Tax Deducted at Source, commonly known as TDS, is a very important part of the Indian tax system. TDS makes sure that the government collects tax from the very source of income. This means, before you even receive your full payment, a certain percentage is already taken away as tax and sent to the government. This system helps the government collect taxes smoothly and reduces the chances of tax evasion.
In this article, we will
explain everything about TDS in simple Indian English. We will cover what TDS
is, how it works, how it affects your salary, house rent, property purchase,
and many other situations. We will also tell you how to claim TDS, how to
reduce it, and what happens if you miss a TDS payment. Let’s get started!
What is TDS?
TDS stands for Tax
Deducted at Source. It is a method where a person (called the deductor) who is
making a payment to someone else (called the deductee), deducts a certain
amount as tax before making the payment. The deducted amount is then deposited
with the Income Tax Department.
Example:
Suppose Mr. Sharma hires
a contractor to paint his house and pays him ₹1,00,000. As per TDS rules, Mr.
Sharma has to deduct a certain percentage (let’s say 1%) as TDS before paying
the contractor. So, Mr. Sharma will pay ₹99,000 to the contractor and deposit ₹1,000
as TDS to the government.
Why is TDS Important?
- Ensures Regular Tax Collection: The government gets tax revenue throughout the
year, not just at the end of the financial year.
- Reduces Tax Evasion: Since
tax is deducted before payment, people cannot easily hide their income.
- Easy for Taxpayers: Taxpayers
do not have to pay a large amount at once; tax is paid in small portions
throughout the year.
How Does TDS Work?
Whenever you make
certain payments such as salary, rent, interest, commission, or payment to
contractors, you must check if TDS needs to be deducted. The government has
fixed TDS rates for different types of payments. If the payment amount crosses
a certain limit (called the threshold), TDS must be deducted.
Example:
If you pay monthly rent
of ₹60,000 to your landlord, and the threshold is ₹50,000, you must deduct TDS
on the rent.
Latest Updates for 2025
Higher TDS Thresholds:
From April 1, 2025, TDS will be deducted only if your interest income from
banks exceeds ₹50,000 in a year (₹1 lakh for senior citizens), and rent
payments over ₹50,000 per month are liable for TDS.
No More Nil TDS
Certificates: The government has removed the option for a “Nil TDS”
certificate, meaning you must now claim a refund via your tax return if excess
TDS is deducted.
No Higher TDS for
Non-Filers: Section 206AB, which required higher TDS for people not filing
ITRs, is removed from April 2025, making compliance easier.
TDS on House Rent
Who Should Deduct TDS on Rent?
- If you are an individual or a Hindu Undivided Family
(HUF) and you pay rent of more than ₹50,000 per month, you must deduct
TDS.
- The TDS rate is 5% of the rent amount.
Example:
Suppose you pay ₹60,000
per month as house rent.
- Annual rent = ₹60,000 x 12 = ₹7,20,000
- TDS to be deducted = 5% of ₹7,20,000 = ₹36,000 per year
You should deduct ₹3,000
per month as TDS and pay the remaining ₹57,000 to your landlord.
Note: You must provide the landlord’s PAN. If
you do not, TDS will be deducted at a higher rate of 20%.
TDS Deducted on Invoice
TDS is not just for
salary or rent. It is also deducted on payments made to professionals,
contractors, and suppliers. Whenever you make a payment and receive an invoice,
you must check if TDS is applicable.
Example:
Suppose you hire a
freelance graphic designer and receive an invoice of ₹30,000.
- As per Section 194J, TDS on professional fees is 10%.
- TDS to be deducted = 10% of ₹30,000 = ₹3,000
- You pay ₹27,000 to the designer and deposit ₹3,000 as
TDS.
Important: TDS should be deducted either at the time
of payment or when the invoice is raised, whichever is earlier.
How to Claim TDS
If TDS has been deducted
from your income, you can claim it while filing your Income Tax Return (ITR).
Steps to Claim TDS:
1.
Check
Form 26AS:
Form 26AS is a statement available on the Income Tax website. It shows all the
TDS deducted against your PAN.
2.
File
Your ITR:
While filing your ITR, mention the TDS amount shown in Form 26AS.
3.
Adjust
TDS Against Tax Liability:
If your total tax liability is less than the TDS deducted, you can claim a
refund for the extra TDS.
Example:
Suppose your total tax
payable is ₹40,000, but TDS deducted from your salary is ₹50,000.
- You can claim a refund of ₹10,000 from the Income Tax
Department.
How to Reduce TDS on Salary
If you want less TDS to
be deducted from your salary, you need to inform your employer about your
tax-saving investments and eligible deductions.
Steps to Reduce TDS:
1.
Declare
Investments:
Inform your employer about investments under Section 80C (like PPF, ELSS, LIC,
etc.), health insurance (80D), home loan interest (Section 24), and other
deductions.
2.
Submit
Proofs:
Submit proof of these investments and expenses to your employer.
3.
Correct
Calculation:
Your employer will consider these deductions and calculate TDS on the reduced
taxable salary.
Example:
Suppose your annual
salary is ₹8,00,000.
- If you invest ₹1,50,000 in PPF and pay ₹25,000 for
health insurance, your taxable salary becomes ₹8,00,000 - ₹1,50,000 - ₹25,000
= ₹6,25,000.
- TDS will be calculated on ₹6,25,000, not on ₹8,00,000.
Calculating TDS Deduction on Your Salary
Employers calculate TDS
based on your estimated annual income and applicable deductions.
Steps:
1.
Estimate
Annual Income:
Add up your basic salary, HRA, allowances, and any other income.
2.
Apply
Exemptions and Deductions:
Deduct HRA exemption, standard deduction, and investments under 80C, 80D, etc.
3.
Calculate
Taxable Income:
Subtract total exemptions and deductions from your gross income.
4.
Apply
Income Tax Slabs:
Calculate tax as per the current income tax slabs.
5.
Divide
by 12:
Divide the total tax by 12 months to get monthly TDS deduction.
Example:
Let’s say your annual
salary is ₹7,00,000.
- After deductions, your taxable income is ₹5,00,000.
- As per the slab, tax on ₹5,00,000 is ₹12,500 (assuming
no rebate).
- Monthly TDS = ₹12,500 / 12 = ₹1,042
TDS on Property Purchased
If you buy a property
worth more than ₹50 lakh, you must deduct TDS before paying the seller.
How Much TDS?
- TDS rate is 1% of the sale value.
Example:
You buy a flat for ₹70,00,000.
- TDS to be deducted = 1% of ₹70,00,000 = ₹70,000
- You pay ₹69,30,000 to the seller and deposit ₹70,000 as
TDS to the government.
How to Deposit TDS?
- Fill Form 26QB online on the TIN-NSDL website.
- Pay the TDS amount online.
- Download and give Form 16B (TDS certificate) to the
seller.
TDS on Joint Owners of Property
If a property is bought
by two or more people, TDS must be deducted in proportion to each person’s
share.
Example:
You and your spouse buy
a house for ₹80,00,000 (each has 50% share).
- Each buyer must deduct 1% TDS on their share (₹40,00,000
each).
- So, each must deduct ₹40,000 as TDS and deposit it
separately.
Missed TDS Payment
If you forget to deduct
TDS or deposit it late, you will have to pay interest and penalties.
Consequences:
- Interest for Late Deduction: 1% per month from the date TDS was deductible to
the date it is actually deducted.
- Interest for Late Deposit: 1.5% per month from the date of deduction to the
date of deposit.
- Penalty: The
Assessing Officer can also levy a penalty equal to the amount of TDS not
deducted or not deposited.
Example:
If you were supposed to
deduct TDS in April but deducted it in June, you will have to pay interest for
2 months.
TDS on Professional Fees
If you pay fees to
professionals like doctors, lawyers, architects, or consultants, you must
deduct TDS if the payment exceeds ₹30,000 in a financial year.
- TDS rate is 10% under Section 194J.
Example:
You pay a lawyer ₹50,000
for legal advice.
- TDS to be deducted = 10% of ₹50,000 = ₹5,000
- Pay ₹45,000 to the lawyer and deposit ₹5,000 as TDS.
TDS on Contractor Payments
If you hire a contractor
for work (like construction, repairs, etc.), TDS must be deducted if the
payment exceeds ₹30,000 in a single payment or ₹1,00,000 in a year.
- TDS rate is 1% if the contractor is an individual or
HUF, and 2% for others.
Example:
You pay a contractor ₹1,20,000
for building a wall.
- TDS to be deducted = 1% of ₹1,20,000 = ₹1,200
- Pay ₹1,18,800 to the contractor and deposit ₹1,200 as
TDS.
TDS on Bank Interest
Banks deduct TDS on
interest earned on fixed deposits if the interest in a year is more than ₹40,000
(₹50,000 for senior citizens).
- TDS rate is 10%.
Example:
You earn ₹60,000
interest from your fixed deposit in a year.
- TDS to be deducted = 10% of ₹60,000 = ₹6,000
- The bank will pay you ₹54,000 and deposit ₹6,000 as
TDS.
TDS on Commission and Brokerage
If you pay commission or
brokerage to an agent, TDS must be deducted if the payment exceeds ₹15,000 in a
year.
- TDS rate is 5% under Section 194H.
Example:
You pay ₹20,000 as
commission to a property agent.
- TDS to be deducted = 5% of ₹20,000 = ₹1,000
- Pay ₹19,000 to the agent and deposit ₹1,000 as TDS.
How to Check TDS Deducted
You can check all the
TDS deducted in your name using your PAN on the Income Tax Department’s
website.
- Visit https://www.incometax.gov.in
- Log in and check your Form 26AS.
- This form shows all TDS deducted by employers, banks,
tenants, etc.
How to File TDS Returns
If you are a deductor
(the person who deducts TDS), you must file TDS returns every quarter.
- Use Form 24Q for salary TDS, Form 26Q for non-salary
TDS.
- File returns online on the TRACES or Income Tax portal.
- Issue TDS certificates (Form 16 for salary, Form 16A
for others) to deductees.
Tips for TDS Compliance
- Always collect and verify PAN of the payee to avoid
higher TDS rates.
- Deduct and deposit TDS on time to avoid interest and
penalties.
- File TDS returns accurately and on time.
- Keep all records and proofs of TDS deduction and
deposit.
Common Mistakes to Avoid
- Not deducting TDS when required.
- Deducting TDS at the wrong rate.
- Not depositing TDS on time.
- Not filing TDS returns or issuing TDS certificates.
- Quoting wrong PAN or missing PAN.
Other Recent Changes (2025)
Senior Citizens: TDS on bank interest applies only if annual interest exceeds ₹1 lakh. Indiafilings
Professional Fees: TDS threshold for professional/technical fees is now ₹50,000 per year.
Commission/Brokerage: TDS applies if annual commission exceeds ₹20,000.
Gaming Winnings: TDS on gaming/lottery winnings is now only for
individual winnings above ₹10,000.
Also read: How to save Tax if you salary is above 12 Lakh
Conclusion
TDS is a simple but
powerful tool for tax collection in India. It helps the government collect
taxes regularly and ensures that everyone pays their fair share. As a taxpayer,
understanding TDS helps you avoid penalties, claim refunds, and manage your
taxes better.
Always stay updated with
the latest TDS rules and consult a tax expert if you have doubts. Remember,
proper TDS compliance is not just a legal duty but also a step towards a
transparent and honest financial life.
The Big Picture: TDS in India
TDS now accounts for
over 40% of India’s direct tax collections, showing its importance in the
country’s tax system. The government’s recent changes aim to make compliance
easier and reduce the burden on small taxpayers. Business
Sources
IndiaFilings – TDS basics and latest rules
Economic Times – 2025 TDS threshold change
Business Standard – TDS share in tax collections
SAG Infotech – Nil TDS certificate removal
India Briefing – FY 2025-26 TDS rates
Disclaimer: This article is for informational purposes
only. Please consult a tax professional for advice specific to your situation
