Understanding the TDS Deduction and Payment Process: Provisions as per Section 194 of the Income Tax Act

Understanding the TDS Deduction and Payment Process Provisions as per Section 194 of the Income Tax Act


Tax Deducted at Source (TDS) is a critical mechanism under the Indian Income Tax Act that requires certain payments to be made after deducting a specified percentage of tax at the time of making such payments. It ensures compliance with the tax laws and helps the government in collecting taxes in advance. Section 194 of the Income Tax Act lays down the provisions for TDS on payments other than salaries. Let’s delve into the details of the TDS deduction and payment process as per Section 194, and how an E-filing Expert can assist in this process.

Section 139

Understanding the TDS Deduction and Payment Process:

As per Section 194, the provisions of TDS apply to various payments such as interest, rent, commission, brokerage, professional fees, royalty, contract payments, etc. made by certain specified entities such as individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities. The deductors, i.e., the specified entities making such payments, are required to deduct TDS at the time of credit of such payment to the account of the payee or during the time of payment, whichever is earlier.

TDS Rates and Forms:

The rate of TDS is specified in the Income Tax Act and varies depending on the nature of the payment. The deductor is required to deposit the deducted TDS amount with the government within the prescribed due dates, along with filing of TDS returns. The TDS payments made by the deductor need to be accompanied by a Challan-cum-Statement in Form 26Q or 27Q, as applicable. Form 26Q is used for TDS on payments other than salaries made to residents, while Form 27Q is used for TDS on payments made to non-residents. These forms require detailed information about the deductor, the deductee, the nature of payment, the amount of payment, the TDS rate, and other particulars as per the Income Tax Act.

Exemptions, Deductions, and Lower TDS Rates:

The Income Tax Act provides for various exemptions, deductions, and procedures for obtaining lower or nil TDS rates. Fixed Deposit holders can submit declaration in Form 15H and 15G, as applicable to them, and submit it to the bank to ensure that no TDS is deducted from their fixed deposit interest provided certain conditions are fulfilled as per the provision. . The deductor is required to consider these submissions while making TDS deductions and payments. However, the deductor is also required to validate the PAN of the deductee before accepting such forms to ensure compliance with the tax laws.

What are the TDS deduction exceptions under section 194?

Deduction expense as under Section 194 are as follows:

  1. The total amount of the dividend (whether paid individually or collectively during the financial year) does not exceed Rs. 5000 and such payment is made by account payee cheque.
  2. Section 115-O covers dividends.
  3. The dividend is given to LIC, GIC, or any of its subsidiaries, or to any other insurer, in relation to the shares that they own or in which they have a complete beneficial interest.
  4. If your income is below the taxable limit and you have submitted Form I5G/15H.

What is Section 2(22)(a)- Distribution of Assets Deemed as Dividend?

Any distribution of accumulated earnings by a corporation, whether capitalised or not, is considered a dividend if it involves the release of all or a portion of the firm’s assets to its shareholders

Distribution of Debentures, etc., Considered a Dividend - Section 2(22)(b)

Any distribution of shares by way of bonus to a company’s preferred shareholders as well as any distribution of debentures, debenture-stock, or deposit certificates in any form to the company’s shareholders, with or without interest the volume of cumulative profits, whether capitalised or not, that the company has.

The distribution of assets upon liquidation is deemed to be a dividend under Section 2(22)(C)

Dividends include all payments given to shareholders of a corporation upon its liquidation, whether capitalised or not, to the extent that such payments are attributable to the accumulated profits of the firm just before to its liquidation.

Distribution on Decrease of Share Capital Considered a Dividend, Section 2(22)(d)

Any payment made to shareholders by a firm as a result of a reduction in capital to the degree that the company has accumulated profits, whether or not those profits have been capitalised, is referred to as a dividend.

Role of an E-filing Expert:

An E-filing Expert can play a crucial role in assisting deductors in understanding and complying with the TDS provisions as per Section 194 of the Income Tax Act. These experts are well-versed with the Income Tax Act and keep themselves updated with the latest amendments and notifications. They can help deductors in obtaining a TAN, filing TDS returns, and depositing TDS payments within the prescribed due dates. They can also guide deductors in availing exemptions, deductions, and lower or nil TDS rates as per the provisions of the Income Tax Act. Additionally, E-filing Experts can assist in validating the PAN of the deductees and ensure proper documentation and record-keeping to avoid penalties and interest for non-compliance.


Understanding and complying with the TDS provisions as per Section 194 of the Income Tax Act is crucial for deductors to avoid penalties and ensure compliance with the tax laws. An E-filing Expert can provide valuable assistance in this process, ensuring that the TDS process is carried out accurately and efficiently.

Deductors must also maintain proper records and furnish the required documents to the tax authorities on time. Non-compliance with TDS provisions can result in penalties, interest, and legal repercussions, which can be avoided by staying up-to-date with the latest regulations and seeking professional help when needed.

Ultimately, complying with TDS provisions can help promote a culture of transparency and accountability in the country’s financial system, benefiting both taxpayers and the government.

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