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TDS (Tax Deducted at Source) in India: How It Works, Who Deducts It, and How to Claim It Back

Renish Mithani's profile photo Renish Mithani
6 min read
Reviewed by Rahul Godeshwar Last reviewed 8 October 2026 Data verified 8 October 2026
Income Tax TDS Tax Deduction Form 16 Salary Tax Advance Tax

When you earn income in India — salary, interest, dividend, or freelance payment — the Income Tax Act 2025 may require the payer to deduct TDS and remit it to the government. You claim this credit when you file your ITR. If deducted correctly, you get full credit; too much means a refund; too little means you pay the balance.

What is TDS?

TDS is an advance tax collection mechanism built into the Income Tax Act 2025. It requires the deductor — your employer, your bank, your client, or any other payer — to withhold a percentage of your income before paying you the remainder. The deductor then remits this amount to the government and issues you a TDS certificate showing how much was deducted and deposited.

The purpose is to ensure that tax is collected as income is earned, rather than waiting until the financial year ends. It also prevents tax evasion by creating a paper trail for every significant payment.

TDS is not an extra tax. It is a prepayment of your income tax. The credit you claim through your ITR is the same tax that was deducted at source.

Who deducts TDS and when

The Income Tax Act 2025 places TDS obligations on specific categories of payers for specific types of income. The most common scenarios for individual taxpayers are:

Situation Who deducts TDS Section
Your salary is paid Your employer Section 192
You earn interest on bank deposits The bank or post office Section 194A
You receive dividends from a company or mutual fund The company or fund house Section 194
You are a freelancer or contractor paid for services The client or company hiring you Section 194C
You receive professional or technical fees The payer Section 194J
You earn rent from a property The tenant (if rent exceeds threshold) Section 194-I

The deductor is responsible for depositing the TDS to the government by the due date and issuing the appropriate TDS certificate to you. Failure to deduct or deposit TDS correctly attracts penalties under the Act.

TDS on salary (Section 192)

Your employer deducts TDS from your salary each month based on your estimated annual income and the applicable tax slabs under the new tax regime (Section 202 of the Income Tax Act 2025).

How it works:

  • At the start of the financial year, you declare your expected income, investments, and tax-saving deductions (under Sections 80C, 80D, 80CCD(1B), HRA, and others) to your employer using Form 12BB.
  • Your employer calculates your monthly tax liability after accounting for the standard deduction (which is available under both regimes from FY 2026-27) and your declared deductions.
  • TDS is deducted each month and deposited to the government’s account under your PAN.

Key point: TDS on salary is calculated on your estimated annual income, not on each month’s salary in isolation. If your income varies during the year or you have multiple employers in the same year, your total tax liability may not be fully captured by any one employer.

What to check on your Form 16: Your Form 16 (issued by your employer at the end of the financial year) shows your total salary, tax deducted, and deposited Challan details. It is divided into Part A (TDS details) and Part B (salary breakup). Always verify that the TDS amount in Part A matches what appears in your Form 26AS.

TDS on interest income (Section 194A)

When you earn interest from a bank savings account, fixed deposit (FD), recurring deposit, or post office deposit, the bank or post office deducts TDS if the interest earned exceeds the threshold for the financial year.

Threshold for FY 2026-27:

  • ₹10,000 per year for all recipients (this threshold applies to all individuals and HUFs; there is no separate exemption for senior citizens under Section 194A from FY 2026-27 — senior citizens receive a higher exemption of ₹50,000 under Section 80TTB for interest income, but that is a deduction, not a TDS exemption).

TDS rates:

  • With PAN: 10%
  • Without PAN or invalid PAN: 20%

Example — FD interest TDS: You have a fixed deposit that earns ₹1,20,000 in interest for the year. The bank deducts TDS of ₹12,000 (10% of ₹1,20,000) and pays you ₹1,08,000. The ₹12,000 appears in your Form 26AS and can be claimed as credit when you file your ITR.

Tip: If your total income after including interest is below the taxable threshold (₹4 lakh under the new regime for FY 2026-27), you can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens aged 60 and above) to your bank to request that no TDS be deducted.

TDS on dividends (Section 194)

When you receive dividends from a company or a mutual fund, the payer deducts TDS before making the payment to you.

TDS rate on dividends:

  • 10% if the dividend amount exceeds ₹5,000 in a year and you have provided your PAN
  • 20% if PAN is not furnished

This applies to dividends from shares, mutual fund equity schemes, and any other company distributions. Debt mutual fund dividends have a different treatment and are taxed as income from other sources.

Example — dividend TDS: You hold shares in a company that declares a dividend of ₹25,000 for the year. The company deducts TDS of ₹2,500 (10%) and pays you ₹22,500. The ₹2,500 is credited to your Form 26AS.

TDS on contractor and freelancer payments (Section 194C)

Any person or company that pays you for work — as a contractor, subcontractor, or freelancer — must deduct TDS under Section 194C if the payment exceeds the threshold in a financial year.

Threshold for FY 2026-27:

  • ₹30,000 per instance, OR
  • ₹1,00,000 in aggregate in a financial year

TDS rates:

  • 1% for individuals and HUFs (with PAN)
  • 2% for other contractors (with PAN)
  • 20% if PAN is not provided

Important distinction: Section 194C applies to payments for work (contracts for execution of work, labour charges for part of work). Section 194J applies to payments for professional or technical services (fees for legal services, medical services, technical services, consultancy).

Example — freelance payment TDS: You are a graphic designer hired by a company for a logo design project. The project fee is ₹50,000. The company deducts TDS of ₹500 (1%) under Section 194C and pays you ₹49,500. You receive a TDS certificate (Form 16A) from the company showing this deduction.

How to get your TDS credit: The ₹500 deducted appears in your Form 26AS under Section 194C. When you file your ITR, you include the ₹50,000 as income in your total income. The ₹500 TDS is claimed as credit against your total tax liability.

TDS on professional and technical fees (Section 194J)

When you receive fees for professional services — such as legal advice, medical services, consultancy, technical services, or management services — the payer deducts TDS under Section 194J if the payment exceeds the threshold.

Threshold for FY 2026-27:

  • ₹30,000 per instance, OR
  • ₹1,00,000 in aggregate in a financial year

TDS rates:

  • 2% for fees paid to directors of a company
  • 10% for professional and technical fees (with PAN)
  • 20% if PAN is not furnished

Example — professional fees TDS: You are a chartered accountant who bills a client ₹2,00,000 for a tax advisory assignment. The client deducts TDS of ₹20,000 (10%) under Section 194J and pays you ₹1,80,000.

How to claim TDS credit in your ITR

TDS deducted from your income does not mean the tax is paid and gone. It is held as a credit against your total tax liability. Here is how to claim it:

Step 1 — Collect your TDS certificates.

  • For salary TDS: Form 16 from your employer (issued by May 31 after the financial year ends)
  • For other TDS: Form 16A (for non-salary payments), Form 16B (for property transactions), or Form 16C (for rent)
  • All TDS deducted is also reflected in Form 26AS (the consolidated tax statement available on the incometax.gov.in e-filing portal)

Step 2 — Verify Form 26AS. Before filing your ITR, log in to the income tax e-filing portal and check Form 26AS. Confirm that every TDS entry there matches your TDS certificates. If a deductor has deposited TDS but it does not appear in Form 26AS, contact the deductor to correct the challan.

Step 3 — File your ITR and claim the credit. In your ITR form (for salaried individuals, typically ITR-1 or ITR-2 depending on income sources), you report your total income from all sources. The TDS credit available is pre-filled from Form 26AS in the relevant schedule. The tax department matches your claimed TDS against what was deposited by the deductor.

Step 4 — Receive your refund or pay the balance.

  • If TDS exceeds your total tax liability: you receive a refund (usually within 2–6 weeks after verification)
  • If TDS is less than your tax liability: you pay the balance tax before the due date
  • If TDS equals your liability: no payment, no refund

Common mistakes

Mistake 1 — Not linking PAN with Aadhaar. If your PAN is not linked to Aadhaar, deductors are required to deduct TDS at 20% instead of the normal rate. This means you lose out on TDS credits and may receive a smaller refund. Link your PAN and Aadhaar on the income tax e-filing portal as soon as possible.

Mistake 2 — Ignoring TDS deducted by multiple deductors. If you have income from multiple sources in a year — salary from one employer, interest from a bank, and freelance income — each deductor deducts TDS separately. Each deduction appears in Form 26AS. When you file your ITR, you must add up all TDS credits from all deductors to get your total advance tax paid.

Mistake 3 — Not submitting Form 12BB to a new employer. If you change jobs during a financial year, your new employer calculates TDS based only on your salary from that employer — they have no visibility of your income from the previous employer. Submitting Form 12BB with all your income details and deductions to the new employer ensures the correct TDS is calculated from the start. Otherwise you may face a large tax liability at year-end because neither employer deducted enough.

Mistake 4 — Filing ITR without checking Form 26AS. Form 26AS is the master record of all TDS deposited against your PAN. If a deductor made an error in the PAN orChallan, the TDS will not match your account. Filing your ITR without cross-checking Form 26AS first can result in a mismatch that delays your refund.

Mistake 5 — Missing the ITR filing deadline for TDS credit. TDS credit is valid only for the financial year in which it was deducted. If you do not file your ITR within the due date (usually July 31 for individuals not requiring tax audit), you lose the TDS credit for that year and must carry it forward, subject to conditions. Filing on time preserves every rupee of credit you have earned.

Frequently asked questions

What is the difference between TDS and advance tax? TDS is tax deducted by a payer at the time of payment. Advance tax is tax you pay yourself in quarterly installments if your total tax liability after TDS exceeds ₹10,000 in a year. TDS is a prepayment mechanism; advance tax is a self-assessment mechanism. Both are credited to your account when you file your ITR.

My employer deducted TDS but I have a low total income. Can I get it all back? Yes. If your total income after all deductions is below the taxable threshold (₹4 lakh per year under the new regime for FY 2026-27), your total tax liability is zero. All TDS deducted from your salary is claimed as a credit and the entire amount is refunded to you when you file your ITR, provided your PAN is correctly linked and the TDS details appear in Form 26AS.

What happens if my TDS certificate and Form 26AS do not match? Always go by Form 26AS. It is the government’s own record of taxes deposited against your PAN. If a TDS certificate shows an amount that does not appear in Form 26AS, contact the deductor and ask them to revise their quarterly TDS return (Form 24Q, 26Q, or 27Q as applicable) to correct the error.

Can I claim TDS deducted on my freelance income as a business expense? No. TDS deducted under Section 194C or 194J is a tax on your gross income. The deduction is not an expense you claim separately in your ITR. You report your full gross receipts as business income and claim legitimate business expenses (printing, software, travel, professional subscriptions) as deductions under the appropriate heads. The TDS credit reduces your tax liability, not your taxable income.

I have TDS deducted on my salary and on my bank FD interest. Do I add both in my ITR? Yes. Every TDS deducted from income you earned is a credit against your total tax liability. Report all income sources in your ITR — salary, interest income, freelance or professional income, house property income, capital gains — and claim all TDS credits shown in Form 26AS. The total TDS from all sources is added together and matched against your total tax calculated on your combined income.

Disclosure: FinWiz24 is an independent editorial publication. We do not earn commission from any tax-related products or services discussed on this page.

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