TDS (Tax Deducted at Source)

What Is TDS?

Tax Deducted at Source (TDS) is India’s mechanism for collecting income tax at the point of payment rather than at the time of filing. When a deductor (employer, bank, company, or individual making a payment) pays income to a deductee, they are legally required under the Income Tax Act 1961 to deduct a specified percentage of the payment and deposit it with the government on the deductee’s behalf.

TDS is one of the largest sources of income tax revenue in India. It applies to an enormous range of payment types — from monthly salary to bank FD interest, rent, professional fees, contract payments, property purchases, and more.

The deductee receives the net payment (after TDS) and is then entitled to claim credit for the TDS deducted when filing their annual income tax return (ITR).

How TDS Works: The Basic Cycle

1. Payment is due: Employer pays salary; bank credits FD interest; client pays freelancer
2. Deductor calculates TDS: Based on the applicable rate for that payment type and threshold
3. Net payment made: Deductee receives payment minus TDS
4. TDS deposited to government: Deductor deposits the deducted amount to the Income Tax Department (usually by the 7th of the following month)
5. Form 26AS updated: HMRC equivalent — the Annual Tax Statement that shows all TDS credits against your PAN
6. Deductee files ITR: Claims TDS as credit against total tax liability; receives refund if TDS > actual tax, or pays balance if TDS < actual tax

Common TDS Rates and Thresholds (FY 2026-27)

Payment Type	Section	Threshold	Rate
Salary	192	Basic exemption	As per slab rates
Bank FD interest (resident)	194A	₹40,000 (₹50,000 for senior citizens)	10%
Dividend	194	₹5,000	10%
Professional / technical fees	194J	₹30,000	10% (2% for technical services)
Rent — plant, machinery	194I	₹2,40,000	2%
Rent — land, building	194I	₹2,40,000	10%
Contractor payments	194C	₹30,000 (single) / ₹1,00,000 (annual)	1% (individual) / 2% (company)
Commission and brokerage	194H	₹15,000	5%
Property purchase	194IA	₹50,00,000	1%
E-commerce sales	194O	₹5,00,000	1%
Winnings (lottery, games)	194B	₹10,000	30%

Rates may be reduced under applicable Double Tax Agreements for non-residents (Section 195).

TDS on Salary (Section 192)

TDS on salary is unique: there is no flat rate. Instead, the employer estimates the employee’s annual taxable income (including all heads of income declared by the employee) and calculates the income tax payable at slab rates. This amount is then divided by the number of pay periods and deducted from each paycheck.

Employees must submit a declaration to their employer at the start of the year indicating:

• Deductions they intend to claim (HRA, LTA, professional tax, Section 80C, 80D, etc.)
• The tax regime chosen (old or new)

The employer then adjusts TDS accordingly throughout the year. If circumstances change — a bonus, income from other sources, or a change in the regime — TDS may be adjusted in later months.

Form 26AS and AIS: Verifying TDS Credits

Form 26AS is a consolidated tax statement accessible via the income tax portal (incometax.gov.in). It shows:

• All TDS deducted by various deductors against your PAN
• TCS (Tax Collected at Source) credits
• Advance tax payments
• Self-assessment tax paid

Annual Information Statement (AIS) is a more comprehensive version showing a wider range of financial transactions.

Before filing your ITR, always verify Form 26AS to confirm all expected TDS credits appear. Discrepancies between what was deducted and what appears in 26AS are common and must be followed up with the deductor.

TDS Returns

Deductors must file quarterly TDS returns:

• Form 24Q: TDS on salary
• Form 26Q: TDS on non-salary payments to residents
• Form 27Q: TDS on payments to non-residents

TDS return deadlines are the 31st of the month following the end of each quarter (July 31, October 31, January 31, May 31 for Q4).

Lower/Nil TDS: Form 15G and 15H

If your total income is below the taxable threshold, you can submit a declaration to avoid TDS on certain payments:

• Form 15G: For individuals below 60 years of age with income below the taxable threshold
• Form 15H: For senior citizens (60+) with nil tax liability

These declarations must be submitted fresh each financial year to each deductor. Common use cases: preventing TDS on bank FD interest, insurance commissions, or EPF withdrawals.

Alternatively, you can apply to the Assessing Officer for a lower deduction certificate (Form 13) if your actual tax rate will be lower than the standard TDS rate.

TCS: Tax Collected at Source

Related to TDS is TCS — Tax Collected at Source — where the seller collects tax from the buyer and deposits it. Key examples:

• Motor vehicles above ₹10 lakh: 1%
• Foreign remittances above ₹7 lakh under the Liberalised Remittance Scheme (LRS): 20% (0.5% on education loans)
• Sale of goods above ₹50 lakh: 0.1%

TCS credits also appear in Form 26AS and can be set off against your tax liability at filing time.

Common TDS Pitfalls

1. Wrong PAN furnished: If the deductee gives an incorrect PAN, TDS is deducted at 20% (Section 206AA) — far higher than the standard rate
2. PAN not linked to Aadhaar: As of 2023, unlinked PANs are inoperative; TDS is deducted at the higher 20% rate
3. 26AS mismatch: If the deductor filed an incorrect return, your credit may not appear — you must contact the deductor for a correction
4. High TDS on multiple income sources: Freelancers with multiple clients often accumulate significant TDS credits that can only be recovered at filing time

Key Takeaway

TDS is the backbone of India’s income tax collection — a real-time system ensuring tax reaches the government before income reaches taxpayers. Understanding TDS rates, Form 26AS, and the declaration process to your employer is essential for managing your Indian tax position. Use the India income tax calculator to estimate your annual liability and gauge whether you are on track with TDS.