What Is TDS and How Does It Work in India?

In an enormous and economically diverse country such as India, it is imperative and extremely challenging to achieve tax collection that is efficient and transparent. Among the various schemes used by the Indian government for the regular collection of income tax is the TDS. Whether you are salaried, earning interest on bank deposits, getting professional fees or simply renting out a property, TDS is applicable for all.

This system guarantees taxes at the source of income generation, leaving little space for tax evasion and distributing the tax burden throughout the year.What is TDS ? In this article, we dive deep into what TDS is, how it works, and more. Keep reading to fully understand how this tax mechanism affects your finances.

 

What Is TDS ?

 

The TDS (Tax Deducted at Source) is the tax collected at the origin of the income. It is the responsibility of the payor to deduct the tax on certain specified payments and deposit the same into the government's account in the name of the payee/recipient . It was enacted as a provision under the Income Tax Act, 1961 to encourage the collection of tax before it fell due and maintain a steady flow of income.

The TDS (Tax Deducted at Source) is the tax collected at the origin of the income. It is the responsibility of the payor to deduct the tax on certain specified payments and deposit the same into the government's account in the name of the payee/recipient . It was enacted as a provision under the Income Tax Act, 1961 to encourage the collection of tax before it fell due and maintain a steady flow of income.

• Salaries
• Interest on securities and bank deposits
• Rent payments
• Commission and brokerage
• Professional and technical service feese
• Sale of immovable property

TDS acts as an early check against tax evasion and also helps individuals avoid the burden of paying a large amount in a lump sum while filing annual returns.

 

How TDS Works in India

 

The operational framework of TDS follows a “pre-paid taxation” model. Essentially, tax is collected at the point where income is generated, ensuring that the government receives revenue at regular intervals rather than waiting for year-end returns.

Here’s a step-by-step explanation:

 

1. The Deductor:

 

The person who is liable to make the payment is referred to as a deductor (can be a company, an employer, a tenant or a bank)..

 

2. Whoever is getting the payment (such as a salaried employee, landlord, or contractor) is the deductee

 

Whoever is getting the payment (such as a salaried employee, landlord, or contractor) is the deductee

 

3. Rate of Deductions

 

Whoever is getting the payment (such as a salaried employee, landlord, or contractor) is the deductee

 

4. TDS Payment:

 

The withheld sum should be deposited in the account of the Central Government in an approved bank (normally with challan ITNS-281).

 

5. Form 26AS:

 

The deducted amount will appear in the deductee’s Form 26AS, an annual tax credit statement that can be accessed on the income tax portal.

 

Example:

 

Suppose a bank pays interest of ₹60,000 in a financial year to a depositor. Since the interest exceeds ₹40,000 (₹50,000 for senior citizens), the bank must deduct 10% TDS—i.e., ₹6,000—and deposit it with the government. The depositor receives ₹54,000 and can claim credit for the deducted amount while filing their tax return.

 

When and Who Is Liable to Deduct TDS?

 

TDS applicability depends on two main criteria—the type of payment and the threshold limit. Only when a payment exceeds the prescribed threshold does TDS become mandatory. Additionally, the person responsible for making such a payment must meet certain eligibility criteria.

 

Common deductors include:

 

• Employers (for salary payments)
• Banks and financial institutions (for interest payouts)
• Individuals/HUFs paying rent above ₹50,000/month
• Businesses paying professional or technical fees
• Property buyers (for transactions above ₹50 lakhs)

Common Payments and Thresholds

The Budget 2025 has revised threshold limits for TDS, ensuring that smaller transactions remain exempt from tax deduction, thereby reducing the compliance burden. These revised limits, effective from April 1, 2025, apply to various sections of the Income Tax Act, 1961

Nature of Payment

Section

Threshold Limit

TDS Rate

Salary

192

Taxable salary

Based on slab rates applicable to the deductee

Bank Interest (Time deposit)

194A

 50,000 (₹100,000/-for seniors)

10%

Rent of Immovable property (individuals/HUF)

194-IB

₹50,000/month

2%

Fees for Professional Services

194J

₹ 50,000/year

10%

Transfer of Immovable property (other than rular agriculture land)

194-IA

₹50 lakhs

1%

Payment to contractor

194C

Single transaction – INR 30,000; and 

Aggregate of transactions – INR 1,00,000

 1% for individual or Hindu Undivided Family (HUF) 

Rent Paid

194I

₹50,000 per month

10% for land or buildings

and

2% for rent on machinery or equipment

Dividend for an individual shareholder

194

₹10,000

10%

Payment relating to life insurance policy

194DA

₹1,00,000

2%

Note: If the deductee fails to furnish PAN, TDS must be deducted at 20%.

 

TDS Deduction Process

 

Proper compliance with the TDS process is essential to avoid penalties. Here’s a breakdown of the step-by-step process:

 

1. Apply for TAN

 

The deductor must obtain a Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. This is mandatory for all TDS filings and payments.

 

2. Deduct the Tax

 

Once the payment is due, the deductor calculates and deducts TDS at the applicable rate. For salaries, tax is calculated based on the employee’s tax slab.

 

3. Deposit with the Government

 

The deducted tax must be deposited using the Challan No. ITNS-281, usually by the 7th of the following month.

 

4. File TDS Returns

 

TDS returns are filed quarterly. These include details such as the PAN of the deductee, the amount paid, the TDS deducted, and the challan number.

 

Form Type

Applicable For

Form 24Q

Salary payments

Form 26Q

All payments except salary

Form 27Q

Payments to non-residents

5. Issue TDS Certificates

Deductors are required to furnish Form 16 (salary) and Form 16A (for all other payments) to the deductees. These are important for filing income tax returns.

 

TDS Refund Process

 

At times, TDS is deducted when your total income is lower than the taxable limit or higher than your actual tax liability. In that event, the excess can be demanded as a refund.

The steps are as follows:

1. File your Income Tax Return (ITR) for the relevant financial year.

2. Provide accurate details of income and TDS (refer to Form 26AS).

3. Once processed and verified, the excess amount is credited back to your bank account.

Important Notes:

• Refunds are generally processed within 30-45 days post verification.
• Interest at 6% p.a. is payable by the IT Department for delays in refund under Section 244A.

TDS Non-Compliance & Penalties

TDS Non-Compliance & Penalties

 

1. Interest for Late Deduction or Payment

 

• 1% per month for delay in deduction
• 1.5% per month for delay in depositing TDS

2. Late Filing Fee (Section 234E)

• ₹200 per day of delay in TDS filing
• ₹200 per day of delay in TDS filing

3.Penalty (Section 271H)

Penalty ranging from ₹10,000 to ₹1 lakh may be imposed for:

• Failure to file TDS/TCS returns within the prescribed time
• Filing incorrect information in TDS/TCS return

4. Disallowance of Expenses (Section 40(a)(ia))

If TDS is not deducted or deposited, 30% of such expenses may be disallowed while computing taxable business income.

 

Conclusion

 

TDS is a crucial mechanism for providing liquidity and regular cash inflows to the government. It also helps in dividing the tax payments of individuals evenly throughout the year. Employers, banks, tenants, and businesses need to know the proper rates, timelines, and compliance requirements. Checking TDS in Form 26AS and claiming a refund, if any, may be beneficial to optimise tax outgo for income recipients.

TDS is a crucial mechanism for providing liquidity and regular cash inflows to the government. It also helps in dividing the tax payments of individuals evenly throughout the year. Employers, banks, tenants, and businesses need to know the proper rates, timelines, and compliance requirements. Checking TDS in Form 26AS and claiming a refund, if any, may be beneficial to optimise tax outgo for income recipients.

 

FAQs

 

 

1. What if TDS is deducted incorrectly?

 

If TDS is deducted at a higher or lower rate than applicable, the deductee can adjust the amount while filing the income tax return. The excess paid, if any, can be claimed as a refund from the Income Tax Department.

 

2. How to check TDS online?

 

TDS details can be checked using Form 26AS or the AIS (Annual Information Statement) on the official Income Tax Department’s e-filing portal. Logging in with your PAN-linked credentials allows you to view and verify TDS entries.

 

3. Is it possible to avoid TDS deduction?

 

Yes, individuals whose income is below the taxable limit can submit Form 15G (or Form 15H for senior citizens) to the deductor, declaring that no TDS should be deducted. However, providing false information in these forms can attract penalties.

 

4. What happens if the deductor doesn’t issue a TDS certificate?

 

Failure to issue a TDS certificate (Form 16 or 16A) can lead to a penalty of ₹100 per day of default, under Section 272A(2)(g), up to the amount of TDS. It also creates issues for the deductee while claiming tax credit or filing returns.

 

5. Can TDS be adjusted against advance tax?

 

Yes, TDS is considered prepaid tax, just like advance tax. While computing total tax liability, the TDS amount already deposited with the government is adjusted against the final tax payable.