What is TDS- Tax Deduction at Source

What is TDS- Tax Deduction at Source

Are you also confused why your employer deducts a certain amount when paying your monthly salary or freelancing fee, and how it is adjusted against your final tax liability? Do you also advocate for a higher in-hand salary because you believe you’re getting a better deal?

Getting a hang of taxes and how they work can certainly be a tough nut to crack. However difficult it might be, it’s essential to know the way taxes and their deductions work. After all, a significant chunk of your hard-earned money is spent filing taxes. Through this article, we’ll help you understand the nitty-gritty of what is TDS, how it works, and bust some common myths.

What is TDS?

TDS refers to a mandatory deduction that the payer has to deduct from the total income payable to you - it could be your salary, or your rental income, or even interest on your investments. This deduction is then deposited with the government to offset against your final tax liability.

It serves dual purposes. First, the government likes to collect tax the year it is due. In our current fiscal year, we technically file our income tax returns and pay taxes for the previous year - so their revenue collection suffers. Secondly, it helps the government track income flow and ensures tax is paid. There is a direct conflict of interest between the taxpayer and the government, and there is an incentive to defraud or not pay taxes at all. The government thus eliminates you from the equation and tries to collect money from the person who has to pay you.

The rules of TDS are governed by the Income Tax Act and vary from one income type to another. For example, if your salary exceeds the minimum taxation threshold, your employer will deduct roughly 10%  TDS under section 192B (based on normal slab rates). However, if you’re working as a contractor under 194C, and charging more than Rs. 30,000 per year, the TDS rate will be 1% (for individuals and HUFs) or 2% for all other persons. 

Also Read: How to calculate Income Tax?

For salaried professionals, your TDS is supposed to be deposited with the government by the 7^th of each month following the month in which you have made the deduction. For example, if your TDS is deducted on 15th March, it must be deposited with the Income Tax Department before 7^th April. After the deduction, your employer will file the quarterly return on the due dates, which is when it will reflect in your Income Tax portal under form 26AS. So if you want to see how much TDS has been deposited under your name, just log in and view your TDS credits up to the deadline of return filing.

Where is TDS applicable?

TDS rates differ, depending upon the kind of financial activities you undertake, and your total earnings from that activity.

Let us simplify it for you.

Nature of payment	% of TDS for AY 2019-20
Payment of salary (Section 192)	Normal slab rate
Payment of accrued due of EPF Scheme, to Employees which is taxable in their hand (Section 192A)	10%
Interest on securities (Section 193)	10%
Dividend excluding the dividends mentioned in section 115-O (Section 194)	10%
Income received from interest other than “interest on securities” (Section-194A)	10%
Income received from winning lotteries, crosswords, and games, etc. ( Section-194B / Section 194BB)	30%
Payment to contractors / sub-contractors (Section 194C)	2% for payments made to contractors who are not HUFs/individuals and 1% for payments made to contractors/subcontractors who are HUFs/individuals
Insurance commission (Section-194D)	5%
Payment for life insurance policy (Section 194DA)	1%
Rent (Section 194-I)	For plant and machinery - 2% Land, furniture, fitting and furniture-10%
Payment on transfer of immovable property excluding agricultural land ( Section (194- IA)	1%

For example, if your total estimated tax on salary adds up to Rs. 50,000 based on normal slab rates, your employer will deduct an approximate amount from your salary and pay to the government. 

Also Read: Is life insurance part of your tax planning?

Banks deduct TDS as well. If you have a Fixed Deposit with a bank with interest income exceeding Rs 10,000, TDS will be deducted. To encourage linking of your PAN card, the government has prescribed a lower tax rate. In the absence of PAN information, you will be subjected to 20% TDS. But, if your income does not qualify for taxable income, you can prevent your fixed deposit interest income from TDS by submitting forms 15G (for individuals) and 15H (for senior citizens above the age of 60).

If you have invested in shares and mutual funds, your gains will not be liable to TDS. However, if you are at the receiving end of any insurance commission, you will be subjected to TDS. As the above table explains, TDS could be applied while purchasing a property, paying rent, or paying a salary to any person.

While filing your income tax return, your final tax liability will be: Tax on Gross Total Income - TDS already deposited

If this figure is negative, you will be entitled to a refund of your TDS, which you’re eligible for once you file your ITR. It is advisable to go for a salary structure that deposits a corresponding amount of tax with the government, otherwise, you will have to deposit additional advance tax to meet your tax liabilities. When employers deposit your TDS, they are saving you from the hassle of paying interest on your accrued income and meeting quarterly advance tax deadlines on a timely basis.

What is a TDS Return?

Tax Deducted at Source (TDS) is a mechanism introduced by the Income Tax Department to collect tax at the source of income. There are several types of TDS applicable depending on the nature of payment. Common types include TDS on salary (Section 192), where employers deduct tax before paying salaries. 

TDS on interest from bank deposits (Section 194A) applies if the interest exceeds the specified limit (for senior citizens in a financial year). TDS is also deducted on rent payments (Section 194I), professional fees (Section 194J), and commission or brokerage (Section 194H). Payments to contractors and sub-contractors (Section 194C) are also subject to TDS. Other types include TDS on insurance commission, winning from lotteries or games, and property sales. 

The deducted tax is credited to the government, and the deductee can claim it as a tax credit when filing their ITR. Timely deduction and deposit of TDS help ensure compliance and avoid interest, penalties, or prosecution under the Act.

How to File TDS Online 

1. Prepare TDS Statement 
   Use a utility like NSDL’s Return Preparation Utility (RPU) to prepare the TDS return in the required format (Form 24Q, 26Q, etc.).
2. Validate Using File Validation Utility (FVU) 
   Download the File Validation Utility from the NSDL portal to validate your TDS file. Only validated files can be uploaded.
3. Register on the TRACES Portal 
   If not already done, register your TAN on the TRACES portal. Registration requires details from a previously filed TDS return (non-NIL), including challan details and token number 
4. Log In to the Income Tax e-Filing Portal 
   Visit www.incometax.gov.in and log in using your TAN credentials. Ensure your Digital Signature Certificate (DSC) is registered or your Principal Contact PAN’s is linked with Aadhar for EVC-based registration. 
5. Upload TDS Return 
   Navigate to TDS → Upload TDS. Select the appropriate form, quarter, financial year, and upload the validated file along with the digital signature.
6. Check Status 
   After submission, you can check the status under TDS → View Filed TDS to ensure the return is processed. The status will update within 24 hours as Accepted or Rejected. In case it is rejected, click the Token Number to get detailed report on why it was rejected. Based on the insights, you can make the improvements and submit again. 

We hope this simplified the topic of tax deduction at source for you - feel free to ask any leftover questions in the comments!

(All care has been taken to maintain the accuracy of the information detailed in this blog. Aviva, however, assumes no responsibility about the accuracy of the blog or of the actions taken based on it. Please do refer to the Income Tax Department’s online tax filing site, https://www.incometaxindia.gov.in/Pages/tax-services/file-income-tax-return.aspx, for any further clarifications)

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AN: Feb 51/19