As per the Indian Income Tax Act,1961 TDS (Tax Deducted at Source) was introduced to collect tax at the source of income. When TDS is to be applied, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source.

The deducted amount has to be remitted into the account of the Central Government. Once this amount is remitted, it will reflect in the deductee’s account and Form 26AS or TDS certificate issued by the deductor.

You are familiar with Form 26AS and the TDS certificate, and these refer to the concept of TDS.

This system acts as a cross-check of the amounts collected and paid. Since the PANs of the deductor and the deductee appear on the TDS certificates, both sides get to verify the entries. You would have seen this happen when you file your ITR.

Since the Indian Income Tax Act, 1961, may change every budget day, TDS can also be affected, and so the IT Department announces the new TDS rates and changes, if any, every financial year.

The TDS Rate Chart for Financial Year (FY) 2024-2025 / Assessment Year (AY) 2025-2026, including Budget 2023 Amendments Tax Deduction at Source (TDS), can be seen here as per the Income-tax website here.

The salient points of the TDS rates are per the TDS Section list as follows:

• Section 192 governs TDS on salary
• Section 192A governs TDS on payment of the accumulated balance of the provident fund, which is taxable in the hands of an employee
• Section 193 governs TDS on interest on securities
• Section 194 governs TDS on income by way of dividend
• Section 194A to Section 194LD govern TDS on various payments other than securities
• Section 195 governs TDS on payment of any other sum to a non-resident
• Section 196B to Section 196D govern TDS on payment to a non-resident
• Sections similar to the above are detailed for payments to domestic companies and companies other than domestic companies

As can be seen, there are different kinds of payments accruing to different classes of deductees, and therefore different rates of TDS are applicable.

The IT Department also exempts many payments based on certain considerations. Typically, there is a threshold limit beyond which the TDS rate will be applicable.

There are several instances of the maximum TDS rate of 30% in respect of Section 194B, dealing with income by way of lotteries, crossword puzzles, card games, and other games of any sort, and 194BB, dealing with income by way of winnings from horse races.

As per Section 192, the employer must deduct TDS on the salary payable at the average income tax rate. This is to be computed based on rates that are announced for the financial year in which payment is made.

Calculation of TDS has to be done at the beginning of the financial year, on the total salary that will be paid to the employee.

Further, the employer should also consider any other income reported by the employee. After considering the income exemption, deductions, and relief, the employee's tax liability should be determined based on the TDS rate. Every month, 1/12 of this net tax liability, as computed above, is required to be deducted.