TDS (Tax Deducted at Source) is a mechanism under Indian tax law by which the payer of certain specified incomes deducts income tax at prescribed rates before making the payment to the recipient, and remits the deducted amount directly to the government. Under Indian law, TDS is governed by Chapter XVII-B of the Income Tax Act, 1961, spanning Sections 192 to 206, with each section specifying the nature of payment, applicable rate, threshold limit, and timing of deduction.
Legal definition
The Income Tax Act, 1961 does not provide a single consolidated definition of TDS. Instead, the mechanism is established through individual charging sections under Chapter XVII-B:
Section 192 — Salary: Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force.
Section 194A — Interest other than interest on securities: Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft, whichever is earlier, deduct income-tax thereon.
Section 195 — Other sums (Non-resident payments): Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft, whichever is earlier, deduct income-tax thereon at the rates in force.
The essential principle is that tax is collected at the point of income generation rather than at the point of return filing. The deductor (payer) acts as an agent of the government, deducting tax and depositing it to the government's account, while issuing a TDS certificate (Form 16 for salary, Form 16A for other payments) to the deductee (recipient).
How courts have interpreted this term
Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax [(2022) 2 SCC 361]
In this landmark batch of appeals, the Supreme Court held that payments made by Indian residents to non-resident software suppliers for the purchase of computer software through End-User Licence Agreements (EULAs) or distribution agreements do not constitute "royalty" under the Income Tax Act or under applicable Double Taxation Avoidance Agreements (DTAAs). Consequently, Indian companies had no obligation to deduct TDS under Section 195 on such software purchases. This judgment provided significant relief to the Indian IT industry and clarified the scope of TDS obligations on cross-border software transactions.
GE India Technology Centre Pvt. Ltd. v. Commissioner of Income Tax [(2010) 10 SCC 29]
The Supreme Court clarified that TDS under Section 195 is applicable only when the payment made to a non-resident is "chargeable to tax" in India. The Court held that the payer is not required to deduct TDS on the entire payment if only a portion of the payment constitutes income taxable in India. This "principle of proportionality" allows payers to apply to the Assessing Officer under Section 195(2) for a certificate determining the appropriate amount subject to TDS when the payment includes both taxable and non-taxable components.
Bharti Cellular Ltd. (now Bharti Airtel Ltd.) v. Assistant Commissioner of Income Tax [2024 INSC 148]
The Supreme Court examined whether payments made by a telecom company to its distributors and franchisees attracted TDS under Section 194-H (commission and brokerage). The Court analysed the nature of the relationship between the telecom company and its distributors, distinguishing between principal-agent relationships (which attract Section 194-H) and principal-to-principal relationships (which do not). This judgment provided critical clarity on TDS obligations in distribution and franchise business models.
Types of TDS
The Income Tax Act prescribes different TDS sections for different categories of income. The key sections and rates for FY 2025-26 include:
- Section 192 — Salary: At applicable slab rates (average rate of tax on estimated annual salary)
- Section 194A — Interest (other than securities): 10%, threshold Rs 50,000 per year (Rs 1,00,000 for senior citizens from banks)
- Section 194C — Contractor payments: 1% (individuals/HUFs) or 2% (others), threshold Rs 30,000 per payment or Rs 1,00,000 aggregate per year
- Section 194H — Commission and brokerage: 2%, threshold Rs 15,000 per year
- Section 194I — Rent: 2% (plant/machinery/equipment) or 10% (land/building/furniture), threshold Rs 50,000 per month
- Section 194J — Professional/technical fees: 10% (2% for technical services to specified persons), threshold Rs 50,000 per year
- Section 195 — Payments to non-residents: At rates in force (typically 10-40% depending on the nature of income and applicable DTAA)
Why this matters
TDS is the backbone of India's tax collection system. Over 40% of total income tax revenue is collected through TDS, making it the government's most effective revenue mobilisation tool. For the exchequer, TDS ensures a steady stream of tax revenue throughout the year rather than relying entirely on voluntary compliance at the time of return filing.
For businesses, TDS compliance is a significant operational obligation. Every entity making payments covered by Sections 192-206 must deduct TDS at the prescribed rates, deposit the deducted amount to the government within the specified time (typically by the 7th of the following month), file quarterly TDS returns (Form 24Q for salary, Form 26Q for non-salary payments, Form 27Q for non-resident payments), and issue TDS certificates to deductees. Failure to deduct TDS makes the payer liable to pay the tax from its own pocket under Section 201, along with interest at 1% per month for late deduction and 1.5% per month for late deposit.
For individuals and salaried employees, TDS directly affects monthly take-home pay and annual tax liability. The TDS deducted by employers and other payers is reflected in Form 26AS (Annual Tax Statement), which must be reconciled with the income tax return. Excess TDS can be claimed as a refund, and shortfall TDS must be paid as self-assessment tax before filing the return. Practitioners must advise clients to regularly verify their Form 26AS and ensure that all TDS credits are correctly reflected.
Related terms
Broader concepts:
Related mechanisms:
Related procedures:
Frequently asked questions
What is the difference between TDS and income tax?
Income tax is the substantive tax on a person's total income, computed annually and paid through a combination of advance tax, TDS, and self-assessment tax. TDS is a collection mechanism — it is not a separate tax but a method of collecting income tax at the source of income generation. TDS deducted during the year is credited against the total income tax liability when filing the annual return. If TDS exceeds the actual tax liability, the excess is refunded.
What happens if TDS is not deducted by the payer?
Under Section 201 of the Income Tax Act, if a person fails to deduct TDS or, after deducting, fails to pay it to the government, they are deemed to be an "assessee in default." The consequences include payment of the undeducted TDS amount, interest at 1% per month from the date TDS was deductible until the date of deduction, and interest at 1.5% per month from the date of deduction to the date of deposit. Additionally, a penalty equal to the TDS amount may be imposed under Section 271C, and prosecution under Section 276B may follow for failure to deposit.
Can TDS be avoided or reduced?
Yes, in certain circumstances. Individuals whose total income is below the taxable limit may submit Form 15G (below 60 years) or Form 15H (senior citizens) to the payer, requesting that no TDS be deducted on interest income. For other cases, a taxpayer can apply to the Assessing Officer under Section 197 for a certificate authorising TDS at a lower rate or nil rate, based on their estimated total income and tax liability for the year.
How do I check my TDS credits?
TDS credits can be verified through Form 26AS (Annual Tax Statement) available on the income tax e-filing portal at incometaxindiaefiling.gov.in, or through the AIS (Annual Information Statement). Form 26AS shows all TDS deducted by various deductors against the taxpayer's PAN, along with advance tax payments and self-assessment tax paid. Any discrepancy between TDS deducted and TDS credited must be resolved with the respective deductor before filing the income tax return.
Is TDS applicable on payments between individuals?
Generally, individuals and HUFs are not required to deduct TDS on most payments, unless they are subject to a tax audit under Section 44AB. However, there are exceptions: Section 194-IA requires individuals to deduct TDS at 1% on the purchase of immovable property valued above Rs 50 lakh, and Section 194M requires individuals to deduct TDS at 5% on commission, brokerage, contractual payments, or professional fees exceeding Rs 50 lakh per year to residents.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.