What is TDS (Tax Deducted at Source)?
TDS is a mechanism under the Income Tax Act 1961 where the payer deducts tax at the time of making certain payments (salary, rent, professional fees, interest, contractor payments) and deposits it with the government on behalf of the payee. The deductor must have a TAN (Tax Deduction and Collection Account Number). TDS rates range from 1% to 30% depending on the payment type.
Current Rate (FY 2025-26 (AY 2026-27))
1% (contractor payments Section 194C), 2% (professional/technical services Section 194J from April 2020), 10% (rent above INR 2.4L/year Section 194I, dividends Section 194), 30% (non-residents Section 195 without DTAA). Payee can apply for lower/nil deduction certificate from CBDT.
Example
A company pays INR 5 lakh to a chartered accountant for audit services. TDS at 10% under Section 194J = INR 50,000 is deducted. The CA receives INR 4,50,000 and gets credit for INR 50,000 in their ITR. The company deposits INR 50,000 to the government and files TDS return (Form 26Q) quarterly.
How TDS (Tax Deducted at Source) works in India
TDS is one of the primary tax collection mechanisms in India, ensuring the government receives tax throughout the year rather than only at filing time. Failure to deduct or deposit TDS has serious consequences including disallowance of the expense in the payer's tax computation.
**Key TDS sections for companies**
- Section 192: Salary (slab rates per employee) - Section 194: Dividends to resident shareholders (10% above INR 5,000) - Section 194A: Interest from banks/companies (10% above INR 5,000/40,000) - Section 194C: Payments to contractors/sub-contractors (1% individual, 2% others) - Section 194H: Commission and brokerage (5%) - Section 194I: Rent (10% above INR 2.4 lakh/year; 2% for machinery/equipment) - Section 194J: Professional fees, technical services, royalty (10%; 2% for call centres/tech services from April 2020) - Section 195: Payments to non-residents (as per DTAA or statutory rates)
**TAN (Tax Deduction Account Number)**
Every entity deducting TDS must have a TAN (10-digit alphanumeric). Applied via Form 49B at TIN facilitation centres or NSDL portal. TAN must be quoted on all TDS returns, challans and certificates.
**Deposit deadline**
TDS deducted must be deposited by the 7th of the following month (except March deductions, which are due by 30 April). TDS on property purchases under Section 194IA must be deposited within 30 days.
**TDS returns (quarterly)**
- Form 24Q: TDS on salaries - Form 26Q: TDS on all non-salary payments to residents - Form 27Q: TDS on payments to non-residents
Filings are due by 31 July, 31 October, 31 January, and 31 May for Q1-Q4 respectively.
**TDS certificates**
Deductors must issue Form 16 (salary TDS, annually by 15 June) and Form 16A (non-salary TDS, within 15 days of the due date of quarterly return) to payees.
**Consequences of non-compliance**
- Interest: 1% per month for failure to deduct; 1.5% per month for failure to deposit - Penalty: INR 200 per day of default (subject to maximum of TDS amount) for late filing of returns - Disallowance: 30% of the payment is disallowed as a deduction in the payer's tax computation if TDS not deducted (Section 40(a))
Related terms
PAN (Permanent Account Number) is a 10-digit alphanumeric identifier issued by the Income Tax Department to all persons liable to pay tax in India — individuals, companies, and other entities. Every company must have a PAN and quote it on all tax returns, correspondence, and financial transactions above INR 50,000. TAN (Tax Deduction and Collection Account Number) is a separate 10-digit identifier required by any entity that deducts or collects tax at source (TDS/TCS). Both are issued by NSDL/UTIITSL.
Advance Tax requires businesses and individuals with tax liability above INR 10,000 in a financial year to pay tax in four instalments during the year — not in a lump sum at filing. The instalment due dates are 15 June (15%), 15 September (45%), 15 December (75%), and 15 March (100% of assessed tax for the year). Failure to pay results in interest under Sections 234B and 234C.
India levies Corporate Income Tax on the net profits of companies registered under the Companies Act 2013. The headline rate for domestic companies is 30%, but the effective rate for most companies is 22% under the concessional Section 115BAA regime (plus 10% surcharge and 4% cess = ~25.17%). New manufacturing companies incorporated after 1 October 2019 and commencing production before 31 March 2024 can opt for 15% under Section 115BAB (plus surcharge and cess = ~17.01%).
Professional Tax is a state-level tax on professions, trades, and employment levied by most Indian states and Union Territories (exceptions: Arunachal Pradesh, Delhi, Goa, Rajasthan, Uttarakhand, Jammu and Kashmir). It is deducted by employers from employee salaries and remitted to the state government. The maximum rate under the Constitution is INR 2,500 per year per employee. Rates vary by state and income slab.
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