TDS is a system in which the tax is deducted by the deductor, who is making a payment (like salary, rent, commission, etc.), to another person, known as the deductee.
Nidhi | May 20, 2025 |
Understanding TDS: How It Works and Why It Matters?
Have you ever noticed that when you receive income through various sources, including salary, rent, interest, or professional services, some part of the income is deducted before you receive it? This portion is known as Tax Deducted at Source (TDS). But have you ever wondered why this TDS is deducted? Let us understand more about TDS.
TDS is a system in which the tax is deducted by the deductor, who is making a payment (like salary, rent, commission, etc.), to another person, known as the deductee. This TDS is then deposited with the tax authority. The deductee can claim this deducted tax as a credit while filing their Income Tax Return (ITR).
The aim of this system is to reduce tax evasion, and as the tax is collected at the source, it also ensures the timely collection of taxes. For deductors, it’s important to file quarterly TDS returns (such as Form 24Q, 26Q) as late filing can lead to penalties under Section 234E. When you file your ITR, the TDS amount already deducted is adjusted against your total tax liability.
TDS applies to various types of payments, such as:
TDS rates are based on the type of payment and, type of recipient (individual, firm, NRI, etc.). If the deductee fails to submit their PAN, TDS is deducted at 20% or higher as per the applicable section.
You can see the TDS details in Form 26AS or the Annual Information Statement (AIS). The deductor is required to issue TDS certificates to the deductee. This includes:
These certificates are important at the time of filing ITR, as they allow you to claim TDS credit.
If you fail to deduct or deposit TDS, you might have to face consequences, including interest and penalties for Non/short deduction (Sec 201), late deposit (Sec 201(1A)), and not filing returns (Sec 234E, 271H).
TDS Late deduction, Late Payment and Late Filing Fees:
| Type of Deduction | Description | Formula for Late Fees/Interest |
| Late Deduction | TDS Not Deducted | Interest = (TDS/ TCS on Amount Paid/ Credited X Period of Delay X 1.5%) |
| Late Fees | Failure to file TDS/ TCS Return on/ Before Due date | Late Filing Fee = INR 200 per Day (Fees cannot Exceed TDS/ TCS Amount) |
| Late Payment | TDS Deducted but not deposited | Interest = (TDS/ TCS Not Deposited X Period of Delay X 1.5%) |
Hope you find this material helpful.
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