How TDS Works in India: A Plain-English Guide to Tax Deducted at Source
TDS is the government collecting your tax before you even see the money — here is exactly how it works.
Tax Deducted at Source (TDS) is India's mechanism for collecting income tax at the point of payment rather than waiting for taxpayers to file returns. Whether your employer deducts tax from your salary, a bank deducts TDS on your FD interest, or a tenant deducts TDS on rent, the principle is the same: the payer deposits a portion of your earnings directly to the Income Tax Department on your behalf.
Why TDS Exists
The government introduced TDS to ensure a steady flow of tax revenue throughout the year and to prevent tax evasion. For taxpayers, TDS is an advance payment toward your final annual tax liability. If too much is deducted, you get a refund. If too little is deducted (because you have other income), you pay the balance when filing your ITR.
Key TDS Rates for Individuals in FY 2025-26
| Nature of Payment | Section | Threshold | TDS Rate |
|---|---|---|---|
| Salary | 192 | Taxable income | As per slab |
| FD / Bank interest | 194A | ₹40,000 (₹50,000 for senior citizens) | 10% |
| Rent (property) | 194I | ₹2,40,000 p.a. | 10% (land/building) |
| Professional fees | 194J | ₹30,000 | 10% |
| Commission / brokerage | 194H | ₹15,000 | 5% |
| Dividends | 194 | ₹5,000 | 10% |
| Lottery / game show | 194B | ₹10,000 | 30% |
If you do not furnish your PAN to the deductor, TDS is charged at 20% or the applicable rate, whichever is higher (Section 206AA).
How TDS on Salary Works
Your employer estimates your annual taxable income at the start of the year, accounts for declared deductions (HRA, 80C investments, etc.), and divides the resulting tax liability by 12 to deduct an equal amount each month. If you change jobs or make a large investment mid-year, you must submit a revised declaration so TDS is recalculated. Refer to Form 16 — your employer issues this by 15 June each year.
TDS on Fixed Deposits
Banks deduct 10% TDS when your annual FD interest exceeds ₹40,000 (₹50,000 for senior citizens). This is not your final tax — if you are in the 30% bracket, you still owe additional tax when filing. Conversely, if your total income is below the taxable limit, submit Form 15G (or 15H for senior citizens) to the bank to receive interest without TDS deduction.
Example:
FD interest earned: ₹80,000
TDS deducted by bank @ 10%: ₹8,000
Amount received: ₹72,000
If your slab rate is 20%:
Tax actually due: ₹16,000
TDS already paid: ₹8,000
Balance payable at ITR filing: ₹8,000
How to Check Your TDS Credits: Form 26AS and AIS
Every rupee deducted as TDS should appear in your Form 26AS — the consolidated tax statement on the Income Tax portal (incometax.gov.in). The Annual Information Statement (AIS) provides a broader view including interest income, dividend receipts, and property transactions. Always reconcile your Form 26AS before filing your ITR. Mismatches between what the deductor has deposited and what you claim can trigger a notice from the IT department.
How to Claim a TDS Refund
If total TDS deducted exceeds your actual tax liability (common for taxpayers with large 80C deductions or those below the threshold), you will receive a refund after filing your ITR. The IT department typically processes refunds within 3–6 weeks of e-verification. Refunds are credited directly to your pre-validated bank account. Track status on the IT portal under "Refund/Demand Status."
Lower TDS or NIL TDS Certificate
If you expect your tax liability to be lower than what would be deducted at standard rates — for instance, a startup founder with significant business expenses — you can apply to your jurisdictional Assessing Officer for a Certificate under Section 197 authorising the deductor to deduct TDS at a lower or nil rate.
Use the Income Tax Calculator to estimate your annual liability and compare it to TDS already deducted, so you know whether to expect a refund or a demand.
These figures are estimates for educational purposes. Consult a SEBI-registered advisor for personalised advice.
Frequently asked questions
What is TDS and who deducts it?+
TDS (Tax Deducted at Source) is a tax collected by the payer — your employer, bank, tenant, or client — at the time of payment. They deposit it to the government on your behalf under your PAN.
What is the TDS rate on FD interest in India?+
Banks deduct TDS at 10% on FD interest exceeding ₹40,000 per year (₹50,000 for senior citizens). If you do not provide your PAN, the rate rises to 20%.
How do I stop TDS from being deducted on my FD?+
If your total income is below the taxable limit, submit Form 15G (individuals below 60) or Form 15H (senior citizens) to your bank at the start of each financial year to prevent TDS deduction.
How long does a TDS refund take?+
The Income Tax Department typically processes TDS refunds within 3–6 weeks of e-verification of your ITR, provided there are no mismatches in Form 26AS.
What happens if TDS is not deposited by the deductor?+
If the deductor fails to deposit TDS, you can still claim credit for it if it appears in your AIS/Form 26AS. However, the deductor faces penalties and interest for non-deposit under Sections 201 and 220.
Try the calculators
Keep reading
- What Is Form 16? A Complete Guide for Salaried Employees in India
Form 16 is the single document that tells the government everything about your salary and TDS — here is how to read and use it.
- How Income Tax Slabs Work in India: A Step-by-Step Guide for FY 2025-26
India does not tax your entire income at one rate — understanding how slabs work could change how you read your pay slip.
- Old vs New Tax Regime India: Which Should You Choose?
Choosing the wrong tax regime could cost you thousands — here is how to pick the right one for your salary and investments.
Elena writes about taxes and the money side of running a small business. She’s on a mission to make VAT, margins, and break-even points feel a lot less scary.