS reconciliation accordingly.

2. Collect Form 16A from various deductors who have deducted TDS on non-salary incomes paid to your business.

Once you have the required documents, perform TDS reconciliation as below:

• Verify whether your business has correctly received the payment from your deductor after TDS deductions. This can be done by cross-checking invoices your business issued to the deductor with your business's bank statement. The above step will ensure that your business has actually received the amount mentioned in the invoice after TDS deductions.

• Now ensure that the income has been accurately recorded in the books or accounting software. Consider a case where your business earns 10,000 rupees from a sale made to a client and your client deducts 1,000 rupees as TDS. Now, this income would be recorded in your books as follows:
  
  Income: 10,000 (credit)
  Cash account: 9,000 (debit)
  TDS receivables: 1,000 (debit)
  
  The respective income and the TDS deducted for it will be available in Form 16A.

• Reconcile Form 26AS with your books to ensure consistency between your accounting records and government data. Finally, perform reconciliation between Form 26AS and the respective Form 16A statements to verify that the deductors have correctly paid the TDS deducted from your business to the tax authority, enabling you to claim accurate tax credit while filing your ITR.
   

 How to handle mismatches?

• If there is an error on your end, rectify it in your books and file the ITR accurately.

• If the discrepancy is due to a mistake in Form 26AS, reach out to the respective deductor and request them to file a revised TDS return to correct the error.

TDS reconciliation by deductor

When your business has deducted TDS on various payments made to different entities, it is responsible for paying the TDS deducted to the tax authority every month. TDS reconciliation is an integral part of the return filing process.

Documents required by the deductor to perform reconciliation

a) Challan 281

This form is used by deductors to deposit TDS deducted by them to the Income Tax Department.

b) TDS returns

A TDS return is a statement filed by the deductor with the Income Tax Department. It contains details about all TDS payments for a particular quarter. Some of the important TDS returns filed by a deductor are

• Form 24Q: Return filed for TDS deducted on salaries.

• Form 26Q: Return filed for TDS deducted on non-salary payments.

• Form 27Q: Return filed for TDS deducted on payments made to non-residents.

c) TDS certificates

Form 16 and 16A are the TDS certificates issued by the deductor to the deductee for deducting TDS on salary and non-salary payments, respectively. TDS certificates are generated by the TRACES website based on the TDS returns filed by the deductor. The deductor can download it from the TRACES website through the following steps and issue it to the respective deductee.

1. Visit the TRACES website and log in using your credentials.

2. Click the Download tab on the dashboard.

3. Select the type of certificate (Form 16 or 16A) to be downloaded.

4. Enter the PAN details of the respective deductees to download their TDS certificates.

5. Select the assessment year and download the TDS certificate.
    

Procedure for TDS reconciliation by deductor

1. From your accounting software or books, find all the transactions for which your business has deducted TDS.

2. From the identified transactions, extract and compile TDS data such as:

• The TDS amount deducted.

• The section under which TDS is deducted.

• The deductee's PAN details.

3. Cross-check the compiled TDS record with the respective Challan(s) 281 to confirm that the TDS deducted and deposited with tax authorities is accurate. Challan has details such as

• The total TDS amount deducted under a particular section.

• TAN (Tax Deduction and Collection Account Number) of the deductor.

4. Verify that the data in the TDS returns (Form 24Q/26Q/27Q) filed are consistent with your TDS records and challans.

5. Post TDS return filing, download the TDS certificates and ensure their correctness before issuing them to the respective deductees.
 

How to handle mismatches?

When there is an error in:

• Challan 281: Request a challan correction on the TRACES website and submit the corrected challan.

• TDS returns and certificates: File a correction statement to rectify any errors in an already filed TDS return.

   

TDS reconciliation can be performed effectively when your business has clear insights about the various documents and steps involved in the process. Hopefully, this guide has provided you the clarity to handle the TDS reconciliation process for your business from both the deductor's and the deductee's perspectives.