Introduction
Tax Deducted at Source (TDS) is a statutory requirement under the Indian Income Tax Act. Organizations must not only deduct and deposit TDS accurately but also report it correctly through quarterly returns such as Form 26Q. Microsoft Dynamics 365 Finance & Operations (D365 F&O) provides a robust framework to manage the end-to-end TDS lifecycle—from deduction to settlement and statutory reporting.
Legal Compliance Considerations
TDS compliance involves multiple statutory obligations:
- Deduction at correct rates based on sections (e.g., 194C, 194J)
- Application of threshold limits before deduction
- Timely deposit of TDS (monthly due dates)
- Quarterly return filing (Form 26Q for non-salary payments)
- Issuance of TDS certificates (Form 16A)
Non-compliance may lead to interest, penalties, and disallowance of expenses, making accurate system-driven processes essential.
Company Responsibility
TDS represents a statutory obligation to withhold and remit tax on specified payments made to vendors, contractors, professionals, landlords, employees, and other payees.
Deduct TDS at the time of invoice booking or payment, whichever is earlier except few payments like salary TDS deducted on payment only
Deducted amount becomes a statutory liability of the company until it is deposited with the Government.
Deposit timeline: By 7th of the following month for most deductions
Voucher Entry Sequence in D365 F&SC:
| TDS JV while expense booking - Manual |
| Expense | Dr | 1000 |
| Vendor | Cr | 990 |
| TDS Payable | Cr | 10 |
TDS Settlement process: Create TDS authority Vendor liability (Tax > Declaration > Withholding tax > Withholding Tax Payment)
| TDS liability creation JV - Auto |
| TDS payable | Dr | 10 |
| TDS Authority Vendor | Cr | 10 |
| TDS Payment JV - Manual |
| TDS Authority Vendor | Dr | 10 |
| Bank | Cr | 10 |
TDS Settlement Process
1. Posted TDS transaction for April: TDS is automatically posted during April transactions via AP invoice journal/ vendor payment journal or PO or adjustment if any
2. RUN TDS SETTLEMENT PROCESS (Here it is run for April Month)
Navigation: Tax > Declarations > Withholding Tax > Withholding Tax Payment
3. TDS transactions are visible on "Withholding tax settlement period" form only after settlement process run successfully
4. Settlement generates withholding tax payment lines on "Withholding tax settlement period" form based on each TDS section (two sections → two lines).
5. Posting settlement creates reversal entries, clearing the TDS payable ledger balance and creating TDS authority vendor liability to pay
6. TDS authority vendor transaction: System creates TDS authority vendor payable entries for each section at month-end of the April month as the settlement run for april month and tracsaction date was selected as 30-04-2026 on TDS settlement dialogue box
7. TDS liability is paid by settling vendor transactions through the vendor payment process.
8. Challan details are updated to link payment with statutory records.
9. Generate 26Q report (TDS Statement): Form 26Q is generated quarterly using settled TDS and challan data for compliance reporting.
Following are the screenshots from form 26Q of deducted Withholding tax and submitted to Goveenment:
*Refer attached 26Q statment for full view
Note: The following prerequisites are required to generate Form 26Q statement:- In the Tax information area of the Legal entities form, enter the Permanent Account Number (PAN) and withholding tax information.
- In the Withholding tax component groups form, enter the section codes for all withholding tax component groups associated with TDS transactions that are posted for the period.
- In the Withholding tax codes form, set up the reporting codes for the withholding tax components that are used for the TDS transactions that are posted for the period.
- Enter the challan details for all TDS Payment transactions that are posted for the period. (Vendor payment Journal > Withholding Tax > Challan Information)
- Create "withholding tax reporting code" for all the TDS component
Thank You!
​​​​​​​Happy Learning 😊
