Tax Deducted at Source (TDS) is a system under the Indian Income Tax Act where tax is deducted by the payer at the time of making certain payments—such as salary, rent, interest, or professional fees—and deposited directly with the government on behalf of the payee.
The main purpose of TDS is to collect tax at the source of income and ensure regular inflow of revenue to the government. It also helps reduce tax evasion by tracking income earned by individuals and businesses.
Under TDS, the person or entity making a specified payment (called the deductor) is responsible for deducting a fixed percentage of tax before making the payment to the recipient (called the deductee). The deducted amount must then be deposited with the Income Tax Department, and a TDS certificate (Form 16 or 16A) is issued to the payee as proof of deduction.
TDS is crucial for small business owners, startups, and freelancers in India, especially when they make or receive payments that fall under the TDS provisions. It plays a key role in compliance, as failure to deduct or deposit TDS on time can result in penalties, disallowance of expenses, and interest charges.
TDS returns must be filed quarterly by deductors, and the deducted amount gets reflected in the deductee’s Form 26AS, which helps while filing the annual income tax return.
Understanding and managing TDS correctly can make a big difference in staying compliant and avoiding unnecessary legal issues. For those looking to streamline their income tax compliance, including TDS management, FinTax24 offers professional guidance and digital solutions—visit FinTax24’s Income Tax Solutions to learn more.