Tax Deducted at Source (TDS) is an essential compliance mechanism in the Indian tax system. It ensures tax collection at the source of income generation, reducing tax evasion and ensuring timely revenue for the government.
In this guide, we will explain who needs to deduct TDS, when it should be deducted, and the consequences of non-compliance for the Financial Year 2025-26 or Assessment year 2026-27.
What is TDS?
TDS is a mechanism where the payer (deductor) deducts a specified percentage of tax before making a payment to the recipient (deductee) and deposits it with the government.
For example, if a company pays a consultant ₹1,00,000 and TDS @ 10% is applicable, the company will:
- Pay ₹90,000 to the consultant
- Deduct ₹10,000 as TDS
- Deposit ₹10,000 with the Income Tax Department
Who Needs to Deduct TDS?
TDS deduction is mandatory for specific categories of payers when making payments exceeding prescribed thresholds under the Income Tax Act, 1961.
1. Employers Deducting TDS on Salaries (Section 192)
- Every employer paying salary to employees above the basic exemption limit must deduct TDS.
- The TDS rate is based on the income tax slab rates applicable to the employee.
📌 Example:
If an employee earns ₹8,00,000 per annum, the employer will calculate tax liability and deduct TDS accordingly before paying the salary.
2. Businesses & Professionals Deducting TDS on Payments
Any business or professional whose total turnover in the preceding financial year exceeds ₹1 crore (for businesses) or ₹50 lakh (for professionals) must deduct TDS when making specific payments such as:
| Nature of Payment | Section | Threshold (₹) | TDS Rate |
|---|---|---|---|
| Contractor Payments | 194C | 30,000 (single) / 1,00,000 (annual) | 1% (Ind./HUF), 2% (Others) |
| Professional Services | 194J | 30,000 | 10% (General), 2% (Technical) |
| Rent Paid in Course of Business/ Profession | 194I | Rs. 50,000/- per month or part of the month | 10% (Land/Building), 2% (P&M) |
| Commission/Brokerage | 194H | 20,000 | 2% |
| Interest (by Other then Banks, NBFCs) | 194A | 10,000 | 10% |
📌 Example:
If a company pays a consultant ₹50,000, TDS @ 10% (₹5,000) will be deducted before making the payment.
3. Individuals & HUFs Deducting TDS (Sections 194IA, 194IB, 194M)
- Individuals and HUFs generally do not need to deduct TDS unless they meet specific conditions:
- If they pay rent exceeding ₹50,000 per month (Section 194IB) → TDS @ 2%
- If they buy immovable property worth more than ₹50 lakh (Section 194IA) → TDS @ 1%
- If they make payments to contractors, professionals, or commission agents exceeding ₹50 lakh (Section 194M) → TDS @ 2%
📌 Example:
A tenant paying rent of ₹60,000 per month must deduct TDS @ 2% (₹1,200) and deposit it with the government.
4. Banks, Financial Institutions & NBFCs
Banks and financial institutions must deduct TDS when making the following payments:
| Nature of Payment | Section | Threshold (₹) | TDS Rate |
|---|---|---|---|
| Fixed Deposit Interest | 194A | 1 Lakhs (Senior Citizens) 50,000 (Others) | 10% |
| Payment to Foreign Institutional Investors (FIIs) | 196D | No Limit | 20% |
📌 Example:
If a bank pays ₹1,10,000 as interest on a fixed deposit to a senior citizen, TDS @ 10% (₹11,000) will be deducted.
5. E-commerce Operators Deducting TDS (Section 194O)
- E-commerce companies (Amazon, Flipkart, etc.) must deduct 0.1% TDS on payments made to sellers.
- This applies only if the seller’s annual sales exceed ₹5,00,000.
📌 Example:
If a seller earns ₹6,00,000 from Flipkart, Flipkart will deduct ₹600 (0.1%) as TDS before making the payment.
6. Online Gaming & Crypto Transactions
- Online gaming winnings → 30% TDS (Section 194BA)
- Crypto/Virtual Digital Assets (VDAs) transfers → 1% TDS (Section 194S)
📌 Example:
If a person wins ₹1,00,000 in an online game, ₹30,000 will be deducted as TDS before payout.
When Should TDS Be Deducted?
TDS must be deducted at the time of payment or credit to the recipient, whichever is earlier.
| Nature of Payment | When TDS is Deducted? |
|---|---|
| Salary | At the time of salary payment |
| Rent, Commission, Professional Fees | When payment is made or credited (whichever is earlier) |
| Interest on Deposits | When interest is credited or paid |
| E-commerce Transactions | When payment is credited to the seller’s account |
How to Deposit TDS?
TDS must be deposited with the government via Challan ITNS-281 through:
✔ Online payment via the Income Tax Department website
✔ Authorized bank branches
The due date for TDS deposit is 7th of the following month (except for March, which is April 30).
TDS Return Filing & Compliance
All deductors must file TDS returns every quarter:
| TDS Return Form | Applicable For | Due Date |
|---|---|---|
| Form 24Q | Salary payments | Quarterly |
| Form 26Q | Non-salary payments | Quarterly |
| Form 27Q | Payments to NRIs | Quarterly |
| Form 26QB | Property transactions | Within 30 days |
| Form 26QC | Rent payments | Within 30 days |
Consequences of Non-Deduction or Late Payment of TDS
Failure to deduct or deposit TDS leads to penalties & interest charges:
🔴 Interest for Late Deduction: 1% per month
🔴 Interest for Late Deposit: 1.5% per month
🔴 Penalty for Non-Filing of TDS Returns: ₹200 per day (until filed)
Final Thoughts
TDS compliance is essential for businesses, employers, and individuals making significant payments. Understanding who needs to deduct TDS and following the right process ensures tax efficiency and avoids penalties.
For expert guidance on TDS filing, compliance, and tax planning, feel free to Contact Us for professional tax consultation. Here, You can also check for the complete list of TDS Rates Applicable for F.Y 2025-26 A.Y 2026-27.
