Tax Deducted at Source (TDS): Rates, Forms, and Refunds

Tax Deducted at Source, commonly called TDS, is India’s mechanism for collecting income tax at the moment a payment is made. Under the Income-tax Act, 1961, the person making a qualifying payment withholds a set percentage and deposits it with the government on behalf of the recipient. The recipient gets the net amount and later claims credit for the withheld tax when filing an annual return. The rates and thresholds below apply for Assessment Year 2026-27 (Financial Year 2025-26).

How the Mechanism Works

Every TDS transaction has two sides. The deductor is the payer: an employer, a company, a tenant, a client. The deductee is the person receiving the income. Before releasing the full payment, the deductor holds back a percentage as tax and sends it to the government.

TDS only applies once a payment crosses a minimum amount called the threshold limit. Below that, the deductor pays in full with no withholding. Thresholds vary by payment type, so a small bank interest credit may fall below the limit while a professional fee almost certainly won’t. Once the threshold is crossed, the deductor becomes legally responsible for withholding the right amount and depositing it on time.

The deduction itself happens at the earlier of two events: when the income is credited to the deductee’s account in the deductor’s books, or when the actual payment goes out. Which event triggers the obligation depends on the section of the Act that governs the payment.

TDS Rates and Thresholds by Payment Type

Different categories of income carry different rates. The figures below assume the deductee has furnished a valid PAN.

Salary (Section 192)

Employers deduct TDS on salary using the employee’s estimated total income for the financial year and the applicable slab rates rather than a flat percentage.1Indian Kanoon. Income Tax Act 1961 – Section 192 The employer factors in declared deductions and exemptions, such as investments under Section 80C or house rent allowance. The effective rate ends up differing from one employee to the next.

Interest on Securities (Section 193)

Interest paid on listed debentures, government bonds, and similar instruments attracts TDS at 10%.2Income Tax Department. Payments Covered Under the TDS Mechanism and Rates for Deduction of Tax at Source This includes corporate debentures and Central and State Government savings bonds, including the Floating Rate Savings Bonds, 2020.

Dividends (Section 194)

Companies paying dividends must deduct TDS at 10%, whether the shareholder is an individual or a domestic company.3Income Tax Department. TDS Rates

Bank and Other Interest (Section 194A)

Interest from sources other than securities, most commonly bank fixed deposits and recurring deposits, attracts TDS at 10%.3Income Tax Department. TDS Rates Banks and post offices apply a higher threshold before deducting, while other payers use a lower one. If your total interest from a single bank stays under the applicable threshold, nothing is withheld. If you expect your total income to remain below the taxable limit, you can submit Form 15G, or Form 15H if you are a senior citizen, to prevent TDS on your interest.

Contractor Payments (Section 194C)

Payments to contractors are taxed at 1% for individuals and Hindu Undivided Families and 2% for companies, firms, and other entities.3Income Tax Department. TDS Rates The obligation triggers when a single payment exceeds ₹30,000 or when total payments to a single contractor during the year cross ₹1,00,000. Even if no individual invoice hits ₹30,000, withholding must begin once the annual aggregate breaches ₹1,00,000.

Rent (Sections 194-I and 194-IB)

Businesses and professionals paying rent deduct TDS under Section 194-I at 2% for plant and machinery and 10% for land, buildings, furniture, or fittings.3Income Tax Department. TDS Rates A separate provision, Section 194-IB, applies to individuals and HUFs who are not subject to a tax audit: they must deduct TDS at 2% if monthly rent exceeds ₹50,000. Landlords with a mix of business and individual tenants should verify all deductions on their Form 26AS.

Professional and Technical Fees (Section 194J)

Fees for professional services such as legal, medical, or engineering consultancy attract TDS at 10%. Fees classified as technical services carry a lower rate of 2%, as do royalties on cinematographic films.3Income Tax Department. TDS Rates The threshold is ₹30,000 in aggregate during the financial year. The professional-versus-technical distinction matters in practice: a software firm billing for technical support faces 2%, while a chartered accountant billing for audit work faces 10%.

Commission and Brokerage (Section 194H)

Commission or brokerage payments attract TDS at 2%.3Income Tax Department. TDS Rates The provision covers relationships ranging from insurance agents to advertising agencies collecting commission on bookings.

PAN, TAN, and What Happens Without Them

Any entity required to deduct TDS must first obtain a Tax Deduction and Collection Account Number (TAN). This ten-digit alphanumeric code identifies the deductor in every transaction with the tax department.4Income Tax Department. Know TAN Details FAQ Without a TAN, you cannot deposit withheld tax or file the quarterly returns. Budget 2026 carved out one exception: resident buyers purchasing property from non-residents can now deduct and deposit TDS using just their PAN.5Government of India. Budget 2026 Tax Reforms – List and Gist

On the receiving side, the deductee must provide a valid PAN. Under Section 206AA, if the deductee fails to furnish a valid PAN, the deductor must withhold at the higher of the rate specified in the relevant section or 20%.2Income Tax Department. Payments Covered Under the TDS Mechanism and Rates for Deduction of Tax at Source The same 20% rate kicks in if a PAN becomes inoperative, typically because it hasn’t been linked with Aadhaar. In practical terms, someone earning ₹40,000 in bank interest who hasn’t provided their PAN could see ₹8,000 withheld instead of ₹4,000.

Depositing the Tax and Filing Quarterly Returns

Once TDS is withheld, the deductor deposits the funds using Challan ITNS 281, the standard payment voucher for TDS and TCS.6Income Tax Department. TDS/TCS Tax Challan ITNS 281 Payment can be made through authorized banks or the online tax payment portal. The deductor selects the correct category (company or non-company deductees) and the relevant assessment year. A successful payment generates a Challan Identification Number (CIN) combining the bank branch code and deposit date. Keep this number; you need it for the quarterly return.

TDS returns are filed quarterly using different forms depending on the type of payment:

  • Form 24Q for tax withheld from employee salaries.7Income Tax Department. Form 16 and Form 16A
  • Form 26Q for all other payments to residents, including interest, rent, professional fees, and contractor payments.
  • Form 27Q for payments made to non-residents or foreign companies.

Each return must carry every transaction’s date, gross amount, rate applied, challan details, and the deductee’s PAN. Errors in PAN entry are the single most common reason returns get rejected. Check every PAN before submission. A successful filing generates a provisional receipt confirming the quarterly obligation has been met.

Form 16 and Form 16A Certificates

After filing the quarterly return, the deductor must issue TDS certificates to each deductee. Form 16 is issued by employers for salary deductions under Section 192 and covers the entire financial year. Form 16A is issued for all other deductions and is generated quarterly.7Income Tax Department. Form 16 and Form 16A

Deadlines are strict. Form 16 must be provided to employees by June 15 of the year following the financial year in which salary was paid. Form 16A must be issued within 15 days of the due date for filing the relevant quarterly return, so the certificate deadlines fall on August 15, November 15, February 15, and June 15 for the four quarters.7Income Tax Department. Form 16 and Form 16A Without these certificates, claiming TDS credit on your return becomes much harder.

Checking Your TDS Credits on Form 26AS

Form 26AS is your consolidated tax credit statement. It shows every TDS deduction made against your PAN during the year, along with advance tax and self-assessment tax payments. To view it, log in to the e-filing portal at incometax.gov.in, go to “e-File,” then “Income Tax Returns,” and select “View Form 26AS.”8Income Tax Department. Online View Through E-Filing Website

Check Form 26AS every year before filing your return. If a deductor withheld tax but didn’t deposit it, or filed an incorrect return, the credit will not appear. Catching this early gives you time to contact the deductor and resolve the discrepancy before your filing deadline.

Claiming a Refund When TDS Exceeds Your Liability

If the total TDS deducted during the year exceeds your actual tax liability, you are entitled to a refund. This often happens when someone’s income falls below the taxable threshold but TDS was withheld on bank interest or professional fees anyway. The only way to claim it is by filing an income tax return. There is no separate refund application; the return itself calculates the difference between tax owed and tax already paid through TDS.

When filing, enter the TDS amounts shown in your Form 26AS in the appropriate schedules and provide accurate bank details, since refunds are credited directly to the account specified. After filing, verify the return electronically using Aadhaar OTP, net banking, or by sending a signed physical ITR-V to the processing center. Unverified returns are not processed. If the department takes longer than the standard processing period, interest at 0.5% per month accrues under Section 244A from the date the return was due until the refund is issued.

Getting a Lower or Nil Deduction Certificate

If your projected tax liability for the year is significantly lower than what the standard TDS rate assumes, you can apply for a lower or nil deduction certificate under Section 197. This is particularly useful for freelancers and small businesses whose actual income, after expenses and deductions, sits in a lower bracket than the flat TDS rate would suggest.

Applications are made online through the TRACES portal using Form 13. You will need a digital signature or electronic verification code, plus supporting documents: an estimated income computation for the current year and returns or assessment orders from the prior four years. Once approved, the assessing officer’s certificate authorizes the deductor to withhold at the reduced rate, or not at all for nil certificates. Budget 2026 announced that this process will move to a rule-based automated system, replacing the current application to the assessing officer.5Government of India. Budget 2026 Tax Reforms – List and Gist

Penalties for Missing TDS Obligations

Consequences for missing TDS deadlines are layered and add up quickly.

  • Late filing fee under Section 234E: ₹200 per day for every day a TDS return remains unfiled past its due date. The total fee is capped at the amount of TDS deductible for the quarter, so late fees will never exceed the tax itself.
  • Interest for non-deduction under Section 201(1A): 1% per month, or part of a month, from the date the deduction should have been made until it actually is.
  • Interest for late deposit under Section 201(1A): 1.5% per month from the date of deduction until the date the tax is finally deposited.

Interest is simple interest, and a part of a month counts as a full month. For a deductor who withheld ₹1,00,000 in April but didn’t deposit it until October, that is six months at 1.5%, adding ₹9,000 to the bill. Beyond monetary penalties, persistent non-compliance can attract prosecution under Sections 276B and 276BB of the Income-tax Act.

What Changed in Budget 2026

The Union Budget 2026 introduced several changes aimed at simplifying TDS compliance:5Government of India. Budget 2026 Tax Reforms – List and Gist

  • Resident buyers purchasing property from non-residents no longer need a TAN and can use a PAN-based challan.
  • The Section 197 process for lower deduction certificates is moving to a rule-based automated system.
  • Forms 15G and 15H can now be filed through a single window with depositories for TDS on dividends and interest.
  • Simplified TDS provisions for manpower supply are aimed at labour-intensive MSMEs.
  • Tax Collected at Source on overseas tour program packages dropped to 2%, as did the TCS rate for education and medical remittances under LRS.