What is TDS and How Does It Work? A Complete Guide for Indians

If you have ever received a payment from a client or employer that was lower than expected, TDS is likely the reason. Tax Deducted at Source is one of the most common tax mechanisms in India, yet it confuses millions of people every year. This guide explains exactly what TDS is, how it works, and what you need to do about it as a freelancer or professional.

What is TDS?

TDS stands for Tax Deducted at Source. It is a mechanism where the person making a payment deducts a percentage of tax before paying the recipient. The deducted amount is deposited directly to the government on behalf of the recipient. The purpose of TDS is to collect tax at the point of income generation rather than waiting until the end of the year. This ensures a steady flow of revenue to the government and reduces tax evasion.

How Does TDS Work? A Simple Example

Let us say you are a freelance designer. A company hires you for a project and agrees to pay Rs. 1,00,000 for your services. If TDS applies, here is what happens:

1. Company deducts 10% TDS = Rs. 10,000
2. You receive Rs. 90,000 in your bank account
3. 10,000 is deposited to the government by the company on your behalf
4. This Rs. 10,000 is reflected in your Form 26AS as tax already paid
5. At the end of the year, this TDS is adjusted against your total tax liability

If your total tax liability is Rs. 8,000 but Rs. 10,000 was already deducted as TDS, you get a refund of Rs. 2,000 when you file your ITR.

Who Deducts TDS?

TDS is deducted by the payer not the receiver. In most cases, companies, firms, and organisations deduct TDS before making payments. However, individual clients who are not businesses are generally not required to deduct TDS.

TDS is applicable when payments cross specified thresholds in a financial year:

TDS Rates Applicable to Freelancers

Section	Type of Payment	TDS Rate
Section 194J	Professional fees, consultancy, technical services	10%
Section 194C	Contracts and sub-contracts	1% (individual), 2% (company)
Section 194H	Commission or brokerage	5%
Section 194I	Rent of machinery, plant, equipment	2%
Section 192	Salary income	As per slab rate
Section 194A	Interest from banks (above Rs. 40,000)	10%

Most freelancers in India receive payments under Section 194J at 10% TDS when paid by a business entity.

When is TDS Not Deducted?

TDS is not deducted in the following cases:

• Payments made by individual clients who are not businesses
• Payments below the threshold limit for that category
• When you submit a Form 15G or 15H declaring your income is below taxable limit
• When you have obtained a certificate for nil or lower TDS deduction

What is Form 26AS?

Form 26AS is your annual tax credit statement. It shows all the TDS deducted by various parties against your PAN number throughout the year. You can view it on the Income Tax portal at incometax.gov.in.

Always match your Form 26AS with your actual income before filing your ITR. If a client deducted TDS but has not deposited it to the government, it will not appear in your 26AS — this is a common problem for freelancers.

How to Claim a TDS Refund

If more TDS was deducted than your actual tax liability, you are entitled to a refund. Here is how to claim it:

1. File your ITR on time before July 31
2. Declare all income correctly
3. System automatically calculates excess TDS paid
4. Refund is processed and credited to your bank account
5. Most refunds arrive within 3 to 6 months of filing

Tip: Make sure your bank account is linked and validated on the Income Tax portal for faster refund processing.

What if TDS Was Deducted but Not Deposited by the Client?

This is a frustrating but common situation. If a company deducts TDS from your payment but does not deposit it to the government, the TDS will not appear in your Form 26AS. In this case:

• Contact the client immediately and request them to deposit the TDS
• If unresolved, you can file a complaint on the Income Tax portal
• You cannot claim credit for TDS not reflected in Form 26AS
• You may have to pay the tax yourself and then pursue the client legally

TDS Certificate — Form 16 and Form 16A

Form	For Whom
Form 16	Issued by employer to salaried employees showing salary and TDS
Form 16A	Issued by clients to freelancers and professionals showing TDS on professional fees

Always collect Form 16A from clients who deducted TDS from your payments. You will need this when filing your ITR.

Frequently Asked Questions

1. Is TDS the same as income tax?

No. TDS is an advance payment of income tax deducted at source. Income tax is the total tax due on your income for the year. TDS is adjusted against your final income tax liability.

2. Can I avoid TDS deduction?

You cannot avoid TDS if it is legally applicable. However, you can apply for a lower deduction certificate if your income is below the taxable limit or if advance taxes have been paid.

3. What is the threshold for TDS under Section 194J?

TDS under Section 194J applies when the total payment to a professional or consultant exceeds Rs. 30,000 in a financial year.

Final Thoughts

TDS is not a punishment — it is simply an advance payment of your tax. Understanding it helps you plan your cash flow better, claim refunds correctly, and avoid disputes with clients. As a freelancer, always track your TDS via Form 26AS and reconcile it with your income before filing your ITR each year.

Disclaimer: TDS rates and thresholds may change with each Union Budget. Always verify current rates on the Income Tax Department’s official website.