What is tax deducted at source?

For quick and efficient collection of taxes, the Income-tax Law has incorporated a system of deduction of
tax at the point of generation of income. This system is called as “Tax Deducted at Source”, commonly
known as TDS. Under this system tax is deducted at the origin of the income. Tax is deducted by the
payer and is remitted to the Government by the payer on behalf of the payee.
The provisions of deduction of tax at source are applicable to several payments such as salary, interest,
commission, brokerage, professional fees, royalty, contract payments, etc. In respect of payments to
which the TDS provisions apply, the payer has to deduct tax at source on the payments made by him and
he has to deposit the tax deducted by him to the credit of the Government.

TDS vs Income Tax

TDS is Tax deducted at source. It is a part of Income tax which is already deducted at the source of
income.
Illustration 1:
An XYZ Company (employer) has thousands of employees working for it. They all are earning their
income from salaries. They all will have to pay the income tax (if any) to the government.
Now can you imagine, thousands of employees filing their income tax returns and paying tax separately
to the government. Won't it be amazing from the government's point of view if the taxes of all the
employees are already deducted at the time of paying them the salary? Hence, for the sake of
convenience to government TDS will have to be deducted at the time of salary payment as well by the
employer (XYZ Company, in this case)

Income tax is a tax on income earned. TDS is hence very much a part of Income Tax. The only relief to a
person paying income tax is that the TDS already deducted will be adjusted against the net income tax
payable.
For example:
If Mr. 'A' is liable to pay income tax of Rs.1,00,000 and the TDS already deducted comes to Rs.20,000
then, he is now liable to pay just Rs.80,000.

Payments covered under TDS and rates of deductions.

Tax is deductible at source at the rates given in table (infra). If PAN of the deductee is not intimated to
the deductor, tax will be deducted at source by virtue of section 206AA either at the rate given in the
table or at the rate of 20 per cent, whichever is higher. Further, under section 94A(5), if payment or
credit is made or given to a deductee who is located in a notified jurisdictional area, tax is deductible at
the rate given in the table or at the rate of 30 per cent, whichever is higher.
Minimum amount below which TDS is not deducted?
In respect of various items liable to TDS, the Income-tax Law has prescribed a threshold limit. If the
expenditure incurred/payment made during the year is below the threshold limit, then there is no
requirement to deduct tax at source. Following list gives the threshold limit in respect of various items
covered by TDS provisions:

S.No. Particular Section Threshold limist

1. No deduction of tax at source from 192 If net taxable income is less than
salaries maximum amount which is not
chargeable to tax (Rs. 2,50,000 for an
individual, Rs. 3,00,000 for Senior
Citizens and Rs. 5,00,000 for Super
Senior Citizens)

2. No TDS from interest paid on 193 If amount paid or payable during the
debentures issued by a company in financial year does not exceed Rs.
 which public are substantially 5,000
interested. Provided interest is paid by
account payee cheque to resident
individual or HUF

3. No TDS from interest on 8% Saving 193 If amount paid or payable during the
(Taxable) Bonds 2003 paid to a financial year does not exceed Rs.
resident persons 10,000

3A. No TDS from interest on 6.5% Gold 193 If a declaration is made that the
bonds, 1977 or 7% Gold bonds, 1980 nominal value of such bonds did not
paid to resident individual exceed Rs. 10,000 at any time during
the previous year

4. No TDS from dividend paid by account 194 If amount paid or payable during the
payee cheque to resident persons financial year does not exceed Rs.
2,500

5. No TDS from interest other than on 194A If amount paid or payable during the
securities paid by a banking company financial year does not exceed Rs.
or co-operative bank on time deposits 10,000

6. No TDS from interest on deposit with a 194A If amount paid or payable during the
post office under Senior Citizens financial year does not exceed Rs.
Saving Scheme Rules, 2004 10,000

7. No TDS from interest other than on 194A If amount paid or payable during the
securities (in any other case) financial year does not exceed Rs.
5,000

8. No TDS from interest on compensation 194A If amount paid or payable during the
awarded by Motor Accident Claims financial year does not exceed Rs.
Tribunal 50,000

9. No TDS from Lottery / Cross Word 194B If amount paid or payable during the
Puzzles financial year does not exceed Rs.
10,000

10. No TDS from winnings from horse 194BB If amount paid or payable during the
races financial year does not exceed Rs.
5,000

11. No TDS from sum paid or payable to 194C a) If sum paid or payable to a
contractor contractor in a single payment does
not exceed Rs. 30,000
b) If sum paid or payable to
contractor in aggregate does not
exceed Rs. 75,000 during the
 financial year

12. No TDS from insurance commission 194D If amount paid or payable during the
paid or payable during the financial financial year does not exceed Rs.
year 20,000

12A No TDS from sum payable under a life 194DA If amount paid or payable during the
insurance a police (including bonus) to financial year does not exceed Rs. 1
a resident (w.e.f. 01-10-2014) person lakh

13. No TDS from payments made out of 194EE If amount paid or payable during the
deposits under NSS financial year does not exceed Rs.
2,500

14. No TDS from commission paid on 194G If amount paid or payable during the
lottery tickets financial year does not exceed Rs.
1,000

15. No TDS from payment of commission 194H If amount paid or payable during the
or brokerage financial year does not exceed Rs.
5,000. Further no tax to be deducted
from commission payable by BSNL/
MTNL to their PCO Franchisees.

16. No TDS from payment of rent in 194-I If amount paid or payable during the
respect of land &building, furniture or financial year does not exceed Rs.
fittings or plant and machinery 1,80,000

17. No TDS from payment of consideration 194-IA If amount paid or payable during the
for purchase of an immovable financial year does not exceed Rs. 50
property (other than agriculture land) Lakhs

18. No TDS from payment of professional 194J If amount paid or payable during the
fees, technical fees, royalty and financial year does not exceed Rs.
directors' remuneration 30,000

19. No TDS from payment of 194LA If amount paid or payable during the
compensation on compulsory financial year does not exceed Rs. 2
acquisition of immovable property Lakhs
(other than Agricultural Land)

20. Furnishing of quarterly return in 206A
respect of payment of interest (other
than interest on securities) to
residents without deduction of tax
If amount paid or payable during the
financial year does not exceed:
a) Rs.10,000 where payer is banking
company or co-operative society;
b) Rs.5,000 in other case
How to claim TDS refund?
There is no specific refund process or form to claim TDS refunds. You must file your income tax returns
in the normal manner. The excess of TDS over what you are supposed to pay as tax in the year will be
the refund amount due, and this needs to be shown in the returns filed. The TDS refund is processed by
the Income Tax department within a few months of filing returns. Usually, it takes about 6 months’ time.
The Income Tax department processes the refund amount along with an interest of 6% per annum in
some cases. The refund is usually given in the form of a cheque. However, with effect from AY 2015-16,
all refunds will be made in electronic form, directly to the bank account of the assesse, which is required
to be mentioned while filing the returns.