Introduction to TDS

TDS is basically a part of direct tax.

TDS is one of the modes of collection of taxes, by which a certain percentage of amounts are
deducted by a person at the time of making/crediting certain specific nature of payment to the
other person and deducted amount is remitted to the Government account.
Definition of TDS
TDS stands for tax deducted at source. As per the Income Tax Act, any company or person
making a payment is required to deduct tax at source if the payment exceeds certain threshold
limits. TDS has to be deducted at the rates prescribed by the tax department. The company or
person that makes the payment after deducting TDS is called a deductor and the company or
person receiving the payment is called the deductee. It is the deductor’s responsibility to
deduct TDS before making the payment and deposit the same with the government.
Main Features of TDS
1. Responsibility for deduction or collectiosn of tax at source is fixed on specified persons.
2. Every specified person responsible for deduction of tax at source is required to obtain a tax
deduction Account Number.
3. Time for payment of tax deducted or collected at source to the Government account is
prescribed.
4. Certificates of TDS have to be issued to the tax payers on prescribed forms and within
specified time.
5. Every person responsible for deduction of tax at source shall file quarterly statements
6. Tax has to be deducted/collected at the specified rates.
9. Penal and other consequences for non-compliance are provided.

Types of TDS

Here are some of the income sources that qualify for TDS:

 Salary

 Payments to Contractor

 Commission payments

 Sale of House

 Insurance Commission

 Interest on securities
 Interest other than interest on securities

 Rent Payment

 Professional fees

 Online Gaming

 Winning from games like a lottery, betting, gambling, crossword puzzle, card, etc.

TDS on Salary Under Section 192 of Income Tax Act

Section 192 deals with the TDS on salary. It mandates every employer to calculate income
tax on the estimated income of the employee, in case the salary of the employee exceeds the
basic exemption limit and deduct tax on salary payments. The TDS deducted is based on the
estimated income of the employee.

The rate of TDS under section 192 is calculated based on applicable tax slabs. The TDS
should be deposited with the government by furnishing a quarterly TDS return in Form 24Q.
The certificate of TDS will be made available to the employees in Form 16

Calculatetion TDS on Salary Under Section 192

Calculation of Taxable Income of the Employee

Step 1: At first, the employer estimates employee’s salary for the relevant financial year.
This should include basic pay, dearness allowance, perquisites granted by the employer, other
allowances granted by the employer like HRA, LTA, meal coupons, etc., EPF contributions,
bonus, commissions, gratuity, salary from the previous employer, if any, etc.

Step 2: In the next step, the employer calculates exemptions under Section 10 of the Income
Tax Act. The exemptions can be applicable on allowances like HRA, travel expenses,
uniform expenses, children’s education allowances, etc. Also, reduce the amount of
professional tax paid, entertainment allowance and standard deduction of Rs. 75,000 (New
Tax Regime) or Rs 50,000 (Old Tax Regime).

Step 3: The employer reduces such exemption from the gross monthly income and the net
amount will be treated as the taxable salary income.
Step 4: If the employee has provided the information about other incomes such as rental
income from house property or bank deposits, etc.

In that case, such amounts should be added to the net taxable salary.

Step 5: Now, the employer reduces the investments for the year, which fall under Chapter
VI-A of the Income Tax Act declared by the employees as per the investment declaration
submitted. The declaration may include the amounts of investments such as PPF, employee’s
provident fund, ELSS mutual funds, NSC and Sukanya Samridhi account. It may also include
expenditures such as home loan repayment, life insurance premiums, NSC Sukanya Samridhi
account, etc. Similarly, the employer allows a deduction under various other sections such as
Section 80D, 80G, etc.

Step 6: The employer will now compare the tax liability under both the New Tax Regime
and the Old Tax Regime, after taking into consideration all the incomes and deductions
available. The more beneficial tax regime will be opted and TDS will be deduction
accordingly by the employer on monthly basis.

II. Section 193 of the Income Tax Act: TDS on Interest on Securities
Section 193 of the Income Tax Act deals with TDS on interest on securities. It provides
that any person responsible for paying interest on securities is required to deduct tax at the
prescribed rates.
Interest on Securities TDS Rate
As per section 193, the deductor must deduct the TDS at 10%. However, if the deductee does
not provide his PAN, it will be deducted at the rate of 20%.
Exemptions Under Section 193

Here are some exemptions to Section 193:

 If the resident holds a national defence bond with an interest rate of 4.25%.

 Any national defence bonds issued in 1968 or 1972 with a 4.25% interest rate.

 Payable loan interest for national defence.

 A 7-year national savings certificate where interest is payable.

 Debentures interest issued by a company where the public is interested only if the sum
of interest is limited to Rs.5000. Besides, the company must deposit the interest on an
account payee cheque (applicable for HUF, resident, or resident individual).
 Any central or state government unpaid interest on security if the claim is a max of Rs.
10,000 for a financial year.

 Certain notified debentures issued by any authority/institution, cooperative

organisation, or public sector company are subjected to interest payments.

 Companies established under the General Insurance Business Act or any other insurer
will be entitled to interest.

 Interest in dematerialised security issued by any company if the security is listed on

any recognised stock exchange.

 6.5% gold bonds from 1977 or 7% gold bonds from 1980 are owned by a resident
individual whose nominal value does not surpass Rs. 10,000 at any point throughout
the interest-bearing period.

III. Section 194A - TDS on Interest Other than Interest on Securities

Under Section 194A of the Income Tax Act, TDS is deducted at a rate of 10% on interest
income other than interest on securities. If the payer is a bank, post office, or co-operative
society, the TDS threshold limit is Rs. 50,000. For other payers, the limit is Rs. 10,000.
However, for senior citizens, the threshold limit is higher, it increases from Rs. 50,000 to Rs.
1,00,000 for interest income earned from banks, post offices, or co-operative societies.

When is Tax deducted at NIL Rate or Lower Rate

This happens under the following scenarios:

When a declaration is submitted in form 15G/15H u/s 197A

If a declaration is submitted under Section 197A by the recipient to the payer along with
his/her PAN, then no tax is deductible if the following conditions are satisfied:

 Recipient is a person other than a company or firm

 Tax on total income of the Financial year (FY) is NIL

 Total income does not exceed the exemption limit (i.e. for AY 2024-25, Rs.2,50,000 or
Rs.3,00,000 or Rs.5,00,000, as applicable). This condition is NOT applicable if the
recipient is a resident senior citizen.

 Such a declaration shall be given in duplicate form 15G (15H for senior citizens). In
case of Senior Citizens Saving Scheme, 2004 (SCSS), investors can submit the
declaration.
 Nominees of investors of SCSS can also produce the declaration at the time of payment
after the death of the depositor.

 On submission of declaration to the bank, bank shall not deduct tax (subject to the
conditions) on payment of interest.

When an application is submitted in Form 13 under Section 197

 As per provisions of Section 197, the recipient can apply in Form no.13 to the
Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate
(or deduct no tax, if certain conditions are satisfied).

 There is no time limit for application and it can be filed at any time before actual
deduction of tax. If the recipient does not have PAN, he cannot apply for the certificate.

 The certificate shall be issued, directly to the person responsible for paying income,
under an advice to the applicant.

 The certificate cannot be issued with retrospective effect. It shall have a validity from
the date of issuance till the end of the Financial Year. It won’t be issued for multiple
FYs.

 The recipient may furnish copy of such certificate to the person responsible for paying
the income for lower/no deduction of tax at source.

What is the Rate of TDS?

Following are the applicable rates of taxes:

 10% when the PAN is furnished

 20% if the PAN is not provided.

 No surcharge, education cess or SHEC shall be added to the above rates. Hence, tax
will be deducted at source at the basic rate.

IV. Deduction of Tax at source from Dividend Income (Section 194)

An investor in equity shares, the other way to earn apart from capital gains is through the
dividend that the company pays which is taxed in the hands of the investor and not the
company. Such dividends are to be disclosed under income from other sources and will be
taxed at slab rates. However, if the dividend received is more than Rs. 10,000 then the
company will deduct a TDS @ 10% as per Section 194
V. Tax to be deducted at source from payments to contractors (Sec194C)
Section 194C of the Income Tax Act governs the provisions of tax deduction on payments
made to contractors or subcontractors. Any person making payments to resident contractors
for rendering services under a contractual agreement is required to deduct tax at source at the
prescribed rate under this section.

 Central Government or any State Government

 Any local authority
 Corporations established under Central, State, or Provisional Act
 Company
 Cooperative society
 Authority in India for housing or city planning
 Society registered under the Society Registration Act of 1980
 Trust
 University or deemed university
 Firm

The term ‘work’ includes:

 Advertising
 Broadcasting and telecasting (including the production of programs)
 Carriage of goods and passengers using any mode of transport (but not railways)
 Catering
 Manufacturing or supply of a product as per a customer's specification by using the
material purchased from him/her. But does not include manufacturing or supplying a
product according to a customer's specification by using material purchased from
other than such customer.

Sl. No Nature of Payment TDS Rate TDS Rate if PAN not

if PAN available
available
1 Payment / Credit to 1% 20%
resident individual
or HUF
2 Payment/Credit to 2% 20%
any resident person
other than
individual / HUF
3 Payment/ credit to NIL 20%
Transporters
VI. Deduction of tax at source from winning from lotteries, crossword, puzzles, horse
game and card games etc.. Sec56(2)
Income from lottery winnings and online games are included under the head ‘Other source of
Income’ and is taxable at the special rate of 30% without providing the benefit of basic
exemption and deduction like 80C, 80D etc.

TDS Applicability On Lottery Or Game Show Income

 If the Prize money exceeds Rs.10,000 for a single transaction, then the winner will
receive the prize money after the deduction of TDS @31.2% u/s 194B.

 In the case of winnings from horse races, TDS will be applicable if the amount exceeds
Rs 10,000.

 No deduction/expenditure is allowed from such income.

 No deduction under section 80C or 80D or any other deduction/allowance is allowed

from such income.

 The benefit of the basic exemption limit and income tax slab rate is also not applicable
to this income. The entire amount received will be taxable at the flat rate of 31.20%
(including cess).

 For instance, if Rahul has won Rs 3 lakhs as prize money from a game show and has
an interest income of Rs 5 lakhs p.a., then the tax liability would be calculated as
follows: Tax on Rs 3 lakhs @ 31.2% Tax on Rs 5 lakhs as per income tax slab rates
after claiming the relevant deductions.

 The TDS has to be deducted on the net winnings received from online games

VII. Section 194D – TDS On Insurance Commission

The insurance commission or any other remuneration/reward received by such agents,

brokers etc., are subjected to Tax Deducted at Source (TDS), if specified threshold limit as
dictated under Section 194D of the Income Tax Act.
The threshold limit is if the commission paid exceed Rs.20,000.
The Rate Of TDS Under Section 194D

Details Rate of TDS

Persons other than a

2%
company

Domestic Company 10%

 Surcharge or Cess will not be added to these rates. Therefore, the tax will be deducted
at the source at the basic rates mentioned above.

 The rate of TDS will be 20% in cases where the deductee has not quoted PAN.

VIII. Section 195 of Income Tax Act - TDS Applicability for NRI

Section 195 of the Income-tax Act, 1961 specifies the TDS provision in the case of an
individual making a payment other than salary to an NRI or a foreign company.

Non-resident Indians (NRIs) also need to file their tax returns for the income earned in India.
Similarly, they also can claim the tax deducted at source (TDS) when filing tax returns.

Section 194E: TDS on Non-Resident Sportsmen & Associations

 Any person who

 Pays money to a non-resident sportsman (including an athlete) or an entertainer (who
is not an Indian citizen), or
 Pays money to a sports institution or an association; an income as referred to u/s
115BBA is required to deduct tax at source u/s 194E.
The rate of tax deduction u/s 194E is 20%, exclusive of EC and Surcharge. And the time of
deduction is earlier of, the credit of income to the account of the payee (receiver) or actual
payment (in cash, cheque, draft, or other modes).

IX. Payment in respect of deposit under National Savings Scheme Section 194EE

This section mandates TDS at 10% on premature withdrawals from NSS accounts when the
amount exceeds ₹2,500, unless the withdrawal is exempted under specific provisions.
Section 80CCA(2)(a): This section deals with withdrawals from the National Savings
Scheme

X. Section 194I - TDS on Rent

Section 194-I of Income Tax Act mandates that Tax (TDS) be deducted on rent paid for
hiring plant, machinery, or equipment at a rate of 2%, and at a rate of 10% of rent payment
for land, building, including factory building or furniture and fittings.
TDS under this section to be deducted if the threshold limit of rent payment exceeds
Rs.50,000 per month or Rs.6 lacs per annum. (This change in threshold limit is effective from
1st April 2025.)

Advance Tax Payment

Advance Tax is a method of paying income tax in installments during the financial year,
instead of paying a lump sum tax after the end of the financial year. Tax payers with a tax
liability of more than Rs. 10,000 for the financial year must pay advance tax.

The provisions related to advance tax are covered under section 207 to section 219 of the
Income tax act.

The taxpayer calculates the estimated total income at the beginning of the financial year,
thereby estimating his tax liability. The advance tax payments have to be made in fixed
percentage through four installments as per the due dates provided by the income tax
department.

Importance of Advance Tax payment

 Effective tax planning: Advance tax requires the taxpayer to estimate his total income
and tax liability in the beginning of the financial year. This helps to analyze his income
sources, applicable deductions and formulate tax planning strategies, ultimately helping
him minimize the tax liability.
 Late payment interest: Payment of advance tax instalments within due dates helps the
taxpayer to avoid penalties and late payment interest.

 No need of lump sum amount: For taxpayer who have high tax liabilities, advance tax
is a comfortable tax payment mechanism as it helps to split the tax payment to four
instalment, instead of paying it as a lump sum.

Who Should Pay Advance Tax?

As per section 208 of the Income tax act, Any assessee whose estimated tax liability for the
financial year exceeds Rs 10,000, he or she is required to pay advance tax. This provision
applies to all taxpayers, salaried individuals, freelancers, and businesses.

Computation and payment of income tax

 Step I : Estimation of Income : Estimate your total income from all sources earned
from 1st April- 31st March of the financial year for which you are doing the advance
tax calculations.
 Step II: Computation of tax: The tax payable on estimated income at the rate
applicable for the financial year should be computed
 Step III: Adjustment of Rebate: From the tax computed in step II, rebate if any likely
as applicable should be added and relief, if any u/s 89 should be allowed
 Step IV: Surcharge on Tax: On the net tax computed in Step III surcharge as
applicable should added
 Step V: Educational cess 4% should added
 Step VI: Deduction of Tax at source: Reduce the amount of tax paid by way of
TDS/TCS
 Step VIII:Advance Taxpayable

Breakdown of Advance Tax Payment Installments

First Installment (June 15)

In the first installment, taxpayers are expected to pay 15% of their total estimated tax liability
for the year.
Second Installment (September 15)

By September 15, taxpayers should pay a cumulative 45% of the estimated tax. This includes
the 15% paid in June and an additional 30% by this date.

Third Installment (December 15)

The third installment requires that taxpayers pay a cumulative 75% of their total estimated tax
liability by December 15. This includes any previous payments made.

Fourth Installment (March 15)

In the final installment, taxpayers are required to pay the remaining balance of their estimated
tax liability, ensuring they reach 100% of their liability by March 15.