What is TDS (Tax Deducted at Source)?
TDS (Tax Deducted at Source) is the Indian income-tax mechanism under Chapter XVII-B of the Income Tax Act, 1961 by which the payer of certain incomes (salary, interest, rent, professional fees, contractor payments, commission, dividends) deducts income tax at prescribed rates before paying the recipient, deposits the tax to the central government, and issues a TDS certificate. The recipient claims credit for the deducted tax against final income-tax liability while filing the return.
Detailed definition
TDS exists to collect tax steadily through the year at the source of income, rather than waiting for an annual self-declaration. The legal architecture sits in Chapter XVII-B of the Income Tax Act, 1961, spanning roughly 40 sections (192 to 196D) each covering a specific kind of payment. The payer (called the deductor) bears the legal duty to deduct, deposit, and file quarterly TDS returns. The recipient (the deductee) gets credit for the deducted amount.
The mechanics are uniform across sections. The deductor identifies the payment, applies the rate prescribed in the relevant section (10 percent for interest, 1 or 2 percent for contractors, 10 percent for professional fees, average slab for salary, etc.), withholds the tax, and pays the net amount to the deductee. Within seven days of the end of the month (or 30 April for March deductions) the deductor must deposit the TDS via Challan ITNS 281 using a TAN (Tax Deduction Account Number). Quarterly returns in Form 24Q (salary), 26Q (non-salary residents), or 27Q (non-residents) flow this data to the CBDT, which populates each deductee's Form 26AS and AIS.
Two design choices matter for taxpayers. First, TDS is not the final tax; it is a credit that flows into the ITR computation. If TDS exceeds the actual tax liability, the difference is refunded. If it is short, the taxpayer must pay the balance via self-assessment tax. Second, threshold limits exist for most sections so that small payments are not burdened with paperwork (for example, no TDS on bank interest below Rs 50,000 per year for an individual under Section 194A for FY 2025-26). Always reconcile Form 26AS against your actual income before filing.
Key TDS sections and FY 2025-26 rates
TDS amount = Payment value x Section rate Net payment = Gross payment - TDS - any other statutory deductions (PF, ESI) Higher rate if no PAN (Sec 206AA) = max(Section rate, Rate in force, 20%) Higher rate for non-filers (Sec 206AB) = max(2 x Section rate, 5%)
| Section | Payment type | FY 2025-26 rate | Threshold (per year) |
|---|---|---|---|
| 192 | Salary | Average slab rate based on chosen regime | Basic exemption (Rs 4,00,000 new / Rs 2,50,000 old) |
| 192A | Premature EPF withdrawal | 10 percent (20 percent if no PAN) | Rs 50,000 |
| 194 | Dividends from domestic company | 10 percent | Rs 10,000 |
| 194A | Interest other than securities (bank FD, RD) | 10 percent | Rs 50,000 (Rs 1,00,000 for senior citizens), raised by FA 2025 |
| 194C | Payments to contractors | 1 percent (individual) / 2 percent (others) | Rs 30,000 single / Rs 1,00,000 aggregate |
| 194H | Commission or brokerage | 2 percent (cut from 5 percent in FA 2024) | Rs 20,000 (raised from 15,000 by FA 2025) |
| 194I | Rent on land/building/furniture | 10 percent (land/building) / 2 percent (plant) | Rs 6,00,000 (raised from Rs 2.4L by FA 2025) |
| 194IA | Sale of immovable property | 1 percent of consideration | Rs 50,00,000 |
| 194J | Professional or technical fees | 10 percent (2 percent for technical / call centres) | Rs 50,000 |
| 194Q | Purchase of goods (buyer with turnover > Rs 10 cr) | 0.1 percent | Rs 50,00,000 |
Worked example: Section 192 salary TDS
Suppose Meera earns a gross annual salary of Rs 16,00,000 in FY 2025-26 and opts for the new regime. Her employer must deduct TDS each month so the full year's tax flows in 12 installments.
- Gross salary: Rs 16,00,000.
- Less standard deduction (Sec 16(ia), new regime): Rs 75,000. Taxable salary = Rs 15,25,000.
- Tax under new regime slabs (FY 2025-26): 0% up to Rs 4L + 5% on Rs 4-8L + 10% on Rs 8-12L + 15% on Rs 12-15.25L = Rs 0 + Rs 20,000 + Rs 40,000 + Rs 48,750 = Rs 1,08,750.
- Plus 4 percent health and education cess: Rs 4,350. Annual tax = Rs 1,13,100.
- Monthly TDS: Rs 1,13,100 / 12 = Rs 9,425 (rounded). Employer deducts this from each month's salary under Section 192 and deposits via Challan ITNS 281 by the 7th of the following month.
- Form 16 issued by 15 June 2026 shows the full year's TDS; Meera files her ITR by 31 July 2026 claiming credit for the Rs 1,13,100 already paid.
Common pitfalls
- Not submitting Form 15G/15H. Senior citizens with total income below the basic exemption can submit Form 15H to the bank to avoid TDS on FD interest. Younger individuals use Form 15G. Without it, banks deduct 10 percent under Section 194A even if no tax is finally payable, locking up cash until refund.
- Wrong regime declaration to employer. Salaried employees declare the regime to the employer via Form 12BB. Choosing the old regime in Form 12BB but the new one in the ITR (or vice versa) leads to TDS mismatch and a refund or shortfall at filing.
- Ignoring AIS / 26AS reconciliation. If a deductor cites the wrong PAN or files the TDS return late, your AIS will not show the credit and the system will not let you claim it. Always cross-check before e-filing.
- Quoting wrong PAN to a deductor. Section 206AA kicks in at 20 percent. A wrong digit in a rental-agreement PAN costs the tenant 20 percent rather than 10 percent under 194I.
- Forgetting 194Q on B2B purchases. Buyers with turnover above Rs 10 crore must deduct 0.1 percent on goods purchases above Rs 50 lakh from the same seller. Many small businesses miss this and face Section 40(a)(ia) disallowance.
Related terms
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Frequently asked questions
What is TDS in income tax?
TDS, or Tax Deducted at Source, is the system under Chapter XVII-B of the Income Tax Act, 1961 by which the payer of specified incomes (salary, bank interest, rent, professional fees, contractor payments) deducts a fixed percentage of tax at the time of payment, deposits it to the government, and issues a TDS certificate. The recipient gets credit for this tax in their Form 26AS and Annual Information Statement (AIS) and can adjust it against the final tax liability while filing the income-tax return.
What are the main TDS sections and FY 2025-26 rates?
Key sections for FY 2025-26: Section 192 (salary, taxed at the average rate based on annual income and chosen regime), Section 194A (interest other than securities, 10 percent, threshold Rs 50,000 per year for individuals/HUFs, Rs 1,00,000 for senior citizens), Section 194I (rent, 10 percent for land/building above Rs 6,00,000 per year as raised in Budget 2025), Section 194C (contractor, 1 percent individual, 2 percent others, threshold Rs 1,00,000 aggregate), Section 194J (professional/technical fees, 10 percent, threshold Rs 50,000), Section 194 (dividends above Rs 10,000, 10 percent).
How is Form 26AS different from AIS?
Form 26AS is the consolidated tax credit statement showing TDS, TCS, advance tax, and self-assessment tax paid against your PAN, populated by deductors filing TDS returns (Form 24Q, 26Q, 27Q). The Annual Information Statement (AIS) is a broader CBDT statement (launched November 2021) that includes 26AS data plus reported financial transactions like high-value bank deposits, mutual fund investments, share trades, and foreign remittances. Always reconcile both before filing your ITR.
Can I get a TDS refund?
Yes. If the total TDS deducted plus advance tax and self-assessment tax paid during the year exceeds your final income-tax liability, the excess is refunded by the Income Tax Department after you file your ITR. Refunds are credited directly to a pre-validated bank account linked to your PAN. The 2024-25 refund cycle typically saw refunds processed within 15 to 30 days of e-verifying the ITR for simple returns, with interest at 0.5 percent per month under Section 244A from 1 April of the assessment year.
What is the TDS rate if I don't provide a PAN?
Section 206AA mandates TDS at a higher rate when the deductee fails to furnish a valid PAN: the higher of (a) the rate prescribed by the relevant TDS section, (b) the rate in force, or (c) 20 percent. So bank interest TDS jumps from 10 percent to 20 percent and contractor TDS from 1 or 2 percent to 20 percent without PAN. Additionally, Section 206AB applies a higher TDS rate (twice the prescribed rate or 5 percent, whichever is higher) for non-filers of ITR.
What is the difference between TDS and advance tax?
TDS is deducted by the payer at the time of payment and deposited with the government on the recipient's behalf. Advance tax is paid directly by the taxpayer in instalments (15 June 15%, 15 September 45%, 15 December 75%, 15 March 100%) when total tax liability after TDS exceeds Rs 10,000 in a financial year. Salaried individuals usually have their entire tax liability covered by TDS under Section 192 and do not pay advance tax. Business and capital-gains income earners typically pay both.
Sources and further reading
- Income Tax Act, 1961, Chapter XVII-B - Sections 192 to 196D - CBDT bare act, all TDS sections and rates.
- Finance Act 2025 - raised thresholds for Section 194A (Rs 50,000 / Rs 1,00,000 senior), 194H (Rs 20,000), 194I (Rs 6,00,000 per year for land/building).
- Income Tax Department, e-Filing portal - access Form 26AS and AIS, file ITR and TDS returns.
- CBDT Circular No. 04/2025 - guidelines for TDS deduction on salary under Section 192 for FY 2025-26.
- TRACES (TDS Reconciliation Analysis and Correction Enabling System) - www.tdscpc.gov.in, the official TDS portal for deductors and deductees.