Introduction
In the SaaS (Software as a Service) and AMC (Annual Maintenance Contract) business models, companies often receive upfront payments for services rendered over multiple years. These payments create unearned income (or deferred revenue), which is recognized gradually over the contract period.
A critical issue arises when Tax Deducted at Source (TDS) is deducted at the time of receipt, while the corresponding income is recognized over multiple financial years. This leads to a mismatch in TDS credit claims and taxable income, creating compliance and cash flow challenges for businesses.
This article will explore:
How unearned income works in SaaS & AMC businesses
When TDS is deducted & the challenges it creates
How to carry forward TDS & claim it in the correct year
Best practices for tax compliance & cash flow optimization
1. Understanding Unearned Income in SaaS & AMC Businesses
How Upfront Payments Create Deferred Revenue
SaaS and AMC companies often receive lump sum payments for long-term service contracts. However, under accounting standards (Ind AS 115 / AS 9), revenue must be recognized proportionally over the contract period.
Example: A SaaS company sells a 3-year subscription plan for ₹30 lakh in April 2024.
- Under accounting standards, the revenue is recognized as ₹10 lakh per year over three years.
- But the entire ₹30 lakh is received upfront, leading to immediate TDS deduction by the client.
TDS Deduction: When & How It Happens
- As per Section 194J (TDS on Professional Fees) or Section 194C (TDS on Contracts), clients deduct 10% TDS when making payments.
- In our example, the client deducts ₹3 lakh TDS (10% of ₹30 lakh) in FY 2024-25.
- However, the company only recognizes ₹10 lakh as income in FY 2024-25, leading to excess TDS deduction compared to taxable income.
Problem: Since TDS is deducted upfront but revenue is recognized gradually, the business cannot claim the full TDS credit in the same year.
2. Can TDS Be Carried Forward to Future Years?
Yes, businesses can claim TDS credit in future years under Section 199 of the Income Tax Act.
Key Rule: TDS credit should be given in the year when the corresponding income is taxed.
CBDT Circular No. 5/2001 clarifies that if TDS is deducted on advance income spanning multiple years, it can be allocated proportionately across those years.
Rule 37BA of Income Tax Rules also allows TDS credit to be matched with the year in which the income is actually taxed.
What This Means: If a SaaS business receives a 3-year AMC payment in one year, it does not have to claim full TDS in that year. Instead, it can carry forward unutilized TDS and claim it proportionally in future years.
3. How to Claim TDS Carryforward in ITR?
Step 1: Verify TDS in Form 26AS
- Check Form 26AS for TDS deducted by clients.
- Ensure that it correctly reflects TDS deducted against the advance income received.
Step 2: Allocate TDS in the Correct Year
- While filing ITR-5 or ITR-6, allocate the TDS credit in proportion to the revenue recognized for that year.
- If only ₹10 lakh revenue is recognized (out of ₹30 lakh), claim ₹1 lakh TDS credit in the first year and carry forward the remaining ₹2 lakh TDS.
Step 3: Use the ‘TDS Credit Carry Forward’ Section in ITR
- Income Tax Return (ITR-5 / ITR-6) allows businesses to carry forward unutilized TDS credit.
- In the TDS schedule, show the full TDS deducted, but claim only the portion relevant for the year.
- The remaining TDS will be auto-adjusted in future ITR filings.
Best Practice: Keep a reconciliation sheet of revenue recognition vs. TDS credit to avoid mismatches with the tax department.
4. Common Mistakes & How to Avoid Them
Mistake 1: Claiming Full TDS in the Year of Receipt
If a company claims full TDS credit in the same year but reports only a portion of the revenue, it may trigger an income-tax scrutiny notice.
Solution: Allocate TDS proportionally over contract years as per tax rules.
Mistake 2: Not Carrying Forward Unused TDS
Many businesses miss claiming carry-forward TDS, leading to cash flow losses.
Solution: Always reconcile Form 26AS with deferred revenue recognition before filing ITR.
Mistake 3: Incorrectly Reporting TDS in ITR
If TDS is not allocated properly in ITR-5 / ITR-6, it may not reflect correctly in future years.
Solution: Use the ‘TDS Credit Carry Forward’ section in ITR.
5. Case Study: Managing TDS Carryforward in a SaaS Business
Scenario:
- A SaaS company sells a 5-year subscription for ₹50 lakh in April 2024.
- The client deducts ₹5 lakh TDS (10%) upfront in FY 2024-25.
- Revenue is recognized ₹10 lakh per year over 5 years.
TDS Claim Breakdown (Per Financial Year):
| Financial Year | Revenue Recognized (₹) | TDS Claimed (₹) | TDS Carry Forward (₹) |
|---|---|---|---|
| 2024-25 | 10,00,000 | 1,00,000 | 4,00,000 |
| 2025-26 | 10,00,000 | 1,00,000 | 3,00,000 |
| 2026-27 | 10,00,000 | 1,00,000 | 2,00,000 |
| 2027-28 | 10,00,000 | 1,00,000 | 1,00,000 |
| 2028-29 | 10,00,000 | 1,00,000 | 0 |
By carrying forward TDS, the business avoids unnecessary tax outflows and matches tax credit with actual income.
6. FAQs on TDS Carryforward for SaaS & AMC Businesses
Q1: Can a business claim full TDS in the year of receipt?
No. TDS credit must be claimed in proportion to revenue recognition.
Q2: What if the client wrongly deducts TDS on the full amount upfront?
The business should carry forward excess TDS and claim it in future years.
Q3: How to adjust TDS in case of a refund or contract cancellation?
- If the contract is canceled, unrecognized revenue must be reversed, and excess TDS credit can be adjusted in ITR.
Q4: How can businesses avoid tax scrutiny in case of large TDS carryforward amounts?
Maintain proper documentation, including revenue recognition schedules and Form 26AS reconciliations.
Conclusion: Key Takeaways
Unearned income is taxed when recognized, not when received.
TDS should be claimed proportionally across contract years.
Use the ‘TDS Credit Carry Forward’ section in ITR-5/ITR-6.
Keep proper reconciliation records to avoid tax disputes.
By following these best practices, SaaS & AMC businesses can optimize tax payments, improve cash flow, and ensure smooth tax compliance.
Stox N Tax 
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