TDS stands for Tax Deducted at Source. It is one of the most important concepts in accounting, taxation, and finance. TDS means deducting tax before making payment to someone. It is collected by the payer (also called deductor) and paid to the Income Tax Department on behalf of the payee (person receiving the income).
Example:
You hired a consultant and you have to pay ₹50,000 for their services. According to tax law, you need to deduct 10% TDS (₹5,000) before paying them.
- You pay ₹45,000 to the consultant.
- You deposit ₹5,000 with the government as TDS.
This way, tax is collected in advance and reported to the government.
Types of TDS
Here are some of the income sources that qualify for TDS:
- Salary
- Amount under LIC
- Bank Interest
- Brokerage or Commission
- Commission payments
- Compensation on acquiring immovable property
- Contractor payments
- Deemed Dividend
- Insurance Commission
- Interest apart from interest on securities
- Interest on securities
- Payment of rent
- Remuneration paid to the director of a company, etc
- Transfer of immovable property
- Winning from games like a crossword puzzle, card, lottery, etc.
Basic Concepts of TDS
- Deductor and Deductee
-
- Deductor: Person who deducts TDS (payer)
- Deductee: Person who receives payment (payee)
- TAN (Tax Deduction Account Number) – A 10-digit number required by anyone who deducts TDS. It is mandatory for filing TDS returns.
- PAN (Permanent Account Number) – The deductee must provide PAN; otherwise, TDS is deducted at a higher rate (usually 20%).
- Threshold Limit – If the total payment during the year is below a certain limit, TDS is not applicable. Each type of payment has a different threshold.
Common Sections of TDS
| Section | Nature of Payment | Rate of TDS | Threshold Limit |
|---|---|---|---|
| 192 | Salary | Slab-based | As per salary |
| 194C | Contractor Payments | 1%/2% | ₹30,000 per bill |
| 194J | Professional Fees | 10% | ₹30,000 per year |
| 194I | Rent | 10% | ₹2,40,000 per year |
| 194H | Commission/Brokerage | 5% | ₹15,000 per year |
How TDS Works
- Check if TDS is applicable – Look at the type of payment and the amount.
- Deduct TDS – Calculate and deduct TDS at the correct rate.
- Pay TDS to the Government – Use Challan ITNS 281 to deposit TDS.
- File TDS Returns – Every quarter, the deductor must file TDS return (Form 26Q or 24Q).
- Issue TDS Certificate – Give Form 16 or Form 16A to the deductee.
TDS on Salary (Section 192) – FY 2025–26
TDS on salary is not fixed like other sections (e.g., 10%, 1%, etc.). Instead, it is calculated based on the applicable income tax slab rates of the individual employee for the financial year.
Applicable Slab Rates – FY 2025–26 (For Individuals Below 60 Years)
Old Regime (with deductions like 80C, HRA, etc.)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 – ₹5,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
New Regime (without most deductions but lower rates)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 – ₹6,00,000 | 5% |
| ₹6,00,001 – ₹9,00,000 | 10% |
| ₹9,00,001 – ₹12,00,000 | 15% |
| ₹12,00,001 – ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
How TDS on Salary is Calculated?
TDS under Section 192 is calculated as:
TDS = Total Income Tax Liability (as per slab) / Number of months of employment
It also considers:
- Deductions claimed (if under old regime)
- HRA, Standard Deduction, Investments
- Previous employer income (if applicable)
- Rebate under Section 87A (if total income ≤ ₹5 lakh under old regime or ≤ ₹7 lakh under new regime)
Example:
- Employee annual salary: ₹6,50,000
- Tax regime: New
- Standard deduction: ₹50,000
- Taxable income = ₹6,00,000
- Tax = 5% on ₹3,00,000 = ₹15,000
- Rebate under 87A = ₹15,000
- So, TDS = Nil
Due Dates for E-Filing of TDS Return AY 2023-24
Who Is Required To Deduct TDS?
TDS applies in the following scenarios:
- Professional service fees
- Fees for technical services
- Remuneration is paid to directors that do not come under ‘salary.’
- Royalty
- Payments in the form of non-compete fees or fees paid to not share any technical expertise.
What are ‘Professional’ and ‘Technical’ Services?
Professional services under Section 194J imply any service in the following fields:
• Medical
• Legal
• Engineering
• Architectural profession
• Accountancy
• Technical consultancy, or
• Interior decoration
Professional services mentioned in section 44AA:
• Film artist
• Authorised representative
• Company Secretary
Professional services related to sports activities:
• Anchors
• Commentators
• Event managers
• Physiotherapists
• Referees and umpires
• Sports persons
• Sports columnists
• Trainers and coaches
Filing TDS Returns
TDS must be deposited with the government and a quarterly TDS return on form 26Q must be made.
Simple Assignments with Solutions
Assignment 1: Calculate TDS
You paid a contractor ₹1,20,000 during the year. TDS rate is 1%. Calculate how much TDS to deduct and journal entry.
Answer:
- TDS = 1% of ₹1,20,000 = ₹1,200
- Net Payment = ₹1,18,800
Journal Entry:
- Contract Expense A/c Dr. ₹1,20,000
- To TDS Payable A/c ₹1,200
- To Bank A/c ₹1,18,800
Assignment 2: No TDS Scenario
You paid ₹20,000 as rent to a landlord. TDS is applicable only if total rent exceeds ₹2,40,000 in a year. Should you deduct TDS?
Answer:
No. Since annual payment is below ₹2,40,000, TDS is not applicable.
Assignment 3: TDS with No PAN
You paid ₹40,000 to a professional who did not provide PAN. What is the TDS rate?
Answer:
As per Section 206AA, if PAN is not available, TDS is deducted at 20%.
- TDS = 20% of ₹40,000 = ₹8,000
- Net payment = ₹32,000