TDS stands for Tax Deducted at Source. It is a tax that is deducted at the source of income, which means that the tax is deducted at the time the income is earned or received. TDS is applicable to various types of income, including salary, rent, professional fees, and interest on deposits.

In India, TDS is governed by the Income Tax Act, 1961, and the TDS rates are set by the Central Board of Direct Taxes (CBDT). TDS is deducted by the payer (also known as the deductor) and paid to the government on behalf of the recipient (also known as the deductee). The deductor is required to obtain a TAN (Tax Deduction and Collection Account Number) and file TDS returns on a quarterly basis.

The recipient of the income is required to file an income tax return and claim credit for the TDS paid, to ensure that they are not taxed twice on the same income. If the recipient’s tax liability is less than the TDS paid, they may be eligible for a refund of the excess TDS paid.

TDS is an important part of the income tax system in India and helps to ensure that tax is collected at the source of income, rather than requiring individuals to pay their tax liability in a lump sum at the end of the year.

How TDS works?

  1. The deductor calculates the TDS that is required to be deducted from the income of the deductee.
  2. The deductor deducts the TDS from the income of the deductee and pays it to the government.
  3. The deductor issues a TDS certificate, also known as Form 16 or Form 16A, to the deductee. This certificate shows the amount of TDS deducted and the amount of income on which TDS has been deducted.
  4. The deductee can claim credit for the TDS deducted while filing their income tax return.
  5. If the TDS deducted is more than the tax liability of the deductee, the excess amount is refunded to the deductee.

TDS helps in collecting tax from the source of income and ensures that tax is paid on time. It also helps in reducing the burden of tax on the taxpayer as the tax is paid in installments throughout the year instead of being paid as a lump sum at the end of the year.