Definition:
Tax Deducted at Source (TDS) is a mechanism under the Income-tax Act, 1961, where the person making payments such as salary, interest, rent, commission, brokerage, professional fees, contractor payments, and other prescribed payments deducts tax at the applicable rate before making the payment and deposits it with the government on behalf of the recipient.
The tax deducted is reflected in the recipient's tax records and can be claimed as a credit while filing the income tax return.
TDS Tax Rates
Typical TDS Rate | Common Payments | Why This Rate? (Underlying Logic) |
0.1%–1% | Purchase/sale of goods above prescribed thresholds, certain reporting-based transactions | The objective is to track high-value transactions, not to collect significant tax. A low rate minimizes the impact on business cash flow while creating a reporting trail. |
1%–2% | Contractor payments, some business transactions | These businesses often operate on thin profit margins. Lower TDS prevents excessive cash flow strain while ensuring advance tax collection. |
5% | Certain payments where the law prescribes a moderate withholding rate | Used where a balance is needed between collecting advance tax and avoiding excessive deductions. The income is taxable, but a higher rate could result in unnecessary overwithholding. |
10% | Professional fees, technical services, interest, royalty, commission, brokerage, dividends (where applicable) | These are generally high-compliance, taxable income streams. A 10% deduction provides meaningful advance tax collection without attempting to match the recipient's final tax liability. |
20% | Payments where the recipient has not furnished a valid PAN (subject to applicable provisions) | A higher default rate acts as a deterrent against non-compliance and encourages taxpayers to furnish PAN and maintain proper tax records. |
The Logic Behind TDS Rates
TDS rates are not based on your income tax slab. The main exception is TDS on salary, which an employer deducts at your average rate of income tax, based on your estimated annual income and the tax regime you choose. Instead, the government prescribes different rates based on the type of recipient, the nature of the payment, expected profit margins, compliance risk, and the purpose of withholding. The goal is to collect tax in advance while balancing ease of compliance and cash flow.
Why am I paying 10% TDS while someone else pays 2%?
Because TDS rates are based on the type of payment and the recipient, and not your income tax slab.
For example, a contractor may be subject to 1% or 2% TDS because contracting businesses often have lower profit margins, and a higher deduction could strain their cash flow. On the other hand, payments for professional services, consultancy, interest, royalty, or commission are commonly subject to 10% TDS as these are generally taxable income streams where a higher advance deduction is considered appropriate.
Similarly, very low rates like 0.1% are used for certain high-value business transactions where the government's primary objective is to track the transaction, while a 20% rate may apply if the recipient fails to provide a valid PAN, discouraging non-compliance.
TDS rates are designed by considering factors such as:
The nature of the payment.
The type of recipient.
Typical profit margins in that sector.
The risk of tax evasion.
The impact on the recipient's cash flow.
Your actual tax liability is calculated separately when you file your income tax return, so a higher or lower TDS rate does not necessarily mean you will pay more or less income tax overall.
Try the calculators
Because salary TDS depends on the regime you choose, use the free ReviseTax Old vs New Tax Regime Calculator to compare your tax under both regimes, and the 80C / 80D Tax-Saving Planner to see how declaring your deductions to your employer reduces the TDS deducted from your salary.
Definition:
Tax Deducted at Source (TDS) is a mechanism under the Income-tax Act, 1961, where the person making payments such as salary, interest, rent, commission, brokerage, professional fees, contractor payments, and other prescribed payments deducts tax at the applicable rate before making the payment and deposits it with the government on behalf of the recipient.
The tax deducted is reflected in the recipient's tax records and can be claimed as a credit while filing the income tax return.
TDS Tax Rates
Typical TDS Rate | Common Payments | Why This Rate? (Underlying Logic) |
0.1%–1% | Purchase/sale of goods above prescribed thresholds, certain reporting-based transactions | The objective is to track high-value transactions, not to collect significant tax. A low rate minimizes the impact on business cash flow while creating a reporting trail. |
1%–2% | Contractor payments, some business transactions | These businesses often operate on thin profit margins. Lower TDS prevents excessive cash flow strain while ensuring advance tax collection. |
5% | Certain payments where the law prescribes a moderate withholding rate | Used where a balance is needed between collecting advance tax and avoiding excessive deductions. The income is taxable, but a higher rate could result in unnecessary overwithholding. |
10% | Professional fees, technical services, interest, royalty, commission, brokerage, dividends (where applicable) | These are generally high-compliance, taxable income streams. A 10% deduction provides meaningful advance tax collection without attempting to match the recipient's final tax liability. |
20% | Payments where the recipient has not furnished a valid PAN (subject to applicable provisions) | A higher default rate acts as a deterrent against non-compliance and encourages taxpayers to furnish PAN and maintain proper tax records. |
The Logic Behind TDS Rates
TDS rates are not based on your income tax slab. The main exception is TDS on salary, which an employer deducts at your average rate of income tax, based on your estimated annual income and the tax regime you choose. Instead, the government prescribes different rates based on the type of recipient, the nature of the payment, expected profit margins, compliance risk, and the purpose of withholding. The goal is to collect tax in advance while balancing ease of compliance and cash flow.
Why am I paying 10% TDS while someone else pays 2%?
Because TDS rates are based on the type of payment and the recipient, and not your income tax slab.
For example, a contractor may be subject to 1% or 2% TDS because contracting businesses often have lower profit margins, and a higher deduction could strain their cash flow. On the other hand, payments for professional services, consultancy, interest, royalty, or commission are commonly subject to 10% TDS as these are generally taxable income streams where a higher advance deduction is considered appropriate.
Similarly, very low rates like 0.1% are used for certain high-value business transactions where the government's primary objective is to track the transaction, while a 20% rate may apply if the recipient fails to provide a valid PAN, discouraging non-compliance.
TDS rates are designed by considering factors such as:
The nature of the payment.
The type of recipient.
Typical profit margins in that sector.
The risk of tax evasion.
The impact on the recipient's cash flow.
Your actual tax liability is calculated separately when you file your income tax return, so a higher or lower TDS rate does not necessarily mean you will pay more or less income tax overall.
Try the calculators
Because salary TDS depends on the regime you choose, use the free ReviseTax Old vs New Tax Regime Calculator to compare your tax under both regimes, and the 80C / 80D Tax-Saving Planner to see how declaring your deductions to your employer reduces the TDS deducted from your salary.