Module 1: Introduction to TDS (Tax Deducted at Source)
Understanding the Basics of TDS Under the Income Tax Act
Introduction
Tax Deducted at Source (TDS) is one of the most important compliance mechanisms under the Indian Income Tax system. Almost every business, employer, or professional comes across TDS—whether while making payments, receiving income, or filing returns.
In this first module of our “TDS for Beginners to Advanced” course, we will build a strong foundation by explaining what TDS is, why it exists, who is responsible for deduction, and when it becomes applicable.
Quick Summary (Module Snapshot)
- TDS is a system of advance tax collection
- Responsibility lies with the payer (deductor)
- Applicable on specific payments like salary, rent, professional fees, etc.
- Non-compliance leads to interest, penalties, and notices
- Understanding basics avoids future tax disputes
Table of Contents
- What is TDS?
- Why Was TDS Introduced?
- Who is Deductor and Deductee?
- When is TDS Applicable?
- Difference Between TDS, TCS & Advance Tax
- Consequences of Non-Deduction or Late Deduction
- Who Needs to Understand TDS?
- Conclusion
What is TDS?
TDS (Tax Deducted at Source) means tax deducted by the payer at the time of making certain payments such as salary, rent, professional fees, commission, interest, etc.
Instead of waiting for the recipient to pay tax at year-end, the government collects tax at the source of income itself.
Simple Example:
If a business pays ₹50,000 as professional fees and applicable TDS rate is 10%:
- ₹45,000 is paid to the professional
- ₹5,000 is deducted as TDS and deposited with the Income Tax Department
Why Was TDS Introduced?
TDS was introduced to:
- Ensure regular flow of revenue to the government
- Reduce tax evasion
- Bring unreported income into the tax system
- Share tax responsibility between payer and recipient
From the government’s perspective, TDS is a risk-free tax collection mechanism.
Who is Deductor and Deductee?
Deductor
The person or entity who makes the payment and deducts tax.
Examples:
- Employer paying salary
- Business paying contractor or professional
- Company paying rent or commission
Deductee
The person who receives payment after deduction of tax.
Examples:
- Employee
- Consultant
- Contractor
- Landlord
📌 Important: Responsibility of correct deduction, payment, and return filing lies entirely with the deductor.
When is TDS Applicable?
TDS is applicable when all the following conditions are satisfied:
- Payment is covered under a specific TDS section (like 194C, 194J, 192, etc.)
- Payment exceeds the threshold limit prescribed under that section
- The person making payment is specified as a deductor under law
Common Payments Covered Under TDS:
- Salary
- Professional & technical fees
- Contractor payments
- Rent (building, machinery)
- Commission & brokerage
- Interest payments
- Purchase of goods (Section 194Q)
Difference Between TDS, TCS & Advance Tax
| Basis | TDS | TCS | Advance Tax |
|---|---|---|---|
| Collected by | Payer | Seller | Taxpayer |
| Time | At payment/credit | At sale | During year |
| Applicable to | Specific payments | Sale of specified goods | Total tax liability |
| Responsibility | Deductor | Collector | Assessee |
Understanding this difference is crucial to avoid wrong compliance.
Consequences of Non-Deduction or Late Deduction
Failure to comply with TDS provisions can be costly.
Financial Consequences:
- Interest @ 1% or 1.5% per month
- Late filing fee under Section 234E
- Penalty under Section 271H
Legal & Practical Issues:
- Disallowance of expense under Income Tax
- Notices from Income Tax Department
- Mismatch in 26AS / AIS
- Loss of credibility with vendors or employees
👉 In many cases, penalty is higher than the original TDS amount.
Who Needs to Understand TDS?
This course is especially important for:
- Small & Medium Business Owners
- Employers & HR professionals
- Accountants & Tax Consultants
- Startups & Professionals
- Freelancers handling vendor payments
Even individuals making rent payments or contractor payments may fall under TDS provisions.
Conclusion
TDS is not just a tax concept—it is a compliance responsibility. A small mistake in understanding or implementation can result in heavy interest, penalties, and unnecessary litigation.
This module builds the base for the entire TDS course. In the upcoming modules, we will go section-by-section, return-by-return, and notice-by-notice, ensuring complete practical clarity.
Call to Action
If you want expert help in:
Setting up your TDS compliance system
Reviewing existing TDS practices
Filing TDS returns or handling notices
📞 Contact Verotus Finlegal Solutions LLP
for professional TDS advisory and compliance support.
🌐 Visit: www.verotusllp.com
