What is Tax Deducted At Source (TDS)?

By Hiral Vakil on March 8, 2019

What is TDS?

Tax Deducted at Source (TDS) is an indirect method of collecting Income Tax. TDS is based on the principle of “Pay as you earn” which is beneficial for both Government and the taxpayer. Tax Deducted at Source (TDS) is a concept where a person making payment of specified nature is liable to deduct tax at source at a prescribed rate and deposit the same with the Government. This ensures continuous revenue for Government by way of Tax Deducted at Source and not at the end of the year when you assess your income and pay tax before filing income tax return.

The person receiving payments after tax are entitled to the tax credit of the amount so deducted. This tax credit can be claimed on the basis of Form-16A which is issued by the deductor or Form-26AS which can be downloaded from e-filing account on incometaxindiaefiling.gov.in

How is TDS deducted?

As per the Income Tax Act, tax at a prescribed rate is to be deducted by the person who is responsible to make the payment. So while making the payments like salary, rent, interest from banks, commission, professional fees, payments to consultants or freelancers, a percentage of the total amount is to be withheld by the payer. Here, the payer who withholds the amount of tax is called ‘deductor’ and the payee from whose payments the TDS is being deducted is called the ‘deductee’. Deductor will deposit the TDS to the Authorities so that the deductee can claim the credit for the same.

Who needs to deduct TDS?

The provisions of TDS can be applicable depending upon the nature of payments; for eg. salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc.

In all these payments, the payer has to deduct TDS as prescribed in the government rules and the amount deducted has to be credited to government. For example: employers paying salary to employees, companies paying professional fees to professionals etc.

Now, the persons who are required to deduct or collect TDS on behalf of IT Department are required to apply for and obtain TAN. (Tax deduction/Tax collection Account Number).

TDS on Salary

The TDS on Salary comes under Section 192. The total TDS deducted by the employer is stated in the Form-16 issued by the employer.

Here is the brief overview on how the total amount of TDS on Salary is decided.

Section TDS Rate TDS Applicability
Section 192 Applicable Income Tax Slab Rate
  • When the estimated income of the employee is taxable, TDS is deducted.
  • Employer is not allowed to deduct tax on non-taxable allowances (for eg. conveyance allowance, rental allowance, medical allowance etc..)
  • If the estimated total income of the employee is less than the minimum taxable income, no TDS is deducted. (Which is Rs. 2,50,000/- in case of Individual, HUF, AOP, BOD and AJP. Nil for others.)

As mentioned in the table, if you have any investments (which fall under Section 80) or life events that call for official allowances (Such as your child’s school fees or your wife’s medical treatment), then you can claim deductions. To claim the same you need to provide the relevant documents to your employer. It will also be mentioned in your Form-16.

Let’s understand how the employer would calculate TDS liability of the employee:

Particulars Amount (in Rs.)
1. Income from Salary 8,00,000
2. Tax Deductible Investments and Payments  
a. ELSS 25,000
b. PPF 15,000
c. Insurance premium 17,500
d. Home Loan principal repayment 90,000
e. Home Loan interest 1,30,000
3. Total taxable income (1-2) 5,22,500
4. Tax liability as per slab rates 30,385
5. Monthly TDS deducted by employer (4 / 12 months) 2532

TDS on Income other than Salary

There are various payments other than salary for which TDS is deducted such as professional fees, contract payments, commission or brokerage, property transaction etc.. TDS rates vary by nature of payment.

For Eg. Brijesh is staying in a rental house which is owned by Amar. Brijesh pays monthly rent of Rs. 20,000 (Annual rent Rs. 2,40,000). As per income tax, if total rent payment for a year exceeds Rs. 1,80,000, TDS is to be deducted @ 10% from the total rent paid in that financial year. So here Brijesh will have to deduct TDS of Rs. 2,000 (10% of Rs. 20,000) and pay the net rent of Rs. 18,000 to Amar. Brijesh will have to deposit the TDS to government so that Amar can take the credit for the same while filing his return for the same financial year.

In case of TDS on payments other than salary, details of TDS can be found in Form-16A. It should be furnished by the deductor within fifteen days from the due date for furnishing the ‘statement of TDS’ under rule 31A. You will read about it in the next section.

What are the different types of TDS Returns?

Now, the quarterly returns/statements of the TDS should be submitted in the following forms:

Reason for DeductionForm
Tax Deduction from salary under section 19224Q
Tax deduction other than salary (For eg. professional fees, contract payments etc..)26Q
Tax deduction on sale of Property26QB
Tax Deduction other than salary when deductees are non-resident (not being a company), Foreign Company and persons who are resident but not ordinarily resident27Q
Tax Collected at Source27EQ

Frequently Asked Questions

1. Do I need to file my income tax return if my TDS is deducted by my employer?

Yes. It is very common for salaried individuals to have all their taxes deducted by their employer in form of TDS. Still you should file income tax return to claim any refund and/or carry forward any losses.

2. How to deposit TDS online?

  • Go to TIN-NSDL, select Challan No./ ITNS 281 and enter TAN, Assessment Year and Personal Information .
  • Select Type Of Payment and Nature Of Payment
  • Select Bank Name and you will be redirected to the net banking site, make payment and Save Challan 281 for your records.

3. What is TDS Certificate?

TDS Certificate is a certificate issued by the person/deductor responsible for deducting tax at source. When TDS is deducted it is important to issue TDS Certificate. From TDS Certificate deductee knows how much TDS has been deducted by the deductor. Some of the examples of TDS Certificate are Form 16, Form 16A, Form 16B.

4. How to check my TDS Credit?

The deductor/employer is liable to give you a TDS Certificate i.e; Form 16, Form 16A confirming the amount of tax deducted. You can also check your TDS credit from your Form 26AS by login to your income tax e-filing account.