Tax Deducted at Source (TDS) under the Income Tax Act

Tax Deducted at Source (TDS) is a system designed to collect tax directly at the point of income generation. It requires a person, referred to as the deductor, to deduct tax while making certain payments to another person, known as the deductee, and subsequently deposit the tax with the government. The deductee can claim credit for the deducted tax based on details available in Form 26AS and the TDS certificate provided by the deductor.

TDS ensures tax is collected in advance on various payments, helping regulate tax compliance and reduce tax evasion. It is mandatory to deduct tax on specified transactions before making a payment, as per the provisions of the Income Tax Act.

Understanding Tax Deducted at Source (TDS)

TDS, or Tax Deducted at Source, is a tax collection mechanism where a payer (deductor) withholds a certain percentage of tax from payments made to a recipient (deductee). This applies to various transactions, including:

• Salaries

• Professional fees

• Commissions

• Rent

• Interest payments, and other specified transactions

The applicable TDS rate varies depending on:

1. The type of transaction

2. The status of the recipient (resident or non-resident)

3. The provisions of the Income Tax Act or applicable Double Taxation Avoidance Agreements (DTAA) for non-residents

To comply with TDS provisions, the deductor must:

• Deduct tax at the applicable rate

• Deposit the deducted amount within the prescribed due date

• File TDS returns periodically

TDS Rates and Applicability

TDS is deducted at the rates prescribed under the relevant provisions of the Income Tax Act or the First Schedule of the Finance Act. For payments made to non-residents, the applicable Double Taxation Avoidance Agreement (DTAA) rates should also be considered.

TDS plays a vital role in tax administration by facilitating timely tax collection and minimizing tax liabilities during income tax return filing.

Read our next article to explore TDS rates in detail.