🌟 Running a TDS-Compliant Referral Program for B2B Startups

🏢 1. Introduction

Referral programs can be a powerful growth engine for B2B startups, helping you acquire clients through trusted recommendations. However, in India, referral payouts often attract TDS (Tax Deducted at Source) compliance, which must be handled correctly to avoid penalties.

📜 2. Why TDS Compliance Matters

• Legal Requirement: Under the Income Tax Act, payouts to referrers may require TDS deduction (usually under Section 194H for commission).

• Avoid Penalties: Late deduction or deposit of TDS can attract interest & fines.

• Professional Reputation: Shows that your startup follows ethical business practices.

🧮 3. TDS Rules for Referral Programs

Section to Apply:

• Section 194H – For commission or brokerage.

• TDS Rate: 5% (if annual payout exceeds ₹15,000 to a single referrer).

Key Notes:
✅ Deduct TDS at the time of credit or payment – whichever is earlier.
✅ Deposit TDS by the 7th of the next month.
✅ File TDS Return in Form 26Q quarterly.

💡 4. Designing a TDS-Compliant Referral Program

Step 1: Define eligibility & payout structure.
Step 2: Clearly mention TDS deduction in terms & conditions.
Step 3: Collect PAN details from referrers to avoid higher TDS rates (20%).
Step 4: Issue TDS Certificate (Form 16A) after every quarter.

📊 5. Example Calculation

If you offer ₹20,000 commission to a referrer:

• TDS = ₹20,000 × 5% = ₹1,000

• Net payout = ₹19,000

• Deposit ₹1,000 with the government.

🛠 6. Tools & Automation

• Use accounting software like Tally, Zoho Books, or QuickBooks for automatic TDS tracking.

• Integrate payment gateways that support TDS deduction for vendor payouts.

✅ 7. Key Takeaways

• Always check if your referral payouts cross ₹15,000/year for a referrer.

• Deduct and deposit TDS on time to avoid penalties.

• Keep proper records and issue Form 16A.