Tax Deduction at Source in India

Introduction

Tax Deduction at Source (TDS) is a crucial mechanism in the taxation framework of many countries, including India. TDS is the tax deduced at source from the payments made to a supplier of taxable goods or services or both. It is a crucial component of the Indian taxation system, designed to streamline tax collection and ensure compliance. It is a mechanism where tax is deducted at the source of income, meaning that the payer is responsible for withholding a certain percentage of the payment and remitting it to the government on behalf of the payee.

Understanding TDS in India: Objectives, Deductors, and Timelines

Tax Deducted at source i.e., TDS in India

TDS means Tax Deducted at Source. It is an indirect system of deduction of tax according to the Income Tax Act, 1961. This is governed by the Central Board for Direct Taxes (CBDT). The process of TDS, deduction of tax is affected at the source when income arises or accrues. It is the amount deducted from payments of various kinds such as salary, contract payment, commission etc.

Tax Deducted at source is one of the modes of collection of taxes, by which a certain percentage of amounts are deducted by a person at the time of making or crediting certain specific nature of payment to the other person and deducted amount is remitted to the government account. Tax is deducted by the payer and is remitted to the government by him on behalf of the payee. This deducted amount can be adjusted against the tax due of the deductee. It is similar to “Pay as you earn” scheme it is also denoted as withholding tax in many other countries. It facilitates sharing of responsibility of tax collection between the deductor and the tax administration. It ensures regular inflow of cash resource to the government. It acts as a powerful instrument to prevent tax evasion as well as expends the tax net.

Objective of deduction of tax at source is collect tax in advance

The main reason of deduction of tax at source was to collect tax at the time of the income like salaries, interest on securities or dividend are paid to stakeholders, so that the so that the government could have a regular inflow of cash resources, collect tax in advance. It prevents evasion of tax and also place the responsibility of deducting and depositing tax on the shoulders of deductee.

To analyse the current regulatory framework governing Tax Deduction at Source (TDS) to understand its effectiveness in achieving tax collection objectives.
To examine the impact of TDS provisions on taxpayer compliance behavior and its implications for revenue mobilization.
To assess the administrative challenges and procedural bottlenecks encountered in the implementation of TDS by tax authorities and propose potential solutions.
To investigate the economic implications of TDS on businesses, including its effects on cash flow management and overall financial performance.
To explore international best practices in TDS implementation and identify potential areas for improvement in the existing TDS regime in the study context.

Who is required to deduct TDS?

It is the duty of the person who is making payment to someone for specified goods or services to deduct TDS and file TDS return. The specified payment includes salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc. The person who deducts TDS is called deductor and the person whose tax is being deducted is called deductee. For easy understanding take an example, suppose you're an employee (deductee) earning ₹50,000 per month. If your employer deducts (deductor) ₹2,000 as TDS, you receive ₹48,000, and the ₹2,000 is deposited with the tax department against your PAN (Permanent Account Number). the absence of PAN will attract TDS at a rate of 20% unless any specific rate (like MMR) is mentioned.

The government has obligated the persons responsible for payment or credit for TDS deduction and TDS return filing. Every person deducting the amount of TDS is required to pay the remaining amount to the payee and file TDS Return with the TDS deposit.

Who is the TDS Deductor and TDS Deductee?

TDS Deductor: Is the one who is liable to deduct a specified amount as TDS from the amount which is to be given to the receiver/ payee/ deductee. Deductor is also referred to as Payer (because he/she deposits this part of the tax to the government on the payee’s behalf)
TDS Deductee: Is the one who is receiving the balance money after deduction of tax at source or the person and deposited on his/her behalf to the government by the Deductor. Deductee is also commonly referred to as Payee.

TDS is not required to be deducted by Individuals and HUF except for those whose accounts are required to be audited u/s 44AB i.e., whose gross receipts in preceding financial year in case of business is more than or 1 crore and in case of profession 50 lakhs.

What is Tan and is I required to file TDS Return?

TAN is an alphanumeric 10-digit number required by a person who is liable to deduct TDS and file TDS return. Thus, such person must make an application within a month of deducting TDS for allotment of Tax Deduction and Collection Number (TAN) in Form 49B. This number allotted is mandatory to mention in all TDS Certificates issued, returns, challans etc. If a person fails to apply for TAN, he may be penalized up to Rs. 10,000.

When TDS is to be deducted?

There are majorly 2 situations when the deductor (payer) is required to deduct tax, which are:

At the time of making payment, or
At the time of credit of income to the account of payee (receiver) or actual payment (in cash, cheque, draft or other mode), whichever happens earlier.

It is to be noted that in some sections, TDS liability arises only at the time of payment and in the rest, it happens according to the payment or credit whichever is earlier. For example, u/s 192 i.e., TDS on salary, TDS is deducted at the time of payment. Whereas u/s 194J i.e., TDS on professional services, TDS is deducted at the time of credit or payment whichever is earlier. Let’s understand with example below

Case 1 – ABC Ltd send bill to XYZ Ltd on April 25.

ABC Ltd Raised / Due bill on April 2025
XYZ Ltd Payment – June 2025
On which month TDS will deducted?

Now question arise when to deduct TDS

As per Government Rule “Due or Payment whichever is earlier" XYZ Ltd deduct tax on April 25.

Case – 2 - If ABC Want advance against Order

If order value is beyond threshold limits, then TDS will be deducted on advance payment against order.

What are the rates at which TDS is to be deducted for TDS returns?

As we navigate the complexities of financial regulations, it's important to stay informed about the varying TDS rates that may be imposed by the government. These rates can change annually, reflecting new policies and fiscal strategies. For the most accurate and up-to-date information, I encourage you to visit the TRACES website. Simply click on the "Rates and Tables" link on the homepage to access the latest TDS rates. Staying informed is key to effective financial planning.

What are the due dates for depositing and filing TDS Return?

Once tax is deducted the deductor should deposit the tax deducted with Central Government within time limit specified in the table below:

Type of Deductor	Payments made between April – Feb	Payments made in March
Government	• Without Challan: Same day • With Challan: On or before 7th of next month	• Without Challan: Same day • With Challan: On or before 7th of next month
Other than Government	On or before 7th of next month	On or before 30th April
Other than Government (payment u/s 194IA)	On or before 30th of next month	On or before 30th of next month

After deducting the TDS amount, the deductor is required to deposit this amount with the government within a specified time and this is called making TDS payment. The amount of TDS is deposited by using TDS Challan No. 281 On income tax portal.

Consequences of Failure to deduct of pay TDS

TDS interest late fees penalty

TDS interest - TDS interest is to be paid under section 201 when there is failure to deduct or pay TDS.

Types of TDS Interest

Interest for late deduction
Interest for late deposit

Interest for late deduction of TDS is applicable at the rate of 1% per month
It is applicable from the date on which tax was deductible to the date of actual deduction.
The calculation of interest is on per month basis not on number of days basis i.e., part of month to be considered as full month.

Example –

Professional Service – Rs. 50,000
TDS – Rs. 5,000
Bill Date – 28/01/2025
Date of Payment – 10/02/2025
Which is Earlier Bill or Payment – 28/01/2025
TDS deducted on – 10-02-2025

Solution - Interest applicable from 28 January to 10 February @1% & for late deduction of TDS for two months

5000 * 1% *2

Interest payable = Rs. 100

Example –

Professional Service – Rs. 50,000
TDS on Sec 194J– Rs. 5,000
Bill Date – 28/01/2025
Date of Payment – 10/02/2025
Which is Earlier Bill or Payment – 28/01/2025
TDS deducted on – 10-02-2025
Due date of deposit – 07-03-2025
Actual date of deposit – 16-03-2025

Solution –

Interest late deduction - Interest applicable from 28 January to 10 February @1% for late deduction of TDS for two months = Rs. 5000*1%*2 = Interest Payable = Rs.100
Interest for late deposit - Interest applicable from 10 February to 16 March @1.5% for late deposit of TDS for two months = Rs. 5000 *1.5%*2 = Interest Payable = Rs.150

TDS Return

Form No	What it represents?	Frequency of Submission
Form 24Q	Statement for TDS from salaries	Quarterly
Form 26Q	Statement for TDS on all payments other than salaries.	Quarterly
Form 27Q	Statement for TDS on income received from interest, dividends, or any other sum payable to non-residents.	Quarterly
Form 26QB	Statement of TDS on Payment on Transfer of Immovable Property (Not Being an Agricultural Land).	Within 30 days from the end of the month in which deduction is made.
Form 26QC	Statement of TDS on Payment of Rent by Certain Individuals or HUF.	Within 30 days from the end of the month in which deduction is made.

A TDS Return is a quarterly statement which has to be submitted to the Income Tax Department of India. Submitting TDS Return is mandatory if you are a deductor. It has details of TDS deducted and deposited by you. Due dates of submission of quarterly TDS Return are 31st July for Q1, 31st October for Q2, 31st January for Q3, and 31st May for last quarter.

Different Forms to file Return

Form 24Q -TDS on Salaries,
Form 26Q – TDS on payments other than Salaries,
Form 27Q – TDS on payments made to Non-Residents and
Form 27EQ – TCS.

What are Form 24Q, 26Q, 27Q, 27EQ?

Form 24Q:

This form has to be filled up for declaration of a citizen’s TDS returns in detail.
The form information is based on a citizen’s salary payments and the deductions made for tax.
The declaration and payment are to be made quarterly by companies and firms in India.
Details such as Deductor, Deductees, Challans as well as Salary TDS have to be provided.

The form can be downloaded and submitted online along with the required documents as well as submitted in person/company/organization.

However, for certain people, it is compulsory to be submitted online. This includes:

If the deductor is a government office
If the deductor is a company’s principal officer
If the deductor is required to have their accounts

Audited for the prior year under 44AB of the Income Tax Act, 1961.

If there are 20 or more records of deductees in a statement for any quarter of a particular financial year.

Annexure I and Annexure II are also forms that require submission along with this form.

Annexure I have to be filled in for all four quarters of the year.
Annexure II needs to be filed only for the final quarter of the year.

Form 26Q:

This form has to be filled up for declaration of a citizen’s TDS returns in detail.
This form is based on their payments other than salary.
It has to be filled up for declaration by people who are living and working in India and are Indian citizens.
This form is payable under the sub - section (3) of section 200 of the Income tax Act, 1961.
The sections under which the form is based on, and can be used for reference to fill in the declaration form include sections 193, 194, 194A, 194BB, 194C, 194D, 194EE, 194F, 194G, 194H, 194I, 194J, 194Q and rule 31A.
It needs to be indicated in the form whether the deductor is Government or non-Government.
It is compulsory to quote the PAN for non-Government deductor.
In the case of Government deductor, "PANNOTREQD" has to be mentioned on the form. Mentioned

Form 27Q:

This form has to be filled up for declaration of TDS returns in detail by NRIs and foreigners
This form is based on the payments of foreigners and NRIs other than salary.
It is compulsory for non-Government deductor to mention the PAN in the form.
For Government deductor, "PANNOTREQD" has to be mentioned.
The deductor category needs to be indicated based on the Annexure 1.
If the deductor are Central Government, the Ministry/Department has to be mentioned. The same goes for the State Government.
It is mandatory to fill in all the amount columns. If an amount is not applicable, 0.00 has to be mentioned.
This is a quarterly tax deduction statement under the subsection (3), Section 200 of the Income tax Act, 1961.

Form 27EQ:

It is mandatory to mention the TAN in this form.
The declaration is a Quarterly statement of collection of (TCS) tax at source.
The form is made under the section 206C of the Income Tax Act.
It is compulsory for non-Government deductors to mention the PAN in the form.
For Government deductors, "PANNOTREQD" has to be mentioned.
The deductor category needs to be indicated based on the Annexure 1.
If the deductors are Central Government, the Ministry/Department has to be mentioned. The same goes for the State Government.
TCS is basically the tax that is collected by Seller from Buyer of certain goods when debiting the amount payable to the account of buyer by buyer or when receiving the amount from the buyer in the form of cheque, cash, demand draft or other modes of payment for selling certain prescribed goods as per Section 206C (1) for the purpose of business and not for personal use.

Steps to file TDS Online?

Enter the URL http://incometaxindiaefiling.gov.in/ on the address bar and proceed to the Login option (Mentioned as ‘Login Here’).
Enter your login credentials and press Enter. (Please note, your TAN would be your user ID.)
Once you login to the portal, click the Upload TDS tab under the TDS button.
Upon clicking the TDS button, a form will pop-up asking you to enter your details, such as– TAN, FVU Version, Financial Year, Name of the Form, Particulars of the Quarter, and Upload Type. Once complete, press validate.
You can validate the form either by using a Digital Signature Certificate (DSC) or an Electronic Verification Code.
Once you are done with form validation, submit the form. If you have entered all the information correctly and the form is accepted, you’ll get a provisional/acknowledgement token number. In case, the form is not accepted, you will be provided with a non-acceptance memo along with the reasons.

Points to Remember

Form 27A comprises of a control chart. Ensure that you fill all the columns present. The form will be verified in offline along with the return you filed online.
Ensure that all details are entered accurately.

TDS late fee – for delay in filing TDS return

Late fees for delay in filing quarterly return u/s 234E

Any delay in furnishing the e-TDS statement will result in a mandatory fee of Rs. 200 per day until the filing of the return. The total fees should not exceed the total amount of TDS deducted for the quarter or period.

How to calculate late fees?

As we discussed above that due that of quarterly TDS return is as follows -

Quarter No.	Quarter	Due Date (Other than Salary)
1	April to June	31^st July
2	July to September	31^st October
3	October to December	31^st January
4	January to March	31^st May

Any delay in return filing from the due date late fees minimum of following is charged

Rs. 200 per day
Maximum amount of TDS

TDS penalty – for late filing of TDS Return

Penalty for late filing of TDS return u/s 271H
Assessing officer may direct a person who fails to file the statement of TDS within due date to pay penalty minimum of Rs. 10,000 which may be extended to Rs. 1,00,000.
The penalty under this section is in addition to the penalty u/s 234E.
This section will also cover the cases of incorrect filing of TDS return

When Penalty u/s 271H not levied?

The tax deducted or collected at source is paid to the credit of the government.
Late filing fees and interest if any is paid to the credit of the government
The TDS or TCS return is filed before the expiry of a period of one year from the due date specified in this behalf.

What is a TDS certificate?

Form	Certificate of	Frequency	Due date
Form 16	TDS on salary payment	Yearly	31st May
Form 16 A	TDS on non-salary payments	Quarterly	15 days from due date of filing return
Form 16 B	TDS on sale of property	Every transaction	15 days from due date of filing return
Form 16 C	TDS on rent	Every transaction	15 days from due date of filing return

Who is required to be issue TDS Certificates?

Every person deducting tax as per provisions of section 203 is required to issue a certificate to the payee in respect of tax deducted by him along with certain other particulars. This certificate is called TDS Certificate. Even banks deducting TDS on pensions issue TDS certificates.

Types of TDS certificate to be issued in different cases:

Salaries: Certificate is to be issued in Form 16 containing details of TDS Payment, tax deducted at source and tax calculation based on which TDS was estimated. The certificate should be issued within 31st May of next financial year.
Non Salary Payments: Certificate is to be issued in Form 16A containing details of payment and tax deducted at source. The certificate should be issued within 15 days of due date of filing the return.
TCS: Certificate to be issued in Form 27D containing the Tax Collected & Paid details. Failure to issue certificate will result in penalty of Rs. 100 for every day the failure continues but limited to the TDS amount.

What is TDS justification Report?

It is a document which serves as an annexure to the intimation to be sent to the deductor. Intimation will be sent to the deductor through mail / post but a justification report will have to be downloaded from the portal.

TDS Exemption: If your TDS has been deducted under Sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194LA and 195, while at the same time if you feel that you are not eligible to pay TDS, then, in order to claim a tax deducted at source exemption, follow the below mentioned procedure:

Contact your corresponding Income Tax official or the department through Form 13 to get permission.
There has to be a consequent disposal of the applicants within the time frame of a month (30 days).
All the taxpayers are advised to fill in authentic and complete information in the first occasion itself. Not doing so might result in your application being rejected by the assessing officer. In any other scenario, if the officer is satisfied with the information provided, he/she will go ahead and issue your exemption certificate under Section 197.
Save a copy of this receipt to later attach it with the invoice that you will eventually raise in order to claim your TDS exemption.
Your certificate will have total validation, unless the officer cancels it.

Section 197 - Certificate for deduction at lower rate

Standard Requirements for making an Applicant u/s 197

The process involves registration on the TRACES website, submission of Form 13 and supporting documents and completion of the process by the Assessing Officer, ensuring a quicker and more efficient process. An assessee must complete Form 13 to get a NIL or lower TDS certificate under section 197. Such a certificate is issued by the Income Tax Department if the assessee’s estimated tax liability justifies no deduction tax or deduction of tax at a lower rate. The certificate can be obtained concerning incomes such as Salaries, Interest on Securities, Dividend, Interest other than interest on securities, rent, fees for professionals or technical services, payment of compensation on compulsory acquisition of immovable property.

First, register with PAN (Permanent Account Number) at TRACES (www.tdscpc.gov.in) website. After login, submit Form 13 and Annexure with supporting documents using either Digital Signature, Electronic Verification Code, Aadhar-based Authentication, or Mobile OTP. NRIs can submit the form with the help of a digital signature only.
Contact person (responsible for TDS) details: These details will be used in case any information/ documents are required for processing the application.
Income/Tax payment details:

Details of last three years’ income and projection for current year to be provided.
Tax payment details for last 3 years to be filled.
Details of tax already deducted / paid for current FY to be filled.
Details of demand outstanding before any Income Tax authority to be provided including details of AY, amount outstanding, section and current status (whether any stay granted).
Particulars of default as reported in column 27 of tax audit report (Form No. 3CD) for last three years to be provided. Reasons for the default and corrective action taken should also be mentioned.
Details of pending scrutiny assessment or penalty proceedings to be provided.

TAN details, if applicable.
Details of Cumulative Tax likely to be foregone by issue of certificate

Section: Section of the Income Tax Act under which the receipt is liable for TDS.
Projected amount: Cumulative amount of projected receipt under this section.
No. of parties: No. of parties from whom the receipt is expected.
Normal rate of TDS: Rate of TDS applicable as per Income Tax Act if no certificate is issued.
Lower rate requested: Rate at which lower deduction certificate is requested for receipts covered under this section.
Tax Foregone.
Total Tax foregone as per certificate proposed.
Tax foregone as per certificate, if any issued earlier during Financial Year: to be filled if certificate for lower deduction issued earlier for the same financial year.
Cumulative tax foregone.

Deductor wise details with respect to payments for which certificate is sought to be provided.

Name: Name of the deductor from whom payment is expected. Name should be same as appearing in TAN allotment letter.
TAN
Address: Current correspondence address of the deductor.
Email: Email ID of the deductor.
Receipt amount: Expected receipt amount to be filled.
TDS Section under which receipt is covered.

Documents to be submitted along with application:

ITR-V/Acknowledgement of filing Income Tax return for relevant financial years to be provided.
Computation of Income for relevant financial years.
Balance Sheet and Profit and Loss Account for relevant financial years with all Schedules/Annexures.
Audit report in Form-3CD/3CA-3CB/10B (Whichever is applicable) for relevant financial years.
Complete Chart showing all the payments made, the head of such expenses (e.g., contract payment, legal professional fees, etc.) and the section under which tax has been deducted by the applicant.

What id Form 26AS?

Form 26AS is simply a summarized annual statement which contains tax credit information of each taxpayer against his PAN. This form is maintained and updated by the income tax department. If you have paid any tax (like self-assessment tax, advance tax) or any tax has which has been deducted and deposited with government on your behalf (like various TDS) then all such details will be available on Form 26AS.

This form helps you to claim credit of all the taxes you have paid (plus paid on your behalf-TDS) while filing income tax return. Therefore, it becomes very important that details mentioned here are correct and they match with relevant TDS certificates.

How to Claim Credit of TDS?

It is very simple to claim the benefit of TDS while filing Income Tax Return. Simply download your Form 26AS, consider all the details which it shows and update them in your return and this will reduce your total tax liability (and it may also make you eligible for the income tax refund, if your TDS, advance tax etc. exceeds total tax liability).

Conclusion

TDS denotes the tax deductions at source of an individual’s income/payments. The deductor (employer/contractor etc.) is the person who is making payments to the deductee (employee, stock broker etc.).
TDS helps in reducing tax filing burdens for a deductee and ensures stable revenue for the government.
In most cases, TDS is collected after a certain threshold limit of earnings has been crossed. The highest TDS of 30% is applicable on winnings from horse races, and lotteries and other games.
TDS certificate is issued wherever TDS has been collected, typically by the deductor or a bank.
TDS is exempted on some payments made to government, RBI, cooperative societies etc.
Refunds can be requested if there are discrepancies in the collected amount and the actual payable amount

FAQ’s

How to identify deductee types?

It’s very easy to identify them; first you need to ask their PAN. Fourth character of PAN should be either one of these: -

P – Personal/Individual
H – HUF
C – Company
J – Artificial Judicial Person
F – Firm
A – Association of Person
B – Body of Individual
L – Local Authority
G – Government

How do I know how much TDS has been deducted and whether it has been credited to me?

The employer/deductor is liable to give you a TDS certificate or Form 16 and 16A confirming the amount of tax deducted. You can also log in to your Income Tax e-filing portal and check either your Form 26AS or ‘View Your Tax Credit’ option on the menu.

How can one get the exemption from TDS?

Well, the liability for TDS can be avoided only when your income is below the basic exemption limit. There are 2 forms which can help a resident citizen to avoid TDS liability on interest income. These are:

Form 15G (for Resident Citizen below 60 years & HUF)
Form 15H (for Resident Senior Citizens who are 60 years or above)

You need to use these forms when although a particular income is exceeding than the threshold limit specified in individual section but your overall limit is within basic exemption limit. Further, if the income of non-residents is also less than the basic exemption limit then for avoiding the TDS liability, they need to file an application u/s 195(3) of the IT Act to the jurisdictional tax officer to obtain a certificate of non-deduction or lower deduction of taxes.

What is the difference between TAN and PAN?

TAN is given to a person who is liable to deduct or collect tax at source. Whereas, PAN is issued to a person who is involved in the financial transaction exceeding a particular threshold limit. (Basically, the one from the whose income tax is being deducted).

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