Tax Deducted at Source, commonly known as TDS, is a system through which tax is collected when certain payments are made. Instead of waiting until the recipient files an income-tax return, the person making the payment deducts tax at the applicable rate and deposits it with the government.

TDS applies to several common transactions, including salary, bank interest, professional fees, contractor payments, commission, rent, dividends and the purchase of immovable property. Understanding the basic rules can help individuals and businesses avoid incorrect deductions, interest charges and compliance problems.

This article provides an educational overview of commonly encountered TDS provisions for Financial Year 2026–27. Rates can vary according to the recipient’s residential status, availability of PAN, nature of payment and other conditions.

How does TDS work?

The TDS process generally involves three parties:

1. The diductor, who makes the payment and deducts tax.
2. The deductee, who receives the amount after TDS.
3. The government, with which the deducted amount is deposited.

For example, suppose a business pays ₹60,000 as professional fees and the applicable TDS rate is 10%. The business may deduct ₹6,000 and pay the remaining ₹54,000 to the professional. The ₹6,000 is then deposited with the government against the recipient’s PAN.

TDS is not necessarily an additional tax. It is normally treated as an advance tax payment on behalf of the recipient. The recipient can claim credit for it while filing an income-tax return, subject to the amount appearing correctly in Form 26AS or the Annual Information Statement.

TDS on salary

Employers deduct TDS from salary according to the estimated taxable income of each employee and the applicable income-tax slab rates. Unlike some other payments, salary does not have one flat TDS percentage.

The employer generally considers salary, eligible exemptions, the chosen tax regime, permitted deductions, previous employment income and declarations submitted by the employee. The estimated annual liability is then distributed across the remaining salary payments.

Employees should check their pay slips and Form 16 and inform the employer if any important income or deduction details have been missed.

TDS on interest income

Banks and other eligible financial institutions may deduct TDS when interest crosses the applicable annual threshold. The threshold can differ for senior citizens and other depositors.

The chart supplied with the original reference indicates thresholds of ₹1,00,000 for senior citizens and ₹50,000 for other eligible depositors. However, the treatment depends on the type of institution and interest involved.

Eligible taxpayers whose estimated total tax liability is nil may be able to submit Form 15G or Form 15H, subject to the prescribed conditions. These forms should not be submitted merely to avoid deduction when the eligibility requirements are not met.

Contractor and professional payments

Payments to resident contractors are commonly subject to TDS at 1% when made to an individual or Hindu Undivided Family and 2% for certain other recipients. The commonly referenced threshold is ₹30,000 for a single payment or ₹1,00,000 in aggregate during the financial year.

Professional fees are commonly subject to TDS at 10%, while certain technical-service and specified royalty payments may attract a lower rate depending on their classification. The threshold commonly shown for professional or technical payments is ₹50,000.

Correct classification is important. A payment described casually as “consultancy” could legally fall under professional services, technical services, a works contract or another category. Businesses should evaluate the actual agreement and nature of work instead of relying only on the invoice description.

Commission, brokerage and insurance commission

Commission and brokerage payments to residents can attract TDS after the applicable threshold is crossed. The commonly referenced rate for commission or brokerage is 2%, with a threshold of ₹20,000.

Insurance commission may have different rates depending on the recipient and applicable conditions. Businesses should therefore avoid using one rate for every commission-related payment.

TDS on rent

The rate applicable to rent depends on the asset and the person making the payment. Rent for plant and machinery is generally treated differently from rent for land, a building or furniture.

Certain individuals and HUFs who are not otherwise required to deduct tax under the regular rent provision may still have to deduct TDS when residential or commercial rent exceeds ₹50,000 per month. Under the relevant provision, the applicable rate is generally 2%.

The deduction mechanism and filing requirements can differ from regular business TDS, so tenants should verify the procedure before making the final payment for the year or tenancy period.

Dividend income

Dividend payments to resident shareholders may be subject to TDS at 10% when the prescribed threshold is crossed. A commonly applicable threshold is ₹10,000 during the financial year.

Although TDS may be deducted at 10%, the shareholder’s final tax liability is calculated according to the tax rules and slab rates applicable to that person. The TDS amount can generally be claimed as tax credit.

Purchase of immovable property

A buyer purchasing immovable property from a resident seller may have to deduct TDS at 1% when the consideration or stamp-duty value meets the applicable ₹50 lakh condition. The calculation can involve the higher of the sale consideration and stamp-duty value, subject to the prevailing provision.

This rule generally does not apply to qualifying agricultural land. Transactions involving a non-resident seller are governed by different provisions and may require professional guidance.

Why PAN and tax records matter

If the recipient does not provide a valid PAN, tax may be deducted at a higher rate. Both parties should therefore confirm that the PAN, name and transaction details are accurate.

Recipients should regularly compare their TDS certificates with Form 26AS and AIS. A missing credit may occur because of an incorrect PAN, delayed filing or an error in the diductor’s return. Early reconciliation makes correction easier.

Key takeaway

TDS rates should never be applied using the percentage alone. The payment category, threshold, recipient type, residential status, PAN availability and special conditions must all be considered. The Income-tax Act, 2025 is scheduled to take effect from tax year 2026–27, so businesses should also pay attention to updated section references and forms.

Disclaimer: This article is for general education only and does not constitute tax, legal or financial advice. Tax rules may change, and transaction-specific conditions may alter the applicable rate or threshold. Consult a qualified tax professional when necessary.