What is Tax Deducted at Source (TDS)?
**Tax Deducted at Source (TDS)** is a system introduced by the Indian Income Tax Department to collect taxes directly at the source of income. Under this mechanism, any person or corporation responsible for making specific payments (like salary, rent, professional fees, commission, interest, or contract fees) is required to deduct a percentage of tax before transferring the remaining amount to the payee.
The deducted tax is deposited with the Central Government. The payee (the person who earned the income) receives a certificate (Form 16 for salaries or Form 16A for non-salaries) and can claim credit for this deducted tax when filing their annual Income Tax Return (ITR).
How to Calculate TDS: Mathematical Formulas
Calculating TDS is straightforward and uses basic percentage calculations:
TDS Amount = (Gross Payment Amount × TDS Rate) / 100
Net Receivable Amount = Gross Payment Amount - TDS Amount
Example: A consultant raises an invoice of ₹50,000 for professional services, subject to 10% TDS under Section 194J.
- Gross Invoice = ₹50,000
- TDS rate = 10%
- TDS Amount = (50,000 × 10) / 100 = ₹5,000.
- Net payment received by consultant = 50,000 - 5,000 = ₹45,000.
Common TDS Sections and Rates under the Income Tax Act
| Section | Nature of Payment | Threshold (p.a.) | TDS Rate (Individual / Corporate) |
|---|---|---|---|
| Section 194C | Payments to Contractors (e.g. advertising, catering, transport) | ₹30,000 (single) / ₹1,00,000 (annual) | 1% for Individuals / 2% for Companies |
| Section 194J | Professional or Technical Services, Director fees | ₹30,000 | 10% (2% for call centers/certain services) |
| Section 194I | Rent payments on land, building, or machinery | ₹2,40,000 | 10% for land/building, 2% for machinery |
| Section 194H | Commission or Brokerage payments | ₹15,000 | 5% |
| Section 194DA | Maturity payments of Life Insurance policies | ₹1,00,000 | 5% (on net income portion) |
How to Track and Claim TDS Credits
Since TDS is deducted from your payments, it is essential to verify that the deductor has deposited this tax with the government under your PAN. Here is how to reconcile it:
- Form 26AS: This is your consolidated annual tax statement. It records all taxes deducted from your income (TDS), TCS (Tax Collected at Source), advance tax paid, and self-assessment tax. You can download it from the Income Tax e-filing portal.
- AIS (Annual Information Statement): Provides a comprehensive view of all financial transactions, including interest earned, dividend incomes, and matching TDS credits.
- Reconciling Differences: If a TDS deduction does not appear in your Form 26AS, contact the deductor (client or bank) to correct the PAN details and file a revised TDS return. You can only claim tax credit for deductions that reflect on your Form 26AS.