TDS
Tax Deducted at Source (TDS) is a mechanism under the Income Tax Act, 1961 where the payer deducts a specified percentage of tax before making payments for salary, interest, dividends, rent, professional fees, and other specified incomes, and remits it directly to the government on behalf of the recipient.
TDS is India's most pervasive tax collection mechanism, designed to collect tax at the very point income is generated rather than waiting for the recipient to self-assess and pay. The payer — whether a company, bank, broker, or employer — acts as a withholding agent and is legally responsible for deducting the applicable rate and depositing it with the government by the prescribed due date.
For equity investors, TDS is most commonly encountered on dividend income. Since the abolition of the Dividend Distribution Tax (DDT) in Budget 2020, companies deduct TDS at 10% under Section 194 on dividends exceeding ₹5,000 in a financial year paid to resident individuals. For NRIs, TDS on dividends is typically 20% plus surcharge and cess under Section 195, unless a lower rate applies under a Double Taxation Avoidance Agreement (DTAA).
TDS on interest income from bonds and fixed deposits under Section 194A applies at 10% for amounts exceeding ₹40,000 per year (₹50,000 for senior citizens) from banks and NBFCs. Mutual fund redemptions involving debt funds and other non-equity funds attract TDS under Section 194K on capital gains distributions, though equity fund redemptions are currently not subject to TDS for residents.
The key instrument for TDS reconciliation is Form 26AS, the tax credit statement maintained by the Income Tax Department. Every TDS deduction by every deductor is reflected in the taxpayer's Form 26AS. Investors must match this with their actual income to ensure no TDS has been missed or overstated. Errors in Form 26AS must be corrected with the deductor, not directly with the income tax department.
Over-deduction of TDS does not result in tax loss — the excess TDS is reflected in Form 26AS and can be claimed as a credit while filing ITR, resulting in a refund. However, under-deduction creates liability for the recipient. Submitting Form 15G or 15H (for individuals below or above 60, respectively) to banks and companies can prevent TDS if total income is below the taxable threshold.