TDS (Tax Deducted at Source) – Complete Guide

 

Tax Deducted at Source (TDS) is an essential part of India’s income tax system. It ensures that tax is collected at the very source of income, making tax collection more efficient and reducing the chances of tax evasion.

Whether you are a salaried employee, freelancer, or business owner, understanding TDS rules, rates, and compliance requirements is crucial to avoid penalties and manage cash flow effectively.

In this article, we’ll cover what TDS is, how it works, applicable rates, due dates, return filing process, and latest updates for FY 2025-26.

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What is TDS?

TDS stands for Tax Deducted at Source. It is a system introduced by the Income Tax Department where tax is deducted by the payer at the time of making specified payments such as salary, rent, professional fees, interest, and commission.

The deducted tax is then deposited with the government and appears in the recipient’s Form 26AS as tax credit.

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How Does TDS Work?

Here’s a simple example:

• Suppose a company pays ₹50,000 as professional fees.

• Applicable TDS rate is 10%.

• The company deducts ₹5,000 as TDS and pays ₹45,000 to the professional.

• ₹5,000 is deposited with the government under the professional’s PAN.

• The professional can adjust this TDS while filing income tax return.

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Applicability of TDS

TDS applies to several payments including:

• Salary (Section 192)

• Interest on Fixed Deposits (Section 194A)

• Rent (Section 194I)

• Contractor Payments (Section 194C)

• Professional Fees (Section 194J)

• Commission or Brokerage (Section 194H)

• Purchase of Property (Section 194IA)

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TDS Rates for FY 2025-26

(Note: PAN is mandatory. If PAN is not provided, TDS will be deducted at a higher rate of 20%.)

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Due Dates for TDS Payment

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TDS Return Filing

TDS deductors must file TDS returns quarterly using the following forms:

Once filed, deductees can download Form 16 (for salary) and Form 16A (for other payments) as proof of TDS deducted.

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Benefits of TDS

• ✅ Ensures regular tax collection

• ✅ Reduces year-end tax burden

• ✅ Improves government revenue flow

• ✅ Minimizes tax evasion

• ✅ Helps maintain compliance track record

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Penalties for TDS Non-Compliance

• Late Payment Penalty: 1.5% per month on TDS amount

• Late Filing Fee: ₹200 per day under Section 234E (subject to max TDS amount)

• Penalty: Ranging from ₹10,000 to ₹1,00,000 for failure to file return (Section 271H)

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Latest TDS Updates – 2025

• 🔹 PAN-Aadhaar Linking Mandatory – Higher TDS applies if PAN not linked with Aadhaar.

• 🔹 E-Filing Compulsory – All deductors must file TDS returns electronically.

• 🔹 Pre-filled ITRs – TDS credits are auto-reflected in pre-filled ITR forms.

• 🔹 New Thresholds for Rent TDS – No TDS if annual rent < ₹2.4 lakh.

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FAQs on TDS

Q1: How can I check my TDS?
You can check your TDS on the TRACES portal or in your Form 26AS on the Income Tax portal.

Q2: Can excess TDS be refunded?
Yes. If excess TDS is deducted, you can claim it as a refund while filing your income tax return.

Q3: Is TAN mandatory for TDS?
Yes, every deductor (except individuals deducting TDS under Section 194-IA) must have a TAN (Tax Deduction Account Number).

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Conclusion

TDS is a vital compliance requirement that ensures steady tax collection for the government and reduces last-minute tax payment burdens for taxpayers. By deducting, depositing, and filing TDS returns on time, you can avoid penalties and maintain a clean compliance record.

If you are a business or employer, it is advisable to use TDS management software or professional help to ensure accuracy and timely compliance.