Glossary · Finance & Payments

TDS (Tax Deducted at Source)

TDS is a mechanism where the payer deducts tax from certain payments, such as salary or fees, and remits it to the government on the recipient's behalf.

Updated October 6, 2026

TDS (Tax Deducted at Source) is a system in which the person making a specified payment withholds a portion as tax and deposits it with the government, instead of the recipient paying that tax later. The recipient receives the net amount and a certificate recording the deduction.

Why it matters

TDS collects tax close to the time income arises and widens the tax base. In India it applies to payment types such as salary, interest, professional fees and contractor payments, each with its own rules, rates and thresholds. For businesses it creates compliance duties: deduct at the correct rate, deposit on time, file periodic statements and issue certificates. Recipients can generally claim credit for the deducted tax when filing their own return. Many countries have similar withholding tax systems.

Example

A company pays a freelancer 50,000 for a project. If the applicable rule requires a 10 percent deduction, it deposits 5,000 with the government and pays 45,000 to the freelancer, reporting the deduction against the freelancer's PAN. The freelancer sees the 5,000 credited in their tax statement.

Common mistakes

  • Missing the deduction because the payment looked small or informal.
  • Not collecting the recipient's PAN, which can lead to a higher deduction rate.
  • Depositing late, which can attract interest or penalties.

Rates and rules change and vary by country; this entry is a definition only, not tax advice.

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