Understanding TDS: How Tax Deducted at Source Works in India

If you earn salary, interest, rent, or professional income in India, TDS (Tax Deducted at Source) affects you every month – whether you realize it or not. I often see people surprised at tax time because they don't fully understand how much TDS has been deducted, whether it's correct, and how to make sure they're getting proper credit in their income tax return. In this guide, I'll walk you through TDS in simple language so you know exactly what is happening with your money.

TDS is not an extra tax – it’s a way for the government to collect tax in advance throughout the year, instead of waiting until you file your return. When TDS is deducted correctly and you file your return properly, you either have very little tax left to pay or you get a refund if excess TDS was deducted. Understanding TDS helps you avoid surprises, cash-flow issues, and refund delays.

What is TDS and Why Does It Exist?

TDS is a system where the person making a payment (employer, bank, tenant, company, etc.) deducts tax before paying you and deposits it with the government on your behalf. You receive the net amount after TDS, and the tax deducted appears against your PAN in the government’s records.

Key objectives of TDS:

• Ensure regular tax collection throughout the year
• Reduce chances of tax evasion
• Spread tax burden instead of a big one-time payment
• Create a clear trail of income and tax already paid

From your perspective, TDS does two things:

1. Reduces your in-hand cash (because tax is deducted upfront)
2. Gives you tax credit that you can adjust when filing your ITR

If total TDS during the year is more than your actual tax liability, you’re entitled to a refund. If it’s less, you pay the balance tax while filing your return.

Where is TDS Deducted? Common Income Sources

TDS applies to many different types of income. Here are the most common ones individuals deal with:

• Salary (Section 192): Employer deducts TDS every month based on your estimated annual income and declared investments
• Bank Interest (Section 194A): Banks deduct TDS on fixed deposit and sometimes savings interest if it crosses the threshold
• Rent (Section 194I / 194IB): TDS on rent paid for property above specified limits
• Professional Fees (Section 194J): TDS on fees paid to professionals like CAs, doctors, consultants, freelancers
• Contract Payments (Section 194C): TDS on payments to contractors
• Purchase of Property (Section 194IA): TDS when buying immovable property above ₹50 lakh
• Commission, Brokerage, etc. (Section 194H): TDS on commissions and brokerage

As an individual, you’ll commonly see TDS deducted:

• By your employer from salary
• By your bank from FD/interest income
• By tenants if you receive high rent
• By clients/companies if you are a freelancer/consultant

All of this TDS is linked to your PAN and appears in Form 26AS and Annual Information Statement (AIS).

How TDS on Salary Works (Section 192)

TDS on salary is often the biggest TDS component for salaried individuals. Your employer estimates your annual income and tax liability and then divides the tax by 12 months to deduct TDS every month.

Steps your employer follows:

1. Estimates your annual salary income (basic, HRA, allowances, bonus, etc.)
2. Adds any declared income from other sources (like interest) if you share it
3. Applies exemptions (HRA, LTA, etc.) based on proofs and declarations
4. Applies deductions (80C, 80D, home loan interest, etc.) based on declarations/proofs
5. Calculates tax under old or new regime (depending on your choice)
6. Divides the final tax by the number of months to calculate monthly TDS

If you don’t submit investment proofs or choose your tax regime properly, your employer may deduct higher TDS than necessary. This is one of the most common reasons people get large refunds after filing ITR.

Reading TDS in Form 16

Form 16 is your salary TDS certificate. It has:

• Part A: Details of TDS deducted and deposited with the government
• Part B: Salary breakup, exemptions, deductions, and final tax calculation

Always verify these:

• PAN is correct
• Total salary income matches your payslips
• Deductions under 80C/80D/80G, etc. are recorded correctly
• Total TDS deducted matches what’s shown in Form 26AS

If there’s any mismatch, ask your employer to correct it before you file your return.

TDS on Bank Interest and Other Income

Banks and financial institutions deduct TDS on interest if it crosses specified thresholds. For example:

• Fixed Deposit Interest: TDS is deducted once interest exceeds the threshold in a financial year
• Recurring Deposit Interest: May also attract TDS depending on bank policies
• NRO Account Interest: Usually always subject to TDS at higher rates for NRIs

Important points:

• Banks deduct TDS at source, not at the time of maturity only
• Even if TDS is not deducted (because interest is below threshold), interest is still taxable
• You must report full interest income in your ITR, not just net after TDS

If your total income is below taxable limit, you can submit Form 15G/15H (if eligible) to avoid TDS on interest. But if you submit these forms wrongly when you are actually taxable, you could end up with a tax demand later.

How to Check All TDS Deducted Against Your PAN

Two key documents help you verify TDS:

1. Form 26AS (Tax Credit Statement)

Form 26AS shows:

• All TDS deducted by employers, banks, tenants, etc.
• Advance tax and self-assessment tax you paid
• Refunds issued to you in past years

Access it via the income tax portal:

• Log in → e-File → Income Tax Returns → View Form 26AS / AIS
• Cross-check TDS entries with your Form 16, bank statements, and TDS certificates

2. Annual Information Statement (AIS)

AIS is a more detailed report that shows:

• TDS entries
• SFT transactions (like large deposits, investments, credit card spends)
• High-value transactions reported by banks, mutual funds, registrars, etc.

Always reconcile your income and TDS with AIS and 26AS before filing your ITR. This is critical for smooth processing and avoiding notices.

How to Claim TDS Credit in Your Income Tax Return

Claiming TDS credit is straightforward if records are correct:

1. Collect All TDS Documents
2. Form 16 from employer
3. Form 16A from banks/other deductors (if available)
4. Check 26AS/AIS for any additional TDS

1. Report Full Income
2. Salary, interest, rent, professional income, etc.
3. Don’t just report income where TDS is deducted – all taxable income must be included

1. Declare TDS in the Return
2. In ITR, there are specific schedules for TDS on salary (Schedule TDS1) and other income (Schedule TDS2)
3. Ensure TAN of deductor, amount of TDS, and income details match Form 26AS

1. Verify the Net Tax Position
2. The portal automatically adjusts TDS against your final tax liability
3. If TDS > tax liability → refund
4. If TDS < tax liability → pay balance as self-assessment tax

If TDS in 26AS is correct and you’ve claimed it properly, you don’t need to do anything extra – the system automatically gives you credit.

Common TDS Problems and How to Fix Them

1. TDS Deducted but Not Appearing in Form 26AS

This usually happens when:

• Deductor has not deposited TDS with the government
• Deductor has used wrong PAN
• Deductor has not filed TDS return correctly

What to do:

• Ask the deductor (employer, bank, tenant, etc.) to verify their TDS return
• Request correction in their TDS filing so it reflects under your correct PAN
• Don’t claim TDS that is not visible in 26AS – it will almost certainly lead to mismatch and notices

2. Excess TDS Deducted

If more TDS has been deducted than your actual tax liability, the solution is:

• File your ITR
• Claim full TDS as per Form 26AS
• The excess will be refunded to you after processing

You cannot get TDS refunded directly from the deductor once they’ve deposited it with the government.

3. Wrong PAN Given to Deductor

If you gave the wrong PAN to your bank/employer and they deducted TDS:

• The TDS might be credited to someone else’s PAN
• You will not see it in your 26AS

What to do:

• Immediately inform the deductor and request correction
• They may need to revise their TDS return with the correct PAN
• Once corrected, TDS will show up in your 26AS and you can claim it

4. Mismatch Between Form 16 and Form 26AS

Sometimes the TDS in your Form 16 doesn’t match what’s in 26AS.

Action steps:

• Treat Form 26AS as the final truth – the department relies on it
• Ask your employer to correct any discrepancy by revising their TDS return
• File your ITR only after the mismatch is fixed, or be prepared to respond to notices

TDS vs Advance Tax vs Self-Assessment Tax

It’s useful to understand how TDS fits into the bigger tax picture:

• TDS: Tax deducted by others before paying you
• Advance Tax: Tax you pay yourself during the year (usually for business/freelance income)
• Self-Assessment Tax: Tax you pay while filing your return to settle any remaining liability

When filing your ITR, the system:

1. Calculates total tax liability
2. Subtracts TDS + advance tax + self-assessment tax already paid
3. Determines if you have to pay more or get a refund

Practical Examples: TDS in Real-Life Scenarios

Example 1: Salaried Employee with FD Interest

• Salary income: ₹10,00,000
• Employer deducted TDS: ₹80,000
• FD interest: ₹40,000, TDS by bank: ₹4,000
• Total TDS as per 26AS: ₹84,000

Actual tax liability (after deductions): ₹78,000

Result:

• You have overpaid ₹6,000 via TDS
• When you file ITR and claim full TDS of ₹84,000, you’ll get a refund of ₹6,000

Example 2: Freelancer with TDS on Professional Fees

• Professional receipts: ₹12,00,000
• Clients deducted TDS @10%: ₹1,20,000 (visible in 26AS)
• Actual tax liability after expenses and deductions: ₹1,50,000

Result:

• You have a balance tax of ₹30,000 (₹1,50,000 – ₹1,20,000)
• You must pay this as self-assessment tax before filing ITR

Frequently Asked Questions (FAQs)

Q1: Is TDS a final tax?

A: No. TDS is only an advance tax collected during the year. Your final tax is computed when you file your ITR by adding all income and deductions. TDS is then adjusted against this final tax.

Q2: Can I get a refund of TDS deducted?

A: Yes. If total TDS is more than your final tax liability, you will get a refund after filing your ITR and e-verifying it. Refunds are usually credited directly to your bank account.

Q3: What happens if TDS was not deducted but I am taxable?

A: Even if TDS was not deducted, you are still responsible for paying tax. You must compute your total income, calculate tax, and pay any balance tax as self-assessment tax before filing your return.

Q4: How do I avoid unnecessary TDS deductions?

A:

• Submit investment declarations to your employer on time
• Submit Form 15G/15H to banks (only if you’re genuinely below taxable limit)
• Plan investments early in the year instead of rushing in March

Q5: Do I need to file ITR if TDS has already been deducted?

A: Yes, in most cases. TDS doesn’t replace the need to file an income tax return if your income exceeds the basic exemption limit or if you meet other filing criteria. Also, you can only get a refund of excess TDS by filing ITR.

Q6: How can I check if my employer or bank has actually deposited TDS?

A: Check Form 26AS and AIS on the income tax portal. If TDS is properly deposited and reported, you will see entries against your PAN with TAN and amount details.

Using Our Calculators to Plan TDS and Tax

Before filing your return or planning investments, use:

• Income Tax Calculator: To estimate your total tax liability under old and new regimes
• Income Tax Refund Estimator: To estimate whether you’ll get a refund based on TDS already deducted

These tools help you understand whether TDS being deducted is broadly correct and how much refund or additional tax you should expect.

Final Thoughts

TDS is one of the most important parts of the Indian tax system, and understanding it puts you in control of your money. Instead of being surprised at refund time or confused by TDS entries, you’ll know exactly why tax was deducted, how to verify it, and how to claim full credit.

The key is to:

• Keep track of all TDS through Form 26AS and AIS
• Ensure deductors use the correct PAN and deposit TDS on time
• File your ITR accurately and on time
• Use refunds and tax projections to plan your cash flow better

Once you understand TDS, the entire tax filing process becomes smoother and more predictable. Start by downloading your Form 26AS today, reconciling it with your income, and then using our Income Tax Calculator to see your true tax position.

Disclaimer: TDS rates, thresholds, and rules are subject to change based on government notifications and Finance Acts. The information in this guide is based on current law and is for educational purposes only. Always verify current provisions on the official income tax portal and consult a qualified chartered accountant for specific situations.