What is TDS (Tax Deducted at Source)?

TDS is a system introduced by the Income Tax Department of India, where tax is deducted at the time of making certain payments such as salary, rent, interest, professional fees, etc. It ensures steady inflow of revenue to the government and prevents tax evasion.

How is TDS Calculated?

TDS is calculated as a fixed percentage on the payment amount, based on the applicable section of the Income Tax Act. The formula is:

TDS Amount = Payment Amount × Applicable TDS Rate

The applicable rate depends on the nature of payment and the recipient's PAN status.

Example: TDS on Salary (Section 192)

If an employee earns ₹60,000 per month and the estimated taxable income is ₹7,20,000 per annum, the employer will compute income tax liability based on slab rates, divide it over 12 months, and deduct TDS monthly.

Example: TDS on Contractor Payment (Section 194C)

If you pay ₹1,00,000 to a contractor, and the TDS rate is 1% (with PAN), then:

TDS = ₹1,00,000 × 1% = ₹1,000

₹99,000 is paid to the contractor and ₹1,000 is deposited with the government.

Important Notes

• If PAN is not provided, TDS is deducted at a higher rate (usually 20%).
• TDS must be deposited with the government before the due date.
• Form 16/16A is issued as proof of TDS deducted.

3. TDS Rates & Sections

The Income Tax Act specifies various sections for different types of payments, each with a prescribed TDS rate. Some important sections include:

• Section 194A: Interest other than securities (10%)
• Section 194C: Payments to contractors (1% or 2%)
• Section 194H: Commission or brokerage (5%)
• Section 194J: Professional fees (10%, 2% if company)
• Section 195: Payments to Non-Residents (varies, often 20%)

Rates differ for residents, non-residents, and in some cases, based on availability of PAN or non-filer status.

4. Compliance & Filing

Once TDS is deducted, it must be deposited with the government by the due date — usually the 7th or 30th day of the next month depending on the section.

Deductors must file quarterly TDS returns electronically, providing details of TDS deducted and deposited.

Deductees (those whose TDS is deducted) receive TDS certificates (Form 16/16A) to claim credit of the tax deducted while filing their income tax returns.

5. Advanced: Penalties & Legal Provisions

Non-compliance with TDS provisions attracts penalties, interest, and legal consequences, including:

• Interest on late deduction or late deposit of TDS
• Penalty equal to the amount of TDS not deducted or deposited
• Prosecution in severe cases

Special rules apply for deductees without PAN (Section 206AA), and higher TDS rates apply to non-filers (Section 206AB). Non-resident transactions must consider Double Taxation Avoidance Agreements (DTAA) to avoid double taxation.

📅 TDS Due Dates & Consequences of Delay

🕒 When to Pay TDS?

• For most payments (including salary, contractors, professionals, etc.): 7th of the following month
• For March month deductions: 30th April (extended due date)

📨 When to File TDS Returns?

• Quarterly TDS returns are required (Form 24Q/26Q depending on payment type)
• Q1 (Apr–Jun): Due by 31st July
• Q2 (Jul–Sep): Due by 31st October
• Q3 (Oct–Dec): Due by 31st January
• Q4 (Jan–Mar): Due by 31st May

⚠️ Consequences of Late Payment or Return

• Interest for late payment:
  • 1% per month for late deduction
  • 1.5% per month for late deposit (from date of deduction to deposit)
• Late filing fees: ₹200 per day under Section 234E (up to the TDS amount)
• Penalty under Section 271H: From ₹10,000 to ₹1,00,000 for non-filing or incorrect filing
• Disallowance of expense: If TDS is not deducted or deposited, the related expense is not allowed under income tax (Sec. 40(a)(ia))

📌 Tip: Always deduct and deposit TDS on time to avoid penalties and ensure tax compliance.