Tax Deducted at Source (TDS): A Complete and Detailed Guide

Introduction

Tax Deducted at Source (TDS) is one of the most important mechanisms of tax collection under the Income Tax Act. It ensures regular inflow of revenue to the government and reduces tax evasion by collecting tax at the point of income generation. TDS shifts the responsibility of tax collection to the payer of income, making tax compliance more efficient and transparent.

What Is Tax Deducted at Source (TDS)?

Tax Deducted at Source (TDS) refers to the tax deducted by a person (deductor) at the time of making certain payments to another person (deductee) and deposited with the government on behalf of the deductee.

The deductee receives the net amount after tax deduction and can claim credit of the deducted tax while filing their Income Tax Return.

Objectives of TDS

The primary objectives of TDS are:

To ensure regular and steady collection of tax
To prevent tax evasion
To spread the tax collection over the year
To bring more people under the tax net

Who Is Responsible for Deducting TDS?

Any person or entity making specified payments is responsible for deducting TDS, including:

Individuals and Hindu Undivided Families (HUFs)
Companies
Partnership firms
Trusts and associations
Government departments

However, individuals and HUFs are required to deduct TDS only if they are subject to tax audit or if specific provisions apply.

When Is TDS Deducted?

TDS is deducted at the earlier of the following events:

At the time of credit of income to the payee’s account, or
At the time of actual payment

Common Payments Covered Under TDS

1. Salary (Section 192)

TDS is deducted by employers on salary payments based on applicable income tax slabs.

2. Interest on Securities (Section 193)

TDS is deducted on interest earned on securities.

3. Interest Other Than Securities (Section 194A)

Applies to interest paid by banks, financial institutions, and others.

4. Dividend (Section 194)

TDS is applicable on dividend income beyond the prescribed threshold.

5. Rent (Section 194I)

TDS is deducted on rent paid for land, building, plant, machinery, etc.

6. Professional and Technical Fees (Section 194J)

Applies to payments made to professionals such as lawyers, doctors, consultants, and technical service providers.

7. Contract Payments (Section 194C)

Covers payments to contractors and sub-contractors.

8. Commission and Brokerage (Section 194H)

Applicable on commission or brokerage payments.

TDS Rates

TDS rates vary depending on:

Nature of payment
Status of deductee (resident or non-resident)
Availability of PAN

If PAN is not provided by the deductee, TDS is deducted at a higher rate, usually 20%.

Threshold Limits for TDS

TDS is applicable only when payments exceed specified threshold limits. For example:

Interest on bank deposits
Rent payments
Professional fees

These limits are prescribed under the Income Tax Act and may change from time to time.

TAN (Tax Deduction and Collection Account Number)

Every deductor is required to obtain a TAN.

Importance of TAN

Mandatory for depositing TDS
Required for filing TDS returns
Quoting TAN in TDS certificates

Depositing TDS with the Government

Time Limit for TDS Deposit

Generally, TDS must be deposited by the 7th of the following month
For March, the due date may differ

Payment is made using challans through authorized banks or online portals.

Filing of TDS Returns

What Is a TDS Return?

A TDS return is a quarterly statement submitted to the Income Tax Department providing details of:

Deductor
Deductee
Amount paid
TDS deducted and deposited

Forms for TDS Returns

Form 24Q – Salary
Form 26Q – Non-salary payments
Form 27Q – Payments to non-residents
Form 27EQ – TCS

TDS Certificates

Types of TDS Certificates

Form 16 – Salary TDS
Form 16A – Non-salary TDS

These certificates must be issued to deductees within the prescribed timelines.

TDS Refund

If the total TDS deducted exceeds the actual tax liability, the deductee can claim a refund by filing the Income Tax Return.

Consequences of Non-Compliance

Failure to Deduct TDS

Interest penalty
Disallowance of expense

Failure to Deposit TDS

Interest at prescribed rates
Penalty and prosecution in serious cases

Late Filing of TDS Return

Late fee under Section 234E
Penalty under Section 271H

Lower or Nil TDS Deduction

Deductees can apply for:

Lower deduction certificate
Nil deduction certificate

This helps avoid excess deduction of tax.

TDS vs Advance Tax

Aspect	TDS	Advance Tax

Who pays

Deductor

Taxpayer

Timing

At source

Periodic installments

Applicability

Specific payments

Total income

Advantages of TDS System

Ensures timely tax collection
Reduces burden at year-end
Improves tax compliance
Enhances transparency

Common Mistakes in TDS Compliance

Incorrect PAN details
Wrong TDS rate
Delay in deposit
Late filing of returns
Mismatch in TDS records

About the Author

Ravi

Ravi is an experienced legal writer who breaks down complex laws into clear, practical guidance, enabling entrepreneurs to understand their legal obligations and build confident, compliant, and sustainable businesses.