A consultant received ₹1,00,000 from a client, but only ₹90,000 was deposited into the bank account. The client deducted ₹10,000 as TDS and deposited it with the government on the consultant's behalf. Both parties were left confused. Neither filed the TDS return on time. Now, aggressive notices are rolling in.
This situation plays out thousands of times across India every month. TDS confusion trips up business owners, freelancers, and even experienced accountants. It affects almost every business transaction in India, whether you're paying a contractor, getting salaried, receiving rent, or earning interest on fixed deposits.
The good news? It's completely avoidable once you understand the system. This guide walks you through everything you need to know about TDS under the New Income Tax Act 2025.
What Is TDS (Tax Deducted at Source)?
TDS is a system where the person who pays you deducts a portion of your payment and sends it directly to the government as an advance tax on your behalf. Instead of waiting for you to file your taxes at year-end, the government collects taxes before you even receive the full amount.
Important: Under the new Income Tax Act 2025, which came into effect from April 1, 2025, TDS rules have been reorganized and simplified compared to the old Income Tax Act 1961. While the fundamental concept remains the same, the structure, section numbers, and compliance requirements have changed. This guide covers the 2025 Act exclusively, but we'll highlight where major differences from the 1961 Act exist.
Here's how it works practically:
- You perform a service or provide goods and invoice ₹1,00,000
- Your client checks if TDS is applicable to that payment
- The client deducts ₹10,000 (let's say) as TDS at the applicable rate
- You receive only ₹90,000 in your bank account
- Your client deposits ₹10,000 with the government in your name (using your PAN)
- The ₹10,000 appears as a TDS credit in your Form 168 ( 26AS) (government record of all your credits)
- When you file your Income Tax Return, this ₹10,000 is adjusted against your tax liability
The party that deducts TDS is called the Deductor. The party whose tax is deducted is called the Deductee. Every deductor must have a Tax Deduction Account Number (TAN) before deducting any TDS. Operating without a TAN invites strict penalties under the 2025 Act.
Who Needs to Deduct and Collect TDS? Who Faces It?
TDS is not just for large corporations. Nearly every category of taxpayer in India needs to follow TDS rules at some point:
Salaried Employees
Your employer deducts TDS from your monthly salary based on your expected annual income and applicable tax slab. The Form 16 you receive at year-end is your TDS certificate for salary income. If your employer fails to deduct enough tax, the responsibility falls back on you to pay the balance at filing time.
Business Owners Paying Vendors and Contractors
This is where most TDS notices originate. Under the Income Tax Act 2025, business owners making payments to contractors must deduct TDS when their business expenses exceed ₹30,000 in a single payment or ₹1,00,000 in a financial year (the threshold for contractor-related work). The applicable TDS rate is 1% for individuals and HUFs, and 2% for other entities.
Example: You hire a plumber for repair work and issue an invoice of ₹50,000. Since it's above ₹30,000, you must deduct 1% TDS (₹500), pay the plumber ₹49,500, and deposit ₹500 with the government.
For rental payments, if the monthly rent exceeds ₹50,000, TDS must be deducted at the rate specified in the 2025 Act (commonly 10% under the rental provisions).
Critical: Failure to deduct or deposit TDS on time is treated as a serious liability by the Income Tax Department. Beyond interest charges, your entire expense claim can be disallowed under Section 40(a) of the 2025 Act, which means the expense doesn't reduce your taxable income. This often creates a 30% instant hit on your profits (the tax rate multiplied by the disallowed expense).
Fixed Deposit Holders
Banks deduct TDS on fixed deposit interest earned by individuals at the rate applicable under the 2025 Act. If your annual interest exceeds ₹40,000 (or ₹50,000 for senior citizens), TDS becomes applicable. If you don't provide a valid PAN, banks deduct TDS at a higher rate (up to 20%).
Freelancers and Professionals
When clients pay you for professional services, consulting, technical work, or any professional fees above ₹30,000 in a financial year, TDS applies at 10% (or 2% for technical services under the 2025 Act).
How TDS Actually Works: The Complete Process
Step 1: Deductor Identifies if TDS Applies
Before making any payment, the payer (deductor) must identify whether that payment type requires TDS under the Income Tax Act 2025. Different payment types have different sections and rules.
Step 2: Check the Threshold Limit
TDS applies only if the payment exceeds the threshold prescribed for that section. For contractor payments, there's a per-transaction threshold of ₹30,000 and an annual aggregate threshold of ₹1,00,000. TDS becomes mandatory only when payments cross these limits.
Important: Under the 2025 Act, the definition and calculation of these thresholds has been clarified to reduce disputes. It's calculated on a financial year basis (April to March).
Step 3: Apply the Correct TDS rate while making deductions
The deductor must use the correct TDS rate applicable under the 2025 Act. If the recipient (deductee) doesn't provide a valid PAN or their PAN is inactive, the rate increases to 20% as per the 2025 Act provisions (compared to varying rates under the 1961 Act). If a lower deduction certificate is available under the 2025 Act provisions, the deductor can use that instead of the standard rate.
Step 4: Deposit TDS With the Government
The deducted amount must be deposited through the Income Tax e-filing portal (www.incometax.gov.in) using the prescribed challan. The 2025 Act maintains the same deposit deadlines as before: TDS must be deposited by the 7th of the following month for most deductors. For March deductions specifically, the deadline has been extended to April 30th. Depositing late attracts interest of 1.5% per month from the deduction date.
Step 5: File TDS Returns Quarterly
Under the Income Tax Act 2025, TDS returns must be filed quarterly using designated forms. Deductors filing for the first time should verify which form applies (the 2025 Act has streamlined the forms compared to 1961). Returns must document all TDS deductions made during that quarter. Missing the quarterly filing deadline results in a ₹200 daily penalty until the full TDS amount is reached.
Step 6: Issue TDS Certificates to Recipients
After filing the quarterly TDS return, the deductor must issue a TDS certificate (Form 16 for salary, Form 131 ( 16A) for non-salary income) to the recipient within a prescribed timeframe under the 2025 Act. Failure to issue certificates attracts a ₹100 daily penalty.
Step 7: Deductee Claims TDS Credit in Income Tax Return
When you file your Income Tax Return, you declare all your income and attach the TDS certificates. The government automatically matches your TDS credits against Form 168 ( 26AS) (the government's record). If the TDS exceeds your actual tax liability, the excess is refunded to your bank account after your return is processed. This typically takes 20-45 days after e-verification.
Key TDS Rates and Thresholds Under Income Tax Act 2025
Below is a summary of the most commonly applicable TDS provisions under the 2025 Act-
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TDS Return Filing Due Dates
Missing these due dates is expensive. Know them cold:
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TDS Compliance Mistakes: What the Department Actually Checks
The Income Tax Department now uses an automated matching system that compares TDS deposits against your Form 168 ( 26AS). Any discrepancy triggers an automatic notice. Here are the six most expensive mistakes:
1. Late TDS Deposit
If you deduct TDS but don't deposit it by the deadline (7th of next month or 30th April for March), interest of 1.5% per month is charged automatically from the deduction date until the deposit date under the 2025 Act. This interest compounds and can exceed the original TDS amount if payment is delayed significantly.
2. Failure to Deduct TDS When Required
Not deducting TDS when legally required creates dual problems: (a) Interest of 1% per month applies until you make the deduction. (b) More critically, under the 2025 Act, your entire expense gets disallowed, which means that a ₹1,00,000 contractor payment doesn't reduce your business profits. If you're in a 30% tax bracket, the actual cost to you becomes ₹30,000 in additional taxes, not just the ₹2,000 TDS.
3. Late TDS Return Filing
Filing your TDS return after the quarterly deadline results in an automatic ₹200 daily penalty under the 2025 Act. This continues until the total TDS amount is reached. For a business with ₹5,00,000 in annual TDS, the penalty alone becomes ₹4,00,000 if filed just one month late. This is one of the fastest ways to accumulate a massive tax penalty.
6. Mismatch Between Form 168 ( 26AS) and Income Tax Return
You file your ITR claiming TDS credit of ₹50,000, but Form 168 ( 26AS) shows only ₹40,000. The system detects this discrepancy and generates an automatic notice under the 2025 Act compliance rules. The solution: contact the deductor, ask them to file a correction statement, and resubmit your ITR once corrected. Ignoring this notice is dangerous; it can lead to additional tax demands.
7. Not Issuing TDS Certificates
Deductors must issue Form 16 or Form 131 ( 16A) certificates to recipients within the prescribed time under the 2025 Act. Failure to do so results in a ₹100 daily penalty. For a deductor managing 10 vendors, this can easily cross ₹50,000 in penalties over a few months.
How to Check and Claim Your TDS Refund
Once TDS is deducted, you want it back if it exceeds your actual tax liability. Here's exactly what to do:
Step 1: Check Form 168 ( 26AS) and AIS
Log in to www.incometax.gov.in, navigate to 'My Account,' then check 'Form 168 ( 26AS)' and 'Annual Information Statement (AIS).' These show all TDS deposited against your PAN by various deductors. Cross-check every entry against your Form 16/131 ( 16A) certificates. If an amount is missing or incorrect, take note, you'll need to contact the deductor to correct it.
Step 2: File Your Income Tax Return
Declare all your income in the correct ITR form for your category. The prefilled ITR on the portal automatically pulls TDS from Form 168 ( 26AS), but verify the figures match your certificates before filing. Common error: choosing the wrong ITR form. Salaried individuals use ITR-1 or ITR-2. Freelancers use ITR-3 or ITR-4. Professionals and businesses choose based on their income type.
Step 3: E-Verify Your Return
After filing, verify using Aadhaar OTP, net banking, or by sending a signed ITR-V form to the CPC in Bengaluru within 30 days. Returns that are not e-verified are not processed, and you won't get your refund. This is a frequent reason for refund delays; the return is filed but not verified.
Step 4: Track Your Refund Status
After e-verification, refunds typically arrive within 20-45 days. Track the status under 'My Account' > 'Refund Status' on the portal. Ensure your bank details in the portal are updated and correct. Many refunds get delayed because of incorrect account numbers or bank details.
Conclusion
TDS is no longer complicated once you understand the system. The new Income Tax Act 2025 has streamlined many provisions compared to the old 1961 Act, though some sections still require careful attention. The government's automated systems now detect TDS mismatches instantly. Late deposits, incorrect deductions, and non-filing of returns get flagged automatically.
The solution? Be proactive. Get a TAN if you're a business. Maintain a simple TDS tracker. Meet every deadline, the ₹200 daily penalty or 1.5% monthly interest is not worth the risk. In case of any confusion, consider consulting a tax professional/
For startup founders and small business owners just getting the hang of TDS, the team at JustStart (www.juststart.co.in) provides straightforward TDS compliance guidance with no jargon and no surprises. Whether it's TDS registration, quarterly return filing, correction statements, or resolving compliance issues, professional support takes the confusion out of the process.
Frequently Asked Questions (FAQs)
Q1: My client deducted 10% TDS from my professional fees. Is this correct?
A: Yes, this is correct under the 2025 Act. Any person making payments for professional services (consulting, accounting, etc.) must deduct 10% TDS if the total fees in a financial year exceed ₹30,000. The deducted amount is deposited with the government in your name and appears in your Form 168 ( 26AS). You claim it as a tax credit when filing your ITR.
Q2: I haven't received my TDS certificate. What do I do?
A: Contact your deductor (employer or client) and ask for Form 16 or Form 131 (131 ( 16A). Under the 2025 Act, the deductor must issue this within a prescribed timeframe after filing their quarterly TDS return. If delayed, follow up—don't wait until the ITR filing deadline. You can also check Form 168 ( 26AS) on the portal to see if the TDS has been credited.
Q3: Can I use Form 15G or 15H to avoid TDS?
A: Yes. If your total income is below the basic exemption limit under the 2025 Act, submit Form 15G (individuals below 60 years) or Form 15H (seniors above 60 years) to your bank at the start of the financial year. The bank will then not deduct TDS on your FD interest. Submit this before TDS is deducted; after-the-fact submission doesn't help.
Q4: What's the penalty for depositing TDS late under the 2025 Act?
A: Interest of 1.5% per month is charged from the deduction date to the deposit date. Additionally, your business expense may be disallowed, meaning the ₹1,00,000 you paid doesn't reduce your taxable income. This creates a 30% tax cost (assuming 30% slab), so the actual damage becomes ₹30,000 in additional tax liability, not just the TDS amount.
Q5: TDS was deposited under my wrong PAN. How do I fix it?
A: This is a serious issue. The TDS credit won't appear in your Form 168 ( 26AS) until corrected. Contact the deductor immediately and ask them to file a TDS correction statement with your correct PAN. This process goes through the TRACES system and can take 2-4 weeks. Do not delay; if you file your ITR before the correction is made, you lose the credit.
