TDS (Tax Deducted at Source)

TDS moves the job of collecting income tax from the person earning to the person paying. When an employer pays salary, a company pays a contractor, or a tenant pays commercial rent, the payer withholds a portion, hands the balance over, and deposits the withheld amount with the government against the recipient's PAN.

The recipient does not lose that money. It appears as a credit in their Form 26AS and annual information statement, and they set it off against their own tax liability when filing a return. If more was deducted than was due, the excess comes back as a refund.

For the employer the obligation is not merely administrative. Failing to deduct, or deducting and not depositing, creates liability on the employer for the tax itself along with interest.

Each type of payment has its own section, threshold and rate. These are the ones a payroll or finance team meets most often.

Rates and thresholds under these sections are revised by successive Finance Acts, so confirm each against the rate chart in force for the current financial year before configuring a deduction. Section 392 is the one that behaves differently from all the others: it has no fixed rate at all.

Under section 392 of the Income-tax Act, 2025, and Section 192 of the 1961 Act before it, the employer estimates what the employee will owe for the whole financial year, then deducts that amount in roughly equal parts across the remaining months. The rate is an average, so it changes whenever the estimate changes.

The steps run the same way every year. Estimate gross salary for the full year, subtract the exemptions and standard deduction available under the employee's regime, apply the investment declarations once proof has been collected, compute tax on the result using that regime's slabs, add cess, subtract any rebate, and divide by the months left in the year.

Here is a worked example. An employee has estimated annual taxable income of 9,60,000 rupees after deductions, and the tax works out to 60,000 rupees including cess. Deducting from April, that is 5,000 rupees a month. In November the employee produces rent receipts that lower the annual liability to 48,000 rupees. Of that, 35,000 has already been deducted over seven months, so the remaining 13,000 is spread over the five months left, at 2,600 a month.

Two things follow from that mechanism. Deductions rise sharply in the last quarter when declared investments go unproven, because the shortfall has to be recovered from the months that remain. And the employee's regime choice matters from the first month of the year, since the new regime under Section 115BAC applies by default where no choice is recorded.

Deduction, deposit and reporting are three separate deadlines, and missing any one has its own consequence.

Deposit is made by challan quoting the employer's TAN, and the challan details are then matched to the return. A mismatch between the challan and the deductee entries in Form 138, which was Form 24Q, is the usual reason an employee finds their Form 26AS missing credit they can see on their payslip. Confirm the current due dates and the March concession against the rules in force, since they have been amended.

The consequences stack rather than substitute for one another.

• Interest runs from the date deduction was due to the date it was made, at one rate, and from the date of deduction to the date of deposit at a higher rate. Deducting and sitting on the money costs more than not deducting at all.
• A late quarterly return attracts a fee under the late-filing fee, whose counterpart in the Income-tax Act, 2025 sits in section 398 and was not read, for each day of delay, capped at the tax deducted for that quarter.
• The employer can be treated as an assessee in default for the tax itself, subject to relief where the recipient has already paid it and can prove so.
• For business payments other than salary, a share of the underlying expense can be disallowed when computing the payer's own income.

Confirm current interest and fee rates against the sections in force. The numbers do not change the practical point: the cheapest error is one caught inside the same month, because both interest clocks run on days.

One reconciliation covers it. The TDS shown on the payslips for the year should match the salary TDS in Form 26AS and the annual information statement, and both should match Part A of Form 130, which was Form 16,.

Where the payslip shows tax that Form 26AS does not, the employer has deducted and either not deposited it or reported it against the wrong PAN. Raise that gap before filing, because a return claiming credit Form 26AS does not carry attracts a demand notice. Employees who changed jobs mid year should also give the new employer the previous employer's salary details, or the year's tax gets computed as though the earlier salary did not exist.