How tax deducted at source works – all you need to know on TDS

TDS is simply stands for Tax deducted at source. As per law, the person responsible for making certain type of payments is required to deduct tax at a specified rate either at the time of payment or at the time of credit or payment, whichever is earlier.

Our law has prescribed different rates of TDS based on the type of payments and category of parties to whom it’s paid.

In the whole TDS process, following persons are involved:

  • Deductor
  • Deductee
  • Tax department

Duties and responsibilities of a deductor

Deductor is the person who is responsible for deducting tax from payments made on certain specified transactions. He has to deduct tax based on the rates specified and deposit it into government’s account. As per laws, it’s the duties of the deductor to ensure that:

  • Tax has been deducted at the specified rate at the right time,
  • It has been deposited into the government’s account on or before the due date,
  • TDS return has been filed with correct details on or before the date of filing,
  • Issue TDS certificates to deductee on or before the due date

Duties and responsibilities of a deductee

The person who receives payment after tax deduction is known as deductee. He is the person from whom deductor has deducted tax. As a deductee, you have certain rights and duties if TDS is deducted from your your receipts.

As per law, deductee has to:

  • Quote permanent account number to the deductee
  • Collect TDS certificate from the deductor to make sure that tax deducted has been credited to the PAN
  • Produce 15G/15H, as the case may be to the deductor
  • In case non deduction of tax, apply to Assessing officer for it and make sure that the certificate has been produced to the deductor

If deductee income is not taxable, then he has right to claim refund.

Responsibility of IT department

Tax has to be deducted and deposited by the deductor from payments of the deductee. IT department is acting like a middle man to make sure both the parties are doing their job according to the tax laws of the country. In case of any default, IT department has power to take action against both the parties. Here are certain responsibility of IT department;

  • To make sure that tax has been deducted by the deductor at the specified rates,
  • TDS amount deducted has been deposited on or before the due date,
  • TDS return has been filed with correct details again deductee PAN,
  • Tax credit has been given to the deductor based on the quarterly TDS return filed.

Now, you know the role and responsibilities of various parties involved in the TDS process. Let us discuss other important provisions for better understanding.

When to deduct tax at source or TDS

Time of deduction and deposit of TDS amount is one of the most important thing you should comply in relation to income tax matters. In case of default, the deductor will be liable for interest and other penalties.

Tax has to be deducted at the time of payment or credit whichever is earlier. However in some cases, tax has to be compulsorily deducted at the time of payment. Time of deduction of tax depends on the type of payment and section under which you are deducting it.

In following cases, tax has to be compulsorily deducted at the time of payment;

  • Section 192 – Payment of Salary and Wages
  • 192A – Withdrawal from Employee Provident Fund or EPF
  • 194B – Winning From Lottery, Crossword Puzzle, Card game, And Game Of Any Sort
  • 194BB – Winning From Horse Races
  • 194DA – Life insurance payouts
  • 194EE – National saving scheme payments
  • 194F – repurchase of 80CCB unit by mutual funds or UTI
  • 194LA – compensation on compulsory acquisition

In certain cases, TDS amount has to be deducted at the time of credit or payment whichever is earlier. Here is a list of few cases where TDS amount has to be deducted at the time of credit or payment, whichever is earlier.

  • 193 – Interest on securities
  • 194A – Interest other than Interest on Securities
  • 194C – Payment to Contractors
  • 194D – Insurance commissions
  • 194H – Payment of commission and brokerage other than insurance commissions
  • 194I – TDS on rent
  • 194IA – Transfer of immovable property other than agricultural land
  • 194J – Professional or technical services, royalty

Rate of TDS

Rate of TDS varies based on type of payments and category of the deductee. In certain cases TDS amount has to be calculated at the rate of 1% or 2% or 10%. In some other cases it has to be calculated based on a different calculation. For instance, in case of salary, TDS amount has to be deducted every month based on the average tax liability of a month.

Here is a table showing TDS rates applicable to different type of payments;

Relevant SectionNature of paymentRate of TDS (rate at which tax is to be deducted at source)
192SalariesAt applicable income tax rates. Inclusive of cess
192AAccumulated balance in EPF10%
194AInterest other than interest on securities10%
194BWinnings from lotteries, crosswords puzzles or any sort of game30%
194BBWinnings from horse race30%
194CPayment to Contractors2%
194DInsurance commission received by an individual10%
194DALife insurance policies not exempt under section 10(10)D1%
194HCommission or brokerage except for insurance commission5%
194IRent2% for machinery, plant or equipment, 10% for land or building or furniture and fittings
194IAPayment made while purchasing land or property1%
194JFees for professional and technical services10% is the normal rate, if payee being a person engaged only in the business of call centers then its 2%

No TDS or tax to be deducted at a lower rate

TDS can be deducted at a lower rate or not at all depending on two things;

  • in first case you need to check if assessee has certificate from the Assessing officer for non deduction of tax or to deduct at a lower rate.
  • Second, on the basis of submission of form 15G or 15H.

In tax law, different sections are specified based on the type of payments. For instance, section 194C is for Tax to be deducted on payment to contractors, section 192 is for Tax to be deducted on salary.

You must remember that TDS on specified transactions is to be deducted only when payment exceeds a threshold limit. These threshold limits are specified against each type of transactions. Based on the provisions and certain conditions, if payment doesn’t exceed these threshold limit, then deductor is not required to deduct tax.

In following table, you can see threshold limits for each type of payments.

Relevant SectionNature of paymentThreshold Limit amount in Rupees (Limit up to which tax is not to be deducted at source)
192SalariesBasic exemption limit below which employee is not taxable
192AAccumulated balance in EPF1,00,000
194AInterest other than interest on securities10,000 in cases where payer is a banking company or co-operative society engaged in banking business or  in case of deposits in post office notified by central government or else in any other case limit is Rs. 5,000
194BWinnings from lotteries, crosswords puzzles or any sort of game10,000
194BBWinnings from horse race10,000
194CPayment to ContractorsSingle payment – 30,000 and aggregate payment for the year 1,00,000
194DInsurance commission received by an individual15,000
194DALife insurance policies not exempt under section 10(10)D1,00,000
194HCommission or brokerage except for insurance commission15,000
194IRent1,80,000
194IAPayment made while purchasing land or property50,00,000
194JFees for professional and technical services30,000

When to deposit TDS amount

Tax deducted at source are to be deposited within 7 days from the end of the month in which TDS amount has been deducted. It has to be deposited by using challan number 281. You need to fill up TAN and other details correctly otherwise payment will be deposited against some other account.

For instance, if you have deducted tax from payment to contractors in the month of January 2018, then the deducted TDS amount has to be deposited on or before 7th February 2018.

Time limit to file TDS return

After depositing TDS amount with government, you are required to credit it to the respected PAN from whose payment it has been deducted. It can be done by filing TDS return. You need to file TDS return on or before the due date. Failure in doing so will attract interest and other penalties.

TDS returns has to be filed every quarter on or before the end of the month following the quarter for which the return is filed. For instance for the quarter starting from April to June 2018, quarterly return has to be filed on or before 31st July 2018.

For the last quarter I.e. starting from January to March, last date of filing is 31st May instead of 30th April.

Sending TDS certificate to the deductee

Many deductor thinks that filing TDS return is the last step. Actually, it’s Not. You are required to issue TDS certificate to every deductee from whom you have deducted tax.

For your employees, you are required to issue Form 16A and to other deductee its Form 16. These certificates are required to be issued before the due date after downloading from traces portal.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.