How to Deduct TDS on a GST Bill: Rule, Examples and Journal Entry

A vendor sends you a bill: a fee, plus 18% GST on top. You owe income-tax TDS on the payment. The question every accounts team asks is whether the TDS goes on the fee alone or on the fee plus GST. The short answer: when the GST is shown separately, deduct TDS on the value without GST. This guide explains the rule, the cases where it does not apply, worked examples for professional fees and contract work, the journal entries, and how all of this differs from TDS under GST.

The rule: TDS on the value without GST

GST is a tax the vendor collects from you and passes to the government. It is not the vendor's income. TDS under the Income-tax Act is an advance collection of the vendor's income tax, so it makes sense to calculate it on the vendor's income, not on tax passing through their hands.

The CBDT confirmed this in a circular issued in 2017, soon after GST began. It said that where the GST component comprised in the amount paid to a resident is indicated separately in the agreement or contract, tax is to be deducted on the amount without including the GST component. The circular was written for payments to residents under the main TDS sections that charge tax on "any sum paid", which covers professional and technical fees, contract payments, commission and rent.

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act and brought the TDS provisions together in one place with new numbering. In practice most people, and most accounting software, still refer to the familiar names such as 194C and 194J, so this guide uses them. The principle on GST has not changed: tax is withheld on income, and GST shown separately is not the vendor's income.

When TDS goes on the full amount

The exclusion only works when the GST is visible. Deduct on the full amount when:

• the bill is a single figure "inclusive of all taxes" with no GST break-up;
• the vendor is unregistered or under composition and does not charge GST separately, so there is no GST component to exclude;
• you pay an advance and neither the agreement nor any document shows how much of it is GST.

If the vendor charges GST, it is worth confirming they are actually registered and active before you pay. A bill showing GST from a cancelled registration does not give you input tax credit, and the TDS calculation does not fix that.

Worked example: professional fees (194J)

A chartered accountant in your state bills you for audit work: fees of ₹2,00,000 plus CGST and SGST at 9% each. Professional fees attract TDS at 10%; fees for technical services carry a lower rate.

Had you deducted on the invoice total, TDS would have been ₹23,600, and the extra ₹3,600 would sit as excess tax in the accountant's Form 26AS until their return is processed. That is the error the rule prevents.

Worked example: contract work (194C)

A company hires a contractor, a partnership firm, to repaint its office. The bill is ₹80,000 plus 18% GST charged as IGST of ₹14,400 because the contractor is registered in another state. Contract payments to a firm or company attract TDS at 2%; payments to an individual or HUF contractor attract 1%.

Thresholds for each section still apply, and they are tested on the payment before deciding whether any TDS is due at all. Check the current thresholds for the year rather than relying on an old figure.

Journal entries for TDS on a GST bill

Using the professional fees example, where the input tax credit is available:

Professional Fees A/c      Dr   2,00,000
Input CGST A/c             Dr      18,000
Input SGST A/c             Dr      18,000
    To TDS Payable (194J) A/c          20,000
    To CA Firm A/c                   2,16,000
(Being bill booked and TDS deducted on value excluding GST)

CA Firm A/c                Dr   2,16,000
    To Bank A/c                      2,16,000
(Being payment made to the vendor)

TDS Payable (194J) A/c     Dr      20,000
    To Bank A/c                         20,000
(Being TDS deposited)

Two points are easy to get wrong. First, the input ledgers carry the full GST: TDS does not reduce your credit. Second, the vendor ledger is credited with the invoice total minus TDS, so it clears to nil when you pay the net amount. If the credit is blocked, the GST goes into the expense instead of the input ledgers, and the TDS is still calculated on the value excluding GST. The GST side of these entries is covered in GST payment journal entry, and where each ledger sits in Tally is in GST ledger heads in Tally.

Rent, purchases of goods and other sections

• Rent. Commercial rent with GST charged separately follows the same rule: TDS on the rent, not on the GST. Where rent falls under reverse charge, you pay the GST yourself, and the TDS is on the rent paid to the landlord. See GST on rent and RCM.
• Commission and brokerage. Same rule: deduct on the commission excluding GST.
• Purchase of goods. The TDS on purchases above the annual threshold is calculated on the amount credited excluding GST where GST is shown separately. If you pay in advance and the GST portion cannot be identified, the whole advance is taken.
• Payments to non-residents. The 2017 circular addressed payments to residents. Payments to non-residents have their own rules and usually need advice.

Income-tax TDS vs GST TDS

The two share a name and very little else. The full GST version is explained in GST TDS and TCS explained; the short comparison:

A supplier billing a government department can face both on the same invoice: income-tax TDS on the value excluding GST, and GST TDS at 2% of the taxable value. Both are deducted from the payment.

A short checklist before you pay

1. Is GST shown separately on the bill or in the agreement? If yes, use the value excluding GST.
2. Which TDS category does the payment fall in, and is the threshold crossed?
3. Is the vendor's PAN on file and valid? Without it, a higher rate applies.
4. Is the vendor's GSTIN active, and does the legal name match the bill? Otherwise the GST you are paying may not come back as credit.
5. Has the TDS ledger been set to calculate on the assessable value?

The GSTIN check takes seconds. The gstinapi.com GSTIN verification API returns the status, legal name and registration details in one call, and can be run against your whole vendor master; see vendor GST verification for accounts payable.

Frequently asked questions