Tax Deducted at Source (TDS) requires the payer of specified incomes — such as professional fees, rent, contractor payments or salary — to deduct income tax at notified rates and deposit it with the government, issuing the payee a certificate. The payee then claims it against their tax liability.
TDS is separate from GST. Businesses must deduct, deposit and report TDS on time to avoid interest and penalties. There is also a GST-specific TDS for certain notified recipients.
The machinery runs on identifiers and forms. A deductor obtains a TAN, deposits each month's deductions by challan, and files quarterly returns — Form 24Q for salaries, 26Q for most resident payments, 27Q for non-residents — before issuing certificates in Form 16 or 16A. Because every deduction is reported against the payee's PAN, it surfaces in the payee's Form 26AS and Annual Information Statement as tax already paid.
Seen from both sides, the flow is simple. If a company owes a consultant ₹1,00,000 and the applicable section produces a deduction of ₹10,000, the consultant receives ₹90,000 in cash but records the full ₹1,00,000 as income, treating the ₹10,000 as tax prepaid on their behalf. The consultant's receivable is settled partly in cash and partly by the tax credit — a detail bookkeepers often miss when knocking off invoices.
Timing trips up deductors most. Liability arises on credit to the payee's account or payment, whichever is earlier, so TDS is due even on year-end provisions where no money has moved. Interest runs at different prescribed rates for deducting late and for depositing late, and failure to deduct can additionally lead to part of the expense being disallowed in the deductor's own tax computation until the default is made good.