What is TDS and how does it work?

What is TDS?

TDS (Tax Deducted at Source) is a mechanism through which the Indian government collects tax at the point where income is generated — before it reaches the recipient. Instead of the earner paying tax later, the payer (your employer, a client, a bank, etc.) deducts a percentage upfront and deposits it directly with the Income Tax Department on your behalf.

Think of it as a pay-as-you-earn tax system. Every rupee deposited as TDS appears as a credit against your tax liability when you file your Income Tax Return (ITR). If too much TDS was deducted, you get a refund. If too little, you pay the balance.

Who deducts TDS?

Anyone making a payment that falls under a TDS provision must deduct it. The most common deductors are:

• Employers — deduct TDS on salary under Section 192
• Companies and firms — deduct TDS on payments to vendors, contractors, and professionals
• Banks — deduct TDS on interest income (FD, RD, savings accounts above ₹40,000/year — ₹50,000 for senior citizens)
• Tenants — if monthly rent exceeds ₹50,000, the tenant must deduct 2% TDS (Section 194-IB)
• Property buyers — deduct 1% TDS if the property value exceeds ₹50 lakhs (Section 194-IA)

Individuals and HUFs are generally not required to deduct TDS unless their accounts are subject to a tax audit.

TDS rates — quick reference

TDS rates vary by the type of payment and the recipient's status (resident / NRI). Here are the most common ones:

⚠️ If the recipient does not provide their PAN, TDS is deducted at 20% (or the applicable rate, whichever is higher).

How TDS is calculated

The mechanics are straightforward:

1. Determine whether the payment exceeds the threshold for that TDS section.
2. Apply the applicable TDS rate to the gross payment amount.
3. Deduct that amount before making the payment to the recipient.
4. Deposit the TDS amount to the government by the 7th of the following month (or 30 April for March deductions).
5. File a quarterly TDS return (Form 24Q for salary, 26Q for other payments) and issue a TDS certificate (Form 16 / 16A) to the deductee.

Check your TDS credit: Form 26AS & AIS

Every rupee deducted as TDS on your behalf is linked to your PAN. You can verify it in two places on the income tax portal (incometax.gov.in):

• Form 26AS — The consolidated tax credit statement. Shows all TDS, TCS (Tax Collected at Source), and advance tax paid against your PAN.
• Annual Information Statement (AIS) — A more comprehensive view that includes interest income, dividends, mutual fund transactions, and more.

Always reconcile your Form 16 / 16A against Form 26AS before filing your ITR. Discrepancies — even small ones — can cause notices or processing delays from the tax department.

Claiming a TDS refund

If the total TDS deducted during the year exceeds your actual tax liability, you are entitled to a refund. The process:

1. File your ITR by the due date (typically 31 July for non-audit cases).
2. The excess TDS automatically appears as a refund payable in your ITR computation.
3. After your return is processed, the Income Tax Department credits the refund to your pre-validated bank account, along with 6% per annum interest if it has been more than 3 months since the end of the financial year.

Important: Refunds are processed faster if your PAN is linked to Aadhaar and your bank account is pre-validated on the portal. Processing time varies but typically takes 3–6 weeks after filing.

Common TDS mistakes to avoid

• Not deducting when required. If you're a business or professional making payments above TDS thresholds, failing to deduct TDS results in disallowance of that expense and a penalty of 100–300% of the TDS amount.
• Wrong PAN. TDS deposited against an incorrect PAN does not reflect in the correct taxpayer's 26AS. The recipient loses their credit; the deductor faces a mismatch.
• Deducting TDS but not depositing it. Deducting TDS and not paying it to the government by the due date attracts interest of 1.5% per month plus penalties.
• Missing the quarterly TDS return deadline. Forms 24Q and 26Q are due by the 31st of the month following the end of each quarter (except Q4, due by 31 May). Late filing attracts ₹200 per day under Section 234E.
• Ignoring Form 26AS mismatches. Discrepancies between your Form 16/16A and Form 26AS can trigger automated tax notices. Check before you file.