Direct Tax Laws & International Taxation · Deduction, Collection and Recovery of Tax

TDS on Payments to Residents

Updated 5 October 2026 · Fact-checked

TDS on payments to residents means the payer deducts tax at a prescribed rate when paying salary, interest, contractor or professional fees, rent, commission and similar sums. To solve a question, identify the nature of payment, check payee and threshold, apply the rate, check PAN, and deduct on the full amount once the limit is crossed.

Understand TDS on Payments to Residents

Tax deducted at source (TDS) is a pay-as-you-earn system. The person making a specified payment (the deductor) cuts tax from it and deposits it with the Government. The payee (the deductee) gets credit for it against their final tax.

Under the Income-tax Act, 2025, the TDS rules are consolidated into tables. Section 392 deals with salary. Section 393 deals with other payments, with tables for residents and non-residents. The rates and thresholds you learned before are largely carried over, so you must know them as a chart: payment type, payee type, threshold, rate.

Two things drive every answer. First, the nature of the payment decides the rate. A fee for a legal opinion is professional fees, not contract work. Second, the threshold decides whether TDS applies at all. For most payments, once the limit is crossed you deduct on the whole amount, not only on the excess.

The deductor must deduct at the earlier of credit to the payee's account or actual payment. As a general rule, a higher rate applies if the payee has no PAN: the higher of the specified rate, the rate in force, or 20%. This is subject to the specific exceptions in the law, so check the provision for the payment in the question. Salary is different: you deduct at the average rate of tax on the employee's estimated income for the year.

In case-scenario questions, the examiner hides the trap in the facts: the status of the payee (individual or company), whether GST is shown separately, or whether the payer is an individual who is not required to get accounts audited. Read these details first.

Key rules to remember

Salary: TDS per month = estimated tax for the year (average rate) ÷ 12, adjusted for tax already deducted; Based on estimated total income after the deductions and regime the employee has opted for. Taxed at average rate, not slab rate.
Interest other than interest on securities: Rate 10%. Threshold: ₹50,000 a year (₹1,00,000 for senior citizens) for banks, co-operative banks and post office; ₹10,000 for other payers; For banks, the threshold applies per payee per bank. All branches that use core banking solutions are treated as one payer. Check the payer type before applying the limit.
Contractor payments: 1% if payee is individual or HUF; 2% for others. Threshold: ₹30,000 single payment or ₹1,00,000 aggregate in the year; A single payment above ₹30,000 attracts TDS on its own. If each payment is ₹30,000 or less, TDS starts when the total for the year crosses ₹1,00,000. At that point deduct on the whole total, including earlier payments on which no TDS was made. Amounts already taxed are not taxed again. Transporter with PAN and declaration: nil.
Professional fees: Rate 10%. Threshold ₹50,000 a year; Applies to legal, medical, engineering, accountancy and similar professional services. This limit has been revised in recent years, so confirm it against the table for payments to residents in the Income-tax Act, 2025 as given in the ICAI material for tax year 2026-27. Apply the threshold to each category of payment separately, per payee. Director's fees (other than salary) have no threshold.
Fees for technical services: Rate 2%. Threshold ₹50,000 a year; This is the 2% category. Do not treat it as professional fees at 10%. Apply the threshold to this category separately, per payee.
Call centre fees: Rate 2%. Threshold ₹50,000 a year; A separate 2% category for call centre operations. It is not professional fees. Apply the threshold to this category separately, per payee.
Rent: Plant, machinery, equipment 2%; land, building, furniture, fittings 10%. Threshold ₹6,00,000 a year; Applies to a payer who is not an individual/HUF, or an individual/HUF subject to audit. Deduct on the whole rent once the limit is crossed.
Rent by individual or HUF not subject to audit: 2% of the rent for the whole period, where rent exceeds ₹50,000 a month; Applies only where the payer is an individual or HUF who is not subject to audit. The 2% is applied to the rent for the whole period and deducted once, in the last month of the year or of the tenancy, whichever is earlier. Confirm the rate and limit against the table for payments to residents in the Income-tax Act, 2025.
Commission and brokerage: Rate 2%. Threshold ₹20,000 a year; Both the rate and the limit have been revised in recent years, so confirm them against the table for payments to residents in the Income-tax Act, 2025 as given in the ICAI material for tax year 2026-27. Insurance commission and commission on lottery tickets are separate provisions with their own rate and threshold. Do not apply this row to them.
Dividend: Rate 10%. Threshold ₹10,000 a year; Applies to a company paying dividend to a resident shareholder. The limit has been revised upward in recent years (it was ₹5,000 earlier), so confirm it against the current table for payments to residents.
Payee without PAN: Rate = higher of (specified rate, rate in force, 20%); The general rule when PAN is not furnished, subject to the specific exceptions in the law. Check the provision for the payment.
GST in the invoice: TDS base = amount excluding GST, if GST is shown separately; Applies to contract, fees and rent when GST is separately shown, as clarified by CBDT. If GST is included in a single figure, TDS applies on the total.

How to solve TDS on Payments to Residents questions

Use the same sequence for every TDS question, whether it asks for the amount, the rate or the consequence of default.

1Read who the payer is: company, firm, individual or HUF, and whether the payer is subject to audit. This decides which rent provision and which contractor rate apply.
2Classify each payment by nature: salary, interest, contract, professional fees, technical fees, rent, commission or dividend. Treat each separately.
3Identify the payee: individual/HUF or other, resident status, PAN available or not, any declaration or certificate.
4Note the threshold for that payment and the period it applies to (single payment or the whole year, per payee).
5Test the threshold. If crossed, apply the rate to the full amount, taking out GST if it is shown separately in the invoice.
6Apply the higher rate if PAN is not furnished. Apply nil or lower rate only if a valid certificate or declaration exists.
7Total the TDS, state the time of deduction and say what happens on default, such as disallowance or interest, if the question asks.
8Write the answer in provision, facts and conclusion form, showing each rate and threshold used.

Quickest way: Chart-and-test method

When to use it: Use it for computation questions with many payments to different payees, where time is short.

Draw a four-column table: payee, nature, amount, threshold.
Mark each row Yes or No for threshold crossed, once, for the whole year.
For Yes rows, multiply the amount excluding GST by the rate. Write 1% or 2% for contract by looking at the payee status.
Check the PAN and payer-type flags last, then total the column.

Common mistakes in TDS on Payments to Residents

Deducting TDS only on the excess over the threshold.
Students mix this up with income-tax slabs, where only the excess is taxed.
Fix: For rent, contract, fees, commission and interest, once the limit is crossed deduct on the whole amount. Write this line in the answer.
Using the wrong contractor rate.
Students forget the rate depends on who is paid.
Fix: Ask who the payee is first. Individual or HUF gets 1%; every other payee gets 2%.
Treating technical services as professional fees at 10%.
Both are fees for services and the wording looks alike.
Fix: Check the facts. Technical services and call centre are 2%; legal, medical, engineering, accountancy and similar professions are 10%.
Applying the ₹6,00,000 rent threshold to the total rent across all landlords.
Students sum all rent in the question.
Fix: Apply the threshold payee by payee, and apply it separately to each category if the facts differ.
Ignoring GST shown separately in the invoice.
Students take the total of the bill without reading the breakup.
Fix: If GST is shown separately, compute TDS on the amount before GST. If only a single figure is given, use the whole amount.
Forgetting that the employer deducts salary TDS at the average rate, not the highest slab rate.
Students take the slab rate for convenience.
Fix: Estimate total tax, divide by estimated income for the average rate, and deduct monthly after allowing for tax already deducted.

Worked examples

Example 1

Alpha Builders Pvt Ltd engaged Ravi (an individual with PAN) for civil work in tax year 2026-27. It paid him ₹40,000 in June, ₹45,000 in September and ₹25,000 in December. No GST was charged. Compute the TDS on each payment.

Show the solution

Payer is a company, so contract provision applies. Payee is an individual, so the rate is 1%.
June: ₹40,000 exceeds the single payment limit of ₹30,000, so TDS applies. TDS = 1% × ₹40,000 = ₹400.
September: ₹45,000 also exceeds ₹30,000. TDS = 1% × ₹45,000 = ₹450.
December: ₹25,000 is below ₹30,000 on its own, but the aggregate for the year becomes ₹1,10,000, which crosses ₹1,00,000. So TDS applies. TDS = 1% × ₹25,000 = ₹250.
Total TDS = ₹400 + ₹450 + ₹250 = ₹1,100.

Answer: TDS of ₹400, ₹450 and ₹250 on the three payments, a total of ₹1,100, at 1%.

Example 2

Beta Ltd paid the following in tax year 2026-27, all to residents with PAN: (a) rent of ₹60,000 a month for 12 months for an office building to Mr Shah, an individual; (b) rent of ₹2,00,000 for the year for a machine to Gamma Ltd; (c) commission of ₹35,000 to an agent; (d) fees of ₹45,000 to a lawyer. No GST was involved. Compute the total TDS.

Show the solution

(a) Beta Ltd is a company, so the general rent provision applies, not the provision for individual/HUF payers. Annual rent = ₹60,000 × 12 = ₹7,20,000. It exceeds ₹6,00,000, so TDS applies on the whole rent. Building rate is 10%. TDS = 10% × ₹7,20,000 = ₹72,000, that is ₹6,000 a month.
(b) Machine rent of ₹2,00,000 is below ₹6,00,000. No TDS.
(c) Commission of ₹35,000 exceeds ₹20,000. TDS = 2% × ₹35,000 = ₹700.
(d) Professional fees of ₹45,000 are below the ₹50,000 threshold. No TDS.
Total TDS = ₹72,000 + ₹700 = ₹72,700.

Answer: Total TDS is ₹72,700: ₹72,000 on rent of the building and ₹700 on commission. No TDS on machine rent or the lawyer's fees.

Exam tips

Memorise the chart in this order: nature, payee, threshold, rate. Revise it from the ICAI material for tax year 2026-27, because the chart is the base of every question.
In scenario MCQs, read the payee status and the invoice breakup first. Most wrong answers come from missing them.
In written answers, state the threshold test as a separate line before the computation. Marks are given for the test as well as the number.
Use the 2025 Act's terms such as tax year, and cite the section only when you are sure of it. Do not use the old Act's section numbers or terms.
Do not stop at the TDS amount if the question asks about default. Mention the consequences for the payer as the question requires.

Practice questions from Deduction, Collection and Recovery of Tax

TDS on Payments to Residents in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

TDS on Payments to Residents: frequently asked questions

Is TDS deducted on the whole amount or only on the excess over the threshold?

For most payments in this topic, such as rent, contract, fees, commission and interest, TDS applies on the whole amount once the threshold is crossed. The threshold only decides whether TDS applies. Check the exact wording of the provision for any exception.

What is the TDS rate on contractor payments?

It is 1% if the payee is an individual or HUF and 2% for any other payee. TDS applies if a single payment exceeds ₹30,000 or the total in the year exceeds ₹1,00,000. A transporter with PAN and a declaration gets nil deduction.

How is TDS on salary different from other TDS?

On salary, the employer estimates the employee's total tax for the year and deducts it in instalments at the average rate. Other payments carry fixed rates. The employee's chosen tax regime and declared deductions affect the estimate.

What if the payee does not give a PAN?

As a general rule, TDS is deducted at the higher of the specified rate, the rate in force, or 20%. This is subject to the specific exceptions in the law. A valid lower deduction certificate or declaration can change the result only where the law allows it.