TDS is a tax-collection mechanism under India's Income Tax Act where the payer of certain specified payments (salary, professional fees, rent, contractor payments, interest, and more) deducts a percentage of tax at the time of payment and deposits it directly with the government, rather than waiting for the recipient to pay tax on their full income later. The recipient can then claim the TDS already deducted as a credit against their own final tax liability when filing their income tax return. Businesses that deduct TDS have their own compliance obligations: depositing the deducted amount within specified deadlines, filing quarterly TDS returns, and issuing TDS certificates (Form 16/16A) to the persons they deducted from. Different types of payments have different applicable TDS rates and threshold limits below which no deduction is required, for example, TDS on professional fees under Section 194J applies once payments to a single payee cross ₹50,000 in a financial year (raised from ₹30,000 by the Finance Act 2025, effective 1 April 2025). This is distinct from GST's own Section 51 TDS mechanism (a separate, narrower GST-specific concept), so "TDS" in a general accounting conversation almost always refers to this income-tax mechanism unless GST context is explicitly stated.
Example: A business pays a consultant ₹1,00,000 in professional fees, above the ₹50,000 Section 194J threshold. It deducts TDS at the applicable rate (commonly 10% for professional fees), pays the consultant ₹90,000, and deposits the ₹10,000 with the government on the consultant's behalf.
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