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TDS & Tax · TDS lesson 2 of 7
What is TDS and how does it work?
TDS means Tax Deducted at Source. The person making a payment keeps back a small part as tax and gives it to the government on your behalf.
The simple idea
Some payments — salary, interest, rent, professional fees, commission and others — are subject to TDS. When the payer makes such a payment, the payer does not hand over the whole amount. A small percentage is held back and deposited with the government. The receiver gets the rest, and later counts the deposited tax as tax already paid.
- Deductor
- The person or business that makes the payment and deducts the tax.
- Deductee
- The person who receives the payment and whose tax is deducted.
Why does TDS exist?
- The government receives tax steadily during the year, not only at the end.
- It is harder to hide income that is reported by the payer.
- It is convenient: the receiver does not have to find a lump sum later.
The five-step cycle
- Deduct — at the time you pay, or the time you record the expense in your books, whichever comes first. (For salary, tax is deducted when salary is paid.)
- Deposit — usually by the 7th of the next month (see lesson 5 for exceptions).
- Return — a quarterly statement listing who was paid, how much, and how much tax was deducted, with the deductor's TAN and each receiver's PAN.
- Certificate — the deductor gives each receiver a certificate (Form 16 for salary and Form 16A for other payments, which the new law renames — see lesson 6).
- Credit — the receiver shows the tax deducted when filing their return, and it reduces the tax they still owe.
Worked example
Meera Consulting Pvt. Ltd. (fictional) pays a freelance designer, Anita, a professional fee of ₹60,000. The rate for professional fees is 10%, and the yearly limit before TDS applies is ₹50,000.
- TDS = 10% × ₹60,000 = ₹6,000
- Amount paid to Anita = ₹60,000 − ₹6,000 = ₹54,000
- Meera Consulting deposits ₹6,000 with the government and reports it in its TDS return.
- Anita counts the full ₹60,000 as her income, and ₹6,000 as tax already paid.
What if the receiver has no PAN?
If the receiver does not give a valid PAN, TDS is generally deducted at a higher rate — normally 20% or the usual rate, whichever is higher. This is one reason deductors ask for PAN before paying.
Who has to deduct?
Businesses, companies, firms and, in certain cases, individuals and HUFs. The rules about who must deduct depend on the type of payment and the payer. You will practise this in lesson 4.
Check yourself
1. Who is the “deductee”?
The deductee receives the payment and has tax deducted.
2. A company pays ₹60,000 professional fee, and TDS is 10%. How much does the receiver get?
10% of ₹60,000 is ₹6,000. ₹60,000 − ₹6,000 = ₹54,000.
3. What is the right order?
Deduct, deposit, file the return, then issue the certificate; the receiver then claims credit.
4. If a valid PAN is not given, TDS is usually…
Missing PAN normally means a higher rate, generally 20% or the usual rate if that is higher.
Learning material for beginners, checked in October 2026. It is not tax or legal advice. Tax rules, rates and due dates change, and different websites sometimes show different details. Always confirm on the Income Tax Department portal (incometax.gov.in) or with a Chartered Accountant before applying anything in real work. All names and amounts in the examples are made up.