1. Country-Specific Features
  2. India Help Topics
  3. India Localization SuiteTax Engine
  4. Tax Deduction at Source
  5. Setting Up TDS
  6. Creating TDS Tax Rate Rules
  7. Vendor Exemption
  8. Calculating and Managing Vendor Exemption Rules

Calculating and Managing Vendor Exemption Rules

If a vendor exemption rule exists, vendor exemption is calculated when you preview or save an approved vendor bill with a section code. The Tax Details subtab provides a summary of the TDS and vendor exemption details. To understand how the vendor exemption and TDS calculation works, read the following.

Transaction Periods

For any financial year, transactions are divided into three periods:

  • Before vendor exemption – Transactions before Date A.

  • Vendor exemption period – Transactions from Date A to Date B.

  • After vendor exemption – Transactions after Date B.

    If an amount-based rule is created from Date A to Date B, then transaction amounts before Date A are considered as the “Before Vendor Exemption” amount, and transaction amounts after Date B are considered as the “After Vendor Exemption” amount.

Note:

Bills created after the vendor exemption rule period won't be adjusted by the rule. For bills without a vendor exemption, TDS is calculated either retrospectively or non-retrospectively, depending on the rules.

Threshold Application

The TDS threshold is applied to the total amount of all transactions in the financial year, which includes the sum of transactions before, during, and after the exemption period. For non-retrospective rules, threshold deduction is applied first to the “Before Vendor Exemption” amount, then to the “Vendor Exemption” period amount, and finally to the “After Vendor Exemption” amount. The TDS rule threshold amounts apply to the vendor exemption amount as well.

If the cumulative total is below the threshold, no TDS is deducted for any period, including the vendor exemption period.

By default, the “Before Vendor Exemption” and “After Vendor Exemption” amounts are calculated using the standard TDS rate. For the “Vendor Exemption” period amount, if slabs are considered, the calculation starts from the cumulative total at the end of the “Before Vendor Exemption” period.

TDS Calculation Methods

The vendor exemption calculation is based on two types of rules:

  • Amount-based Rules

    • The calculation is based on the threshold amount.

    • If the bill amount is negative, a TI Journal is created to adjust the tax.

    • Before vendor exemption – Taxed at the standard TDS rate.

    • Vendor exemption period – Entire amount is taxed at the first period’s slab rate.

    • After vendor exemption – Taxed at the standard TDS rate.

    Amount-based Rule Calculation with Tax Slabs

    ABC Pvt Ltd receives the following bills from XYZ Services:

    • March 2024 (before exemption period):

      Bill amount: ₹10,000

    • May 2024 (during exemption period):

      Bill amount: ₹20,000

    • July 2024 (after exemption period):

      Bill Amount: ₹10,000

    Step-by-step TDS Calculation:

    1. Before exemption period (March 2024, ₹10,000)

      • This amount is calculated at the standard TDS rate. If the TDS rate is 10%:

      • TDS: ₹10,000 × 10% = ₹1,000

    2. During exemption period (May 2024, ₹30,000)

      • The available slabs are:

        • Slab 1: ₹0 – ₹5,000 @ 1%

        • Slab 2: ₹5,000 – ₹30,000 @ 5%

      • The slabs for the exemption period start from ₹10,000 (the cumulative before-exemption total), not from zero.

      • In this case, the calculation starts from ₹10,000. The entire exemption period amount of ₹30,000 is split as follows:

        From ₹10,000 to ₹30,000 (a total of ₹20,000) falls under the 5% slab.

        TDS: ₹20,000 × 5% = ₹1,000

      • The remaining ₹10,000 of the ₹30,000 exemption-period amount, should be taxed at the standard TDS rate.

    3. After exemption period (July 2024, ₹10,000)

      This amount is calculated at the standard TDS rate. If the TDS rate is 10%:

      TDS: ₹10,000 × 10% = ₹1,000

  • Period Ranges – The calculation looks at the specific period for the rule and applies the correct tax rate.

    • Before vendor exemption – Taxed at the standard TDS rate.

    • Vendor exemption period – If a slab is defined (for example, from date A to date B), the calculation for the vendor exemption period amount (bills amount between date A and date B) will be taxed at the slab rate.

      Note:

      Due to the current limitation, only the first applicable period slab rate can be used in the vendor exemption period.

    • After vendor exemption – Taxed at the standard TDS rate.

Calculation Sequence for Nonretrospective Rules

The threshold deduction is applied in the following order:

  1. Before vendor exemption amount

  2. Vendor exemption period amount

  3. After vendor exemption amount

Note:

For period range rules, the vendor exemption period amount is always taxed at the first period’s slab rate. Multiple period slab rates are not supported for the vendor exemption period.

Related Topics

General Notices