TDS
TDS stands for Tax Deducted at Source. It is a tax collection mechanism under the Income Tax Act, 1961, where the person making a payment (the deductor) deducts a specified percentage of tax at the time of making the payment and deposits it with the government on behalf of the recipient (the deductee). The deductee can then claim credit for the TDS deducted when filing their Income Tax Return (ITR).
TDS applies to a wide range of payments including salaries, professional fees, rent, interest, commissions, and contractor payments.
How TDS Works
The process follows three steps. First, the deductor makes a payment (e.g., a company paying a freelancer for professional services). Second, before releasing the full amount, the deductor deducts TDS at the applicable rate and pays the net amount to the recipient. Third, the deductor deposits the deducted TDS with the government and files a TDS return.
Example
A company hires a freelance consultant and agrees to pay ₹1,00,000. TDS at 10% (Section 194J) applies.
- TDS deducted: ₹10,000
- Amount paid to the consultant: ₹90,000
- TDS deposited to the government: ₹10,000
The consultant can claim the ₹10,000 as tax already paid when filing their ITR.
Common TDS Sections and Rates
| Section | Payment Type | TDS Rate |
|---|---|---|
| 192 | Salary | As per slab rate |
| 194A | Interest (from banks, etc.) | 10% |
| 194C | Contractor/subcontractor payments | 1% (individual) / 2% (company) |
| 194H | Commission or brokerage | 5% |
| 194I | Rent | 10% (land/building) |
| 194J | Professional/technical fees | 10% (professional) / 2% (technical) |
| 194Q | Purchase of goods (above ₹50 lakh) | 0.1% |
TDS Threshold Limits
TDS is not deducted on every payment. Each section has a threshold limit below which TDS does not apply. For example, under Section 194J (professional fees), TDS is deducted only if the total payment to a person exceeds ₹30,000 in a financial year.
TDS and Freelancers
For self-employed individuals and freelancers in India, TDS under Section 194J is the most relevant. When a registered company or firm pays a freelancer more than ₹30,000 in a year for professional services, the company must deduct 10% TDS before releasing payment.
This is why many freelancers receive invoiced amounts minus TDS. The TDS is not a loss — it is tax paid in advance on their behalf, which they reconcile when filing their ITR. Freelancers should track all TDS deductions using Form 26AS or the AIS (Annual Information Statement) on the Income Tax portal.
TDS Certificate — Form 16 and Form 16A
Once TDS is deducted and deposited, the deductor must issue a TDS certificate to the deductee:
Form 16 is issued for TDS on salary (annually, by 15th June).
Form 16A is issued for TDS on non-salary payments like professional fees, rent, and interest (quarterly).
These certificates are essential when filing the ITR to claim TDS credit.
TDS Returns
Deductors must file quarterly TDS returns with the government:
| Form | Purpose |
|---|---|
| Form 24Q | TDS on salary |
| Form 26Q | TDS on non-salary payments (domestic) |
| Form 27Q | TDS on payments to non-residents |
TDS vs. Advance Tax
TDS and advance tax both serve the same purpose of collecting tax before the end of the year, but they differ in who initiates the payment.
| Feature | TDS | Advance Tax |
|---|---|---|
| Who pays | Deductor (payer) | Taxpayer themselves |
| Trigger | Any qualifying payment | Estimated annual tax liability over ₹10,000 |
| Basis | Fixed rate per section | Estimated income for the year |
TDS Under GST
TDS under the Income Tax Act is separate from TDS under GST. Under GST, certain government entities and notified companies are required to deduct 2% GST TDS (1% CGST + 1% SGST, or 2% IGST) on payments made to suppliers for taxable supplies above ₹2.5 lakh per contract. This is governed by Section 51 of the CGST Act and is different from income tax TDS.
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