Definition
What is TDS?
Tax Deducted at Source is a mechanism under the Income Tax Act 1961 where the entity making a payment - the deductor - withholds tax at a prescribed rate before releasing funds to the recipient - the deductee. The deducted amount is then deposited with the government on the deductee’s behalf; the deductee claims it as a credit when filing their income tax return.
Where TDS applies
TDS is triggered across a wide range of payment types. The governing sections you’ll encounter most often:
- Section 192 - salaries
- Section 194A - interest other than on securities
- Section 194C - payments to contractors and sub-contractors
- Section 194H - commission and brokerage
- Section 194I - rent
- Section 194J - professional and technical services
- Section 195 - payments to non-residents
TAN - the deductor’s identity
Every entity that deducts TDS needs a TAN (Tax Deduction and Collection Account Number). The TAN is quoted on every challan 281 deposit and every quarterly return.
Deposit and return timelines
TDS deducted in a month must be deposited with the government by the 7th of the following month, except for March where the deadline is 30th April.
Quarterly returns are filed in the appropriate form:
- Form 24Q - TDS on salaries
- Form 26Q - TDS on non-salary payments to residents
- Form 27Q - TDS on payments to non-residents
Consequences of getting it wrong
Late deposit attracts 1-1.5% monthly interest. Non-deduction or short-deduction can lead to disallowance of the underlying business expenditure under Section 40(a)(ia), plus penalties under Section 271C.