What is TDS (Tax Deducted at Source)?
TDS is a method of collecting income tax in India where the payer deducts tax at the time of making payment and deposits it directly with the government. It's essentially advance tax collection that ensures the government receives tax revenue throughout the year rather than waiting for annual returns.
Real Example: Rajesh has ₹10 Lakhs in a bank Fixed Deposit earning 7% interest (₹70,000/year). Since this exceeds the ₹50,000 threshold, the bank will deduct 10% TDS = ₹7,000 before crediting interest. Rajesh receives ₹63,000 and can claim the ₹7,000 as tax paid while filing his ITR.
TDS applies to various payment types including:
- Salary - Based on income tax slab rates
- Interest - Bank FDs, securities, company deposits
- Rent - Land, building, plant & machinery
- Professional fees - Consultants, doctors, lawyers
- Commission - Brokerage, sales commission
TDS Rates for FY 2025-26 (AY 2026-27)
| Section | Nature of Payment | Threshold | TDS Rate |
|---|---|---|---|
| 194A | Bank/FD Interest | ₹50,000 (₹1L seniors) | 10% |
| 194 | Dividend | ₹10,000 | 10% |
| 194-I | Rent (Land/Building) | ₹6,00,000/year | 10% |
| 194-I | Rent (Plant/Machinery) | ₹6,00,000/year | 2% |
| 194-IB | Rent by Individual | ₹50,000/month | 2% |
| 194J | Professional Fees | ₹30,000/year | 10% |
| 194C | Contractor (Individual) | ₹30K single/₹1L annual | 1% |
| 194C | Contractor (Company/Firm) | ₹30K single/₹1L annual | 2% |
| 194H | Commission/Brokerage | ₹15,000/year | 5% |
| 194IA | Property Sale | ₹50,00,000 | 1% |
Key Changes in TDS Rules for FY 2025-26
Budget 2025 introduced several taxpayer-friendly changes effective from April 1, 2025:
- Rent threshold increased: From ₹2.4 Lakhs to ₹6 Lakhs per year (Section 194-I). This means smaller landlords are now exempt from TDS compliance.
- Senior citizen interest limit doubled: From ₹50,000 to ₹1,00,000 (Section 194A). Seniors earning up to ₹1 Lakh FD interest won't face any TDS.
- Rent TDS rate reduced: Under Section 194-IB, TDS on rent paid by individuals reduced from 5% to 2% (effective Oct 2024).
- Dividend threshold raised: From ₹5,000 to ₹10,000 (Section 194). Small dividend income now TDS-free.
- Section 206AB removed: The compliance burden of higher TDS for non-filers has been eliminated.
How to Calculate TDS
TDS calculation follows a simple formula once you identify the applicable section:
TDS = Payment Amount × TDS Rate (%)
However, TDS is deducted only when payment exceeds the threshold limit for that section. For payments below threshold, no TDS is applicable.
Example Calculation:
- Payment Type: Professional Fees (Section 194J)
- Amount Paid: ₹1,50,000
- Threshold: ₹30,000 (crossed)
- TDS Rate: 10%
- TDS = ₹1,50,000 × 10% = ₹15,000
- Net Payment: ₹1,35,000
How to Avoid TDS Legally
If your total income is below the taxable limit, you can submit declarations to avoid TDS:
Form 15G (For Individuals Below 60)
Submit Form 15G to banks/institutions if:
- Your total estimated income is below ₹3,00,000 (New Regime) or ₹2,50,000 (Old Regime)
- You are an Indian resident
- Your estimated tax liability is NIL for the financial year
Form 15H (For Senior Citizens 60+)
Senior citizens can submit Form 15H if their estimated tax liability is NIL. The income threshold is higher due to senior citizen exemption limits. Must be submitted at the beginning of each financial year to each institution.
Pro Tip: Submit Form 15G/15H online through your bank's net banking portal. Keep copies of submitted forms for your records. If you forget to submit, you can still claim TDS refund via ITR filing.
TDS Without PAN - Higher Rate
If the payee doesn't furnish PAN to the deductor, TDS is deducted at 20% (instead of the normal rate). This rule ensures compliance and prevents tax evasion. Always provide your PAN to avoid higher deduction.
Frequently Asked Questions (FAQs)
What is the TDS rate on bank FD interest for FY 2025-26?
TDS on bank FD interest (Section 194A) is 10% if interest exceeds ₹50,000 in a financial year. For senior citizens (60+), the threshold has been increased to ₹1,00,000 from FY 2025-26. If PAN is not provided, TDS is deducted at 20%.
How can I avoid TDS on FD interest?
Submit Form 15G (if below 60) or Form 15H (if 60+) to your bank if your total income is below the taxable limit. You must submit this at the start of each financial year. This declaration states that your total income is below the basic exemption limit and you're not liable to pay any tax.
What is the TDS rate on rent for FY 2025-26?
TDS on rent is 10% for land/building (Section 194-I) if annual rent exceeds ₹6 lakh (increased from ₹2.4 lakh). For plant and machinery rent, the rate is 2%. Under Section 194-IB for individuals paying rent above ₹50,000/month, TDS is 2% (reduced from 5% w.e.f. Oct 2024).
What happens if TDS is deducted but I don't have to pay tax?
You can claim a refund by filing your Income Tax Return (ITR). The TDS deducted appears in Form 26AS and AIS. When you file ITR, the excess TDS is refunded to your bank account. Typically refunds are processed within 30-45 days of ITR verification.
Is TDS deducted on salary every month?
Yes, employers deduct TDS on salary (Section 192) every month based on your estimated annual income. The employer calculates tax liability for the year, considers declared investments under 80C/80D, and divides the annual TDS by 12 months. You must submit investment proofs by January to get correct deduction.