Role and Importance of TDS in India’s Financial System

TDS, or Tax Deducted at Source, is a system where tax is collected right at the time a payment is made. Instead of the receiver paying tax later, the person making the payment (the deductor) deducts a certain amount upfront and deposits it with the Income Tax Department. The person receiving the payment is the deductee, and the tax is deducted on their behalf. This helps ensure timely and efficient tax collection. Let’s take a closer look at the importance of TDS and how it actually works in real-world transactions.

How TDS Works

TDS is based on the principle that whenever a specified payment is made, the payer must deduct tax at the prescribed rate and deposit it with the government. The person receiving the payment can check these deductions in their Form 26AS. It’s also the deductor’s duty to issue a TDS certificate, confirming the tax deducted and deposited on the deductee’s behalf.

TDS Rate Chart for FY 2025-26 (AY 2026-27)

Section	Nature of Payment	Threshold	TDS Rate
192	Salary	Basic exemption limit of employee	Slab rates
192A	Premature withdrawal from EPF	Rs. 50,000	10%
193	Interest on Securities	Rs. 10,000	10%
194	Dividends	Rs. 10,000	10%
194A	on bank/post office deposits	Rs. 50,000	10%
	Interest on bank/post office deposits (Senior Citizen)	Rs. 1,00,000	10%
	Interest (Others)	Rs. 10,000	10%
194K	Payment of dividend by mutual Funds	Rs. 10,000	10%
194B	Lottery, game shows, gambling winnings	Rs. 10,000	30%
194BA	Online gaming winnings	–	30%
194BB	Winnings from horse races	Rs. 10,000 (Aggregate winnings during a financial year not single transaction)	30%
194C	Payment to contractors or sub-contractors	Rs. 30,000 (Single Transaction) or Rs. 1 lakh (In a FY)	1% for individuals and HUF, 2% for others
194D	Insurance Commission	Rs. 20,000	2% for individuals and HUF, 10% for others
194DA	Payment received – Life insurance Policy	Rs. 1 lakh	2%
194EE	Payment received – National Savings Scheme (NSS)	Rs. 2,500	10%
194G	Lottery Commission	Rs. 20,000	2%
194H	Commission/Brokerage	Rs. 20,000	2%
194J(a)	Fees – Technical Services, Call Centre, Royalty, Distribution / Exhibition of Cinematography Films, etc.	Rs. 50,000	2%
194J(b)	Fees – All other Professional Services	Rs. 50,000	10%

194I(a)	Rent for Plant & Machinery	Rs. 50,000	2%
194I(b)	Rent of Land Building & Furniture	Rs. 50,000	10%
194IA	Transfer of certain immovable property other than agricultural land	Rs. 50 lakh	1%
194IB	Rent payment by individual / HUF not covered u/s 194I	Rs. 50,000 pm	2%
194IC	Payment under specified Joint Development Agreement	–	10%
194LA	Compensation on transfer of certain immovable property other than agricultural land	Rs. 5 lakh	10%
194LB	Income by way of interest from infrastructure debt fund (non-resident)	–	5%
194LBA	Certain income from units of a business trust	–	10%
194LBB	Income in respect of investment of investment fund	–	10% for residents, 30% for non-residents, 40% for foreign companies
194LBC	Income in respect of investment in securitization trust	–	10% for residents, 40% for non-residents, 10% for individual & HUF
194M	Payment made for Contracts, Brokerage or Professional Fees etc. by Individual and HUF	Rs. 50 lakh	2%
194N	Cash withdrawal in excess of 1 crore during the previous year from 1 or more account with a bank or co-operative society	1 Crore (Rs. 3 Crores, if withdrawal is by co-operative society)	2%
		20 Lakh (if ITR not filed for previous 3 years)	2% (Rs. 20 Lakh – 1 Crore)
			5% (Rs. 1 Crore and above)
194O	TDS on e-commerce participants	Rs. 5 lakh	0.10%
194P	TDS in case of Specified Senior Citizen (above 75 years) having Salary & Interest (ITR not required)	–	Slab Rates
194Q	TDS on Purchase of Goods exceeding Rs. 50 Lakh	Rs. 50 lakh	0.10%
194R	Benefits or perquisites of business or profession	Rs. 20,000	10%
194S	Payment of consideration for transfer of virtual digital asset by persons other than specified person	Rs. 10,000	1%
	Payment of consideration for transfer of virtual digital asset by specified person	Rs. 50,000	1%
194T	Payments by Partnership Firms to Partners	Rs. 20,000	10%
194B	Income by way of lottery winnings, card games, crossword puzzles, and other games of any type (Up to Rs.10,000 per transaction- No TDS needs to be deducted)	Nil	30%
194E	Payment to non-resident sportsman (including an athlete) or an entertainer (not a citizen of India) or non-resident sports association.	Nil	20%
194LBA(3)	Interest income received or receivable to a business trust from SPV and distribution to its unitholders.	Nil	5%
	Dividend income received from SPV by a business trust, in which it holds the entire share capital other than required to be held by the government or government body, and distribution to its unitholders.	Nil	10%
	Payment in the nature of income in the nature of rental income, out of real estate assets owned directly by such business trust, to unitholders.	Nil	40%
194LC	Payment in the nature of interest for the loan borrowed in foreign currency by an Indian company or business trust against loan agreement or against the issue of long-term bonds*.	Nil	5%
	If interest is payable against long term bonds listed in recognized stock exchange in IFSC	Nil	4%
194LD	Payment of interest on the bond (rupee-denominated) to Foreign Institutional Investors or a Qualified Foreign Investor	Nil	5%
195	Payment of any other sum, such as-Income by way of LTCG under section 112(1)(c)(iii);	Nil	12.50%
	Income by way of LTCG under section 112A;	Nil	12.50%
	Income by way of STCG under section 111A;	Nil	20%
	Any other income by way of LTCG;	Nil	12.50%
	Interest payable on money borrowed by the government or Indian concern in foreign currency;	Nil	20%
	Income by way of royalty	Nil	20%
	Income from technical fees to the Indian concern by government or Indian concern in pursuance of an agreement on matters related to industrial policy.	Nil	20%
	Any other income.	Nil	35%
196B	Income from units of an offshore fund.	Nil	10%
	Long-term Capital Gain on transfer of units an offshore fund.	Nil	12.50%
196C	Income from foreign currency bonds or GDR of an Indian company	Nil	10%
	LTCG foreign currency bonds or GDR of an Indian company	Nil	12.50%
196D	Income (excluding dividend and capital gain) from Foreign Institutional Investors.	Nil	20%

Source: https://cleartax.in/s/tds-rate-chart 

Note: TDS rates may change from time to time. For the most updated rates, refer to the official Income Tax Department website.

Advantages of TDS

TDS offers benefits to both taxpayers and the Government. Here are the key advantages that highlight the importance of TDS:

• Tax evasion is a major concern, and TDS helps address this issue by ensuring taxes are collected at the source. It not only reduces the chances of evasion but also improves transparency between taxpayers and the government, minimizing discrepancies in tax payments.
• Many people find tax payments complicated, but TDS helps make the process smoother by ensuring the required tax is automatically deducted in advance.
• TDS also reduces the burden on tax authorities, as taxes are deducted automatically. This means taxpayers don’t need to monitor or calculate these deductions themselves.

TDS plays a crucial role in keeping India’s tax system efficient, transparent, and fair. By ensuring taxes are collected at the source, it simplifies compliance for taxpayers while supporting the government in maintaining proper revenue flow. The importance of TDS becomes clear with a better understanding of its process, helping individuals and businesses stay compliant, avoid discrepancies, and manage their finances with confidence.