What is Tax Deducted at Source (TDS)?#
Tax Deducted at Source (TDS) is a mechanism where tax is deducted by the payer at the time of payment itself — rather than the recipient paying tax later. The deducted amount is deposited with the government by the payer (called the deductor).
Think of it as pay-as-you-earn tax. Instead of collecting all tax at year-end, the government collects it in installments throughout the year via TDS.
How TDS Works#
- You receive salary / interest / rent / professional fees
- The payer (employer, bank, tenant) deducts a percentage as TDS
- The payer deposits TDS with the government
- You receive the net amount (after TDS deduction)
- TDS is reflected in your Form 26AS and Form 16/16A
- When you file ITR, TDS is credited against your total tax liability
Common TDS Rates#
| Payment Type | Section | TDS Rate |
|---|---|---|
| Salary | 192 | As per applicable slab |
| Bank FD interest | 194A | 10% (if PAN given) |
| Rent (if > ₹50,000/month) | 194-IB | 5% |
| Professional fees | 194J | 10% |
| Commission/brokerage | 194H | 5% |
| Property purchase (> ₹50L) | 194-IA | 1% |
| Dividend | 194 | 10% |
| Lottery/game winnings | 194B | 30% |
When is TDS Deducted?#
TDS is deducted when:
- Payment exceeds a threshold (e.g., FD interest > ₹40,000/year for individuals)
- Payment is of a specified nature listed under the Income Tax Act
- The payer is a specified entity (companies, individuals with tax audit requirement, etc.)
TDS and Your ITR#
TDS reduces your tax liability when you file ITR:
Total Tax Payable = Tax on Total Income
TDS Already Deducted = Credit from Form 26AS
Balance Payable = Total Tax - TDS - Advance Tax
If TDS > Tax Payable → You get a refund If TDS < Tax Payable → You pay the balance
Submitting Form 15G / 15H to Avoid TDS#
If your total income is below the taxable limit, you can submit:
- Form 15G — for individuals below 60 years
- Form 15H — for senior citizens (60+)
These forms instruct the payer (e.g., bank) not to deduct TDS on interest income.
Consequences of TDS Default#
If a deductor fails to deduct or deposit TDS:
- Interest: 1%/month for late deduction; 1.5%/month for late deposit
- Penalty: Up to ₹1 lakh
- Prosecution: In severe cases, imprisonment up to 7 years