What Is TDS (Tax Deducted at Source) and Why It Affects Your Refund

If you've seen a smaller amount credited to your account than expected, whether it's salary, FD interest, or a freelance payment, TDS is usually why. It's the mechanism India uses to collect tax gradually through the year rather than in one lump sum after the fact.

TDS is tax collected before it reaches you

Tax Deducted at Source means exactly what it says: whoever is paying you certain kinds of income is required, by law, to deduct a percentage of that payment as tax and deposit it with the government, before the remainder reaches you. You don't pay TDS separately; it's subtracted from what you'd otherwise receive.

This exists for a practical reason: it's far easier for the tax department to collect tax from a smaller number of payers (employers, banks, companies) than to chase collection from every individual taxpayer after the fact. It also means tax collection happens throughout the year, aligned with when income is actually earned, rather than arriving as a single bill.

Where TDS commonly shows up

A few sections cover most of what an individual taxpayer will actually encounter:

Section 192, salary. Your employer estimates your annual tax liability based on your declared investments and deductions, then deducts a portion each month so the full year's estimated tax is collected by March.

Section 194A, interest. Banks deduct TDS on FD and recurring deposit interest once it crosses a threshold in a financial year, currently ₹50,000 for individuals and ₹1 lakh for senior citizens from FY 2025-26. (More detail on this specific case in How to Avoid or Reduce Tax on FD Interest in India.)

Section 194J, professional or technical fees. Businesses paying freelancers, consultants, or professionals deduct TDS, typically at 10%, before making the payment.

Section 194-I, rent. Tenants paying rent above a specified threshold (mainly relevant for business tenants or high-value rentals) are required to deduct TDS before paying the landlord.

Section 194C, payments to contractors. Businesses paying contractors for work deduct TDS at rates that vary depending on whether the contractor is an individual or a company.

Each section has its own rate and threshold, and rates can change with the Union Budget, so the specific percentage for any of these is worth confirming for the current year rather than assumed from a prior year's rules.

TDS is a credit, not a final tax

This is the part that matters most at filing time: TDS deducted on your behalf isn't a separate, final tax. It's an advance credit against whatever your actual total tax liability turns out to be once you compute it across all your income sources. Three outcomes are possible:

If your actual liability matches the TDS deducted, there's nothing more to pay or claim, filing your return confirms this.

If TDS deducted is more than your actual liability, common for retirees with FD interest but low overall income, or salaried employees who changed jobs mid-year, you're owed a refund. You only get it back by filing a return, TDS isn't automatically refunded.

If TDS deducted is less than your actual liability (common when you have multiple income sources that weren't individually large enough to trigger higher TDS), you owe the balance as self-assessment tax before filing.

Where to check what's been deducted against your PAN

Every TDS entry made against your PAN, by any deductor, shows up in Form 26AS and the Annual Information Statement (AIS), both accessible on the Income Tax Department's e-filing portal. Checking these before filing matters because TDS credit you don't claim in your return simply goes unclaimed. If you notice a mismatch, TDS your bank or employer says they deducted but that doesn't appear in Form 26AS, that's worth resolving with the deductor before you file, since the tax department reconciles claims against what's actually reported there.

For more on reading these statements, What Is AIS (Annual Information Statement) and Why You Should Check It Before Filing goes into more depth than fits here.

TDS sections, rates, and thresholds change periodically. Confirm current figures for your specific situation on the Income Tax Department's portal before relying on them.