# Indian Startup Year-1 Compliance: What GST, TDS and Payroll Actually Require?

**Category:** Business | **Published:** 2026-05-08 | **Last reviewed:** 2026-06-19 | **Author:** Mrs. Swapna Patel

An Indian startup hits five compliance flashpoints in its first year: GST registration (mandatory above Rs. 20 lakh aggregate turnover, Rs. 10 lakh in special-category states), payroll setup (PF mandatory at 20+ employees, ESI at 10+ employees with salary up to Rs. 21,000), TDS deduction on contractor and professional fees, DPIIT recognition for Section 80-IAC tax holiday access, and an audit-ready document trail behind every customer transaction.

> **Myth:** A startup below the GST turnover limit never has to deal with GST.
>
> **Fact:** Under Section 9(3) of the [CGST Act](https://www.cbic.gov.in/htdocs-cbec/gst/cgst-act), reverse charge shifts GST onto an unregistered buyer of legal, sponsorship, or goods-transport services, who then owes the tax personally.

## What are the five compliance flashpoints in a startup's first year?

> **Short answer:** GST above Rs. 20 lakh turnover, PF/ESI payroll, TDS on outbound payments, DPIIT recognition for [Section 80-IAC](https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx), and an audit-ready document trail.

- GST once turnover crosses Rs. 20 lakh (Rs. 10 lakh in special-category states), or earlier voluntarily.
- Payroll for PF (20+ employees) and ESI (10+ employees, wages up to Rs. 21,000).
- TDS on contractor, professional, and landlord payments under Sections 194C, 194J, 194-IB, and 194-O.
- DPIIT recognition via [Startup India](https://www.startupindia.gov.in/) for the tax holiday and historic angel-tax exemption.
- A trail of tax invoices, payment receipts, salary slips, Form 16, and TDS certificates.

## When must a startup register for GST, and when is voluntary registration worth it?

> **Short answer:** [Section 22 of the CGST Act 2017](https://www.cbic.gov.in/htdocs-cbec/gst/cgst-act) makes it mandatory above Rs. 20 lakh turnover (Rs. 10 lakh special-category states; Rs. 40 lakh for exclusive goods suppliers).

- Special-category states: the North-Eastern states, Himachal Pradesh, Uttarakhand, Jammu and Kashmir, and Ladakh; the Rs. 40 lakh goods limit follows state notifications.
- Register voluntarily when B2B clients need a tax invoice for ITC and reject a [bill of supply](/answers/non-gst-invoice-format-bill-of-supply).
- Rs. 10 lakh of annual inputs at 18% recovers Rs. 1.8 lakh in ITC, and registration is the gateway to LUT-based service exports.

**[GST registration thresholds, mapped](https://hrareceipt.in/atlas/gst-registration-thresholds-2026)**

## Which documents does every B2B transaction generate?

> **Short answer:** Up to four: a quotation, a [Rule 46](https://www.cbic.gov.in/htdocs-cbec/gst/cgst-rules-as-amended) GST tax invoice, a payment receipt, and an advance receipt voucher where GST applies on advances under Section 13.

- A quotation is a pre-deal price offer with no statutory format; it is not a payment demand.
- A tax invoice (pakka bill) under Rule 46 needs both GSTINs, HSN/SAC, item-wise CGST/SGST or IGST, a unique 16-character number, and place of supply; make one via [pakka-bill](/pakka-bill). If a seller refuses to issue a GST invoice, the buyer has legal recourse — see [what to do when a seller refuses a GST invoice](/answers/seller-refuses-gst-invoice-buyer-rights).
- A payment receipt confirms funds received (UTR for digital, revenue stamp for cash above Rs. 5,000); an invoice alone proves you billed, not collected. See [Payment Receipt: When and Why](/answers/payment-receipt-when-why).
- For an advance, issue a receipt voucher and adjust it against the final invoice via [misc-receipt](/misc-receipt).

**[Tax invoice field anatomy](https://hrareceipt.in/atlas/gst-tax-invoice-rule-46-field-anatomy)**

## What does the first hire trigger: PAN, TAN, PF, ESI and Form 16?

> **Short answer:** PF is mandatory at 20+ employees (12% of basic+DA, Rs. 15,000 ceiling) under the [EPF Act 1952](https://www.epfindia.gov.in/); ESI at 10+ employees with wages up to Rs. 21,000 under the [ESI Act 1948](https://www.esic.gov.in/).

- PAN is needed to open a bank account and file the first ITR; TAN is mandatory before deducting any TDS, applied for via Form 49B (Form 134 for Government and Form 135 for non-Government applicants from 1 April 2026).
- PF is 12% of basic+DA matched by the employee; many startups extend voluntary coverage above the Rs. 15,000 ceiling.
- ESI is 3.25% employer and 0.75% employee; above Rs. 21,000 the employee exits ESI while the company covers those below.
- Every salary paying TDS needs a monthly slip and annual Form 16 (Parts A and B); make them via the [salary slip generator](/salary-slip).

## How much TDS does a founder deduct under Sections 194C, 194J, 194-IB and 194-O?

> **Short answer:** Contractor 1%/2%, professional/technical 10%/2%, rent over Rs. 50,000/month 5%, e-commerce 1%, per the [Income Tax Act](https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx).

Deposit TDS by the 7th of the following month via Challan ITNS 281; late-deposit interest is 1.5% per month under Section 201(1A). See [TDS under 194C, 194J, and 194-IB](/answers/tds-194c-194j-194ib-guide).

- File Form 24Q salary (Form 138 from 1 April 2026) and Form 26Q non-salary (Form 140 from 1 April 2026) quarterly.
- Issue Form 16A to the deductee (Form 131 from 1 April 2026) within 15 days of the return due date.

| Section | Applies to | Threshold | Rate |
| --- | --- | --- | --- |
| 194C | Contractors (web dev, design, courier, AMC) | Rs. 30,000 per contract or Rs. 1,00,000 per FY | 1% individuals/HUF, 2% others |
| 194J | Professional/technical fees | Rs. 30,000 per FY per payee | 10% (2% technical/call-centre) |
| 194-IB | Rent by individuals/HUF not under tax audit | Above Rs. 50,000 per month | 5%, in March or on vacating |
| 194-O | E-commerce operator paying participants | On gross sale value | 1% |

*TDS thresholds and rates for founder payments. Source: Sections 194C/194J/194-IB/194-O, Income Tax Act 1961.*

## What does DPIIT recognition unlock, and is angel tax still a risk?

> **Short answer:** [DPIIT Notification G.S.R. 127(E)](https://www.startupindia.gov.in/) opens the [Section 80-IAC](https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx) three-year tax holiday; Budget 2024 abolished angel tax (Section 56(2)(viib)) from AY 2025-26.

- Eligibility needs an Indian private limited company, LLP, or registered partnership, incorporated within the preceding 10 years, with turnover never above Rs. 100 crore.
- Section 80-IAC gives a three-consecutive-year tax holiday claimable in any three of the first ten years; verify the live incorporation-window cutoff first.
- Recognition adds self-certification under nine labour and three environmental laws, plus an 80% patent and 50% trademark fee rebate.
- Earlier vintages still track Section 56(2)(viib) exposure on past funding rounds during assessments.

## What changes for FY 2026-27 from 1 April 2026?

> **Short answer:** GST e-invoicing drops to Rs. 5 crore turnover under [CBIC Notification 10/2023](https://www.cbic.gov.in/htdocs-cbec/gst/notifications), PAN 2.0 brings instant free e-PAN, and faceless assessment extends to startup ITRs.

- PAN 2.0 issues instant Aadhaar-based e-PAN, free for first-time applicants, alongside the still-valid Form 49A path.
- Above Rs. 5 crore, generate and embed an IRN for every B2B tax invoice; the earlier Rs. 10 crore threshold no longer applies. See [e-invoicing and the Rs. 5 crore GST threshold](/answers/e-invoicing-gst-5-crore-threshold-fy2026-27) for the exact compliance steps.
- The Section 80-IAC sunset depends on Finance Act extensions; verify the live cutoff on the Startup India portal.
- Faceless assessment now covers startup ITRs and TDS scrutiny via the e-Filing portal, so keep every invoice, receipt, slip, and challan filed.

**[E-invoicing IRN threshold explained](https://hrareceipt.in/atlas/e-invoicing-irn-5-crore-threshold)**

## What is the day-one document stack for a founder?

> **Short answer:** Company PAN and TAN, a numbered [Rule 46](https://www.cbic.gov.in/htdocs-cbec/gst/cgst-rules-as-amended) tax invoice plus separate payment receipt per transaction, salary slips kept eight years, rent receipts for HRA, and a TDS register.

- Generate Rule 46 pakka bills via [pakka-bill](/pakka-bill) and a separate payment receipt (UTR for digital, revenue stamp for cash above Rs. 5,000) via [misc-receipt](/misc-receipt).
- Issue monthly salary slips via the [salary slip generator](/salary-slip), retained at least eight years.
- Use the [rent receipt generator](/rent-receipt) for personal office rent under HRA, cross-checking [Rule 26C verification](/answers/rule-26c-employer-hra-verification-checklist).
- Keep a TDS register for every 194C/194J/194-IB/194-O payment with Form 16A on time, watching the [Section 269ST cash limit](/answers/section-269st-cash-transaction-limit).
- The [corporate bundle](/corporate) shares all generators across a team from Rs. 499 for 100 credits on a 45-day wallet.

**[Generate a Rule 46-compliant pakka bill](https://hrareceipt.in/pakka-bill)**

## Primary sources

- [Section 22, Central Goods and Services Tax Act 2017 — CBIC](https://www.cbic.gov.in/htdocs-cbec/gst/cgst-act) — GST registration threshold (Rs. 20 lakh / Rs. 10 lakh special-category states)
- [GST e-invoicing notification (Notification 10/2023-Central Tax) — CBIC](https://www.cbic.gov.in/htdocs-cbec/gst/notifications) — E-invoicing mandatory above Rs. 5 crore aggregate turnover
- [Section 80-IAC, Income Tax Act 1961 — Income Tax Department](https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx) — Three-of-ten-year tax holiday for DPIIT-recognised eligible startups
- [DPIIT Notification G.S.R. 127(E) — Department for Promotion of Industry and Internal Trade](https://www.startupindia.gov.in/) — Startup recognition criteria and process
- [Section 56(2)(viib) and Finance Act 2024 — Income Tax Department](https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx) — Angel tax provision; abolished from AY 2025-26 by Budget 2024
- [Employees' Provident Funds and Miscellaneous Provisions Act 1952 — Ministry of Labour](https://www.epfindia.gov.in/) — PF applicability at 20+ employees, basic salary ceiling
- [Employees' State Insurance Act 1948 — Employees' State Insurance Corporation](https://www.esic.gov.in/) — ESI applicability at 10+ employees, wage ceiling Rs. 21,000
- [Sections 194C, 194J, 194-IB, 194-O — Income Tax Act 1961](https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx) — TDS on contractor, professional, rent, and e-commerce payments

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*Source: [Indian Startup Year-1 Compliance: What GST, TDS and Payroll Actually Require?](https://hrareceipt.in/answers/indian-startup-first-year-compliance-gst-tds-payroll) — HRAReceipt.in*
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