Direct and Indirect Taxation · Tax Deducted at Source and Tax Collected at Source

TDS on Salary and Payments to Residents

Updated 10 October 2026 · Fact-checked

TDS means the payer deducts income-tax before paying certain income to a resident. Under section 393(1) of the Income-tax Act, 2025, you find the nature of payment, the payer, the threshold and the rate in a table. If the threshold is crossed, tax is deducted on the entire amount. Salary TDS is deducted on estimated tax for the year.

Understand TDS on Salary and Payments to Residents

Tax deducted at source (TDS) collects tax at the time income is paid. The person paying the income deducts tax and deposits it with the government. The receiver then claims credit for it when his own tax is worked out. This is why TDS rules are about the payer, not the receiver.

For payments to residents, section 393(1) of the Income-tax Act, 2025 gives a table. Column B is the nature of the payment, column C is the payer, and column D is the rate and threshold limit. Always read all three. Many payments have the same nature but a different rate or a different payer, such as rent and professional fees.

The threshold works in a way students often miss. If the amount or the total of amounts crosses the threshold, tax is deducted on the entire amount, not only on the excess. Two serial numbers need care:

Serial number 8(ii), purchase of goods: tax is on the sum above fifty lakh rupees.
Serial number 3(i), transfer of immovable property: tax is deducted where the consideration or the stamp duty value is ₹50 lakh or more, and the rate is 1% of the higher of the two.

Some thresholds are also tested per month (rent) or per sum and in aggregate (contractors), so read the threshold wording for each serial number.

Tax must be deducted at the time of credit to the payee's account or at the time of payment, whichever is earlier. A credit to a suspense account counts as a credit to the payee. Rent has a special rule: for serial number 2(i), the deduction is made for the last month of the tax year or the last month of tenancy.

TDS on salary is not in the section 393 table. It falls under section 392 of the Income-tax Act, 2025. The employer deducts tax on the employee's estimated income of the tax year, at the rates in force, and spreads it over the months. As a computational convention, exam questions usually give or let you compute the annual tax, and you divide it by the number of months.

Key rules to remember

Salary TDS per month (computational convention): Monthly TDS = Estimated tax liability of the tax year ÷ 12; TDS on salary is under section 392 of the Income-tax Act, 2025, on estimated income of the tax year at the rates in force. Dividing by 12 is the usual way to spread it. Use the remaining months if the tax is spread over fewer months, and adjust later months for any excess or shortfall in earlier months.
Threshold rule: If amount or aggregate of amounts > threshold, TDS = rate × entire amount; Applies to section 393(1) generally. Exceptions: for purchase of goods, serial number 8(ii), tax is on the sum exceeding ₹50,00,000. For property transfer, serial number 3(i), tax is 1% of the higher of consideration and stamp duty value, where either is ₹50 lakh or more.
Commission or brokerage (not insurance): 2%; threshold ₹20,000; payer: specified person; Insurance commission, serial number 1(i), is at rates in force with threshold ₹20,000 and any person as payer.
Rent: Person other than specified person: 2%. Specified person: 2% for machinery, plant or equipment; 10% for land, building, furniture or fittings. Threshold ₹50,000 for a month or part of a month; Check the payer first. The threshold is per month or part of a month.
Contractors, serial number 6(i): 1% if contractor is individual or HUF; 2% otherwise. Threshold ₹30,000 for any sum; ₹1,00,000 for the aggregate; Payer is a designated person. Where the work falls under section 402(47)(e), tax is on the invoice value excluding material if shown separately, else on the whole invoice.
Contractors, commission, professional fees by individual or HUF, serial number 6(ii): 2%; threshold ₹50,00,000; For individuals or HUFs not covered by serial numbers 6(i), 6(iii) or 1(ii).
Professional fees, technical fees, director fees, royalty, serial number 6(iii): 2% for technical fees (not professional services), film royalty and call centre payee; 10% for other cases. Threshold ₹50,000; for director remuneration, nil; Payer is a specified person. Professional fees are therefore 10%.
Interest other than interest on securities: 5(ii) bank or post office: rates in force, threshold ₹1,00,000 senior citizen, ₹50,000 others. 5(iii) specified person: rates in force, threshold ₹10,000; Interest on securities, 5(i): rates in force, threshold ₹10,000.
Other resident payments: Dividend by domestic company: 10%, nil threshold. Immovable property transfer, 3(i): 1%, threshold ₹50 lakh. Compulsory acquisition, 3(iii): 10%, threshold ₹5,00,000. Life insurance sum, 8(i): 2% on income element, threshold ₹1,00,000. Perquisite from business or profession, 8(iv): 10%, threshold ₹20,000. E-commerce, 8(v): 0.1%, nil. Virtual digital asset, 8(vi): 1%, nil. Partner payments by firm, 393(3) serial 7: 10%, threshold ₹20,000; For property under 3(i), tax is on the higher of consideration and stamp duty value, and applies where either is ₹50 lakh or more.

How to solve TDS on Salary and Payments to Residents questions

Use the same sequence for every TDS question. It stops you from applying the wrong rate or missing a threshold.

1Identify the payee: resident or non-resident. This page covers residents under section 393(1).
2Identify the nature of the payment precisely, for example rent of building, professional fee, contract payment or interest from a bank.
3Identify the payer: individual, HUF, firm, company, bank. Check whether the question tells you the payer is a specified person or designated person.
4Pick the serial number in the table and note the rate and the threshold.
5Test the threshold on the single payment or the aggregate, as the serial number requires. If it is crossed, apply the rate on the entire amount.
6Check the exceptions: no-deduction cases in section 393(4), the payee's declaration under section 393(6), and payments to the Government or RBI under section 393(5).
7Compute the TDS, state the time of deduction (credit or payment, whichever is earlier), and write the answer with the serial number.

Quickest way: Payer, nature, threshold, rate

When to use it: Use this in MCQs and in short parts of descriptive questions where you must decide quickly whether TDS applies.

Ask three things in order: who pays, what for, how much.
Match to the serial number from memory: 1 commission, 2 rent, 3 property, 4 capital market, 5 interest, 6 contractors and fees, 7 dividend, 8 others.
Compare the amount with the threshold. Below it, answer nil. Above it, apply the rate on the whole amount.
For rent, ask what was rented: land, building, furniture or fittings means 10% for a specified person; machinery means 2%.
For professional fees, remember 10%, but technical fees are 2%.

Common mistakes in TDS on Salary and Payments to Residents

Deducting tax only on the amount above the threshold.
Students confuse the threshold with an exemption limit, as in income slabs.
Fix: Write 'entire amount' once the threshold is crossed. The exception is purchase of goods under serial number 8(ii), where tax is on the sum exceeding ₹50 lakh. For property under 3(i), the base is the higher of consideration and stamp duty value.
Applying 10% to all rent.
Students remember the 10% figure for building rent and forget the payer and asset conditions.
Fix: For a specified person, 10% applies to land, building, furniture and fittings, and 2% to machinery, plant and equipment. For a person other than a specified person, the rate is 2%.
Treating professional fees and technical fees at the same rate.
Both sit in the same serial number, 6(iii).
Fix: Professional fees fall in the 'other cases' at 10%. Technical fees that are not professional services are at 2%. The threshold for both is ₹50,000.
Ignoring the aggregate test for contractors.
Students check each bill separately only.
Fix: For serial number 6(i), tax applies if any single sum exceeds ₹30,000 or the aggregate exceeds ₹1,00,000.
Using ₹50,000 for every bank interest case.
Students forget the senior citizen limit and the different limit for other payers.
Fix: For banks and post offices under 5(ii), the limit is ₹1,00,000 for a senior citizen and ₹50,000 for others. For specified persons under 5(iii), it is ₹10,000.
Deducting tax when the payer has no obligation, for example where the payment is made by an individual solely for personal purposes.
Students do not read the no-deduction table in section 393(4).
Fix: Check section 393(4) before computing. For example, no TDS applies on fees for professional or technical services paid by an individual or HUF exclusively for personal purposes.

Worked examples

Example 1

Mehta Textiles Pvt. Ltd. (assume it is a specified person) pays ₹60,000 per month as rent for a factory building to Ravi Shah, and ₹45,000 per month as rent for a machine to Sunita Engineering. It also pays ₹80,000 as professional fees to a cost accountant and ₹1,20,000 as technical fees (not professional services) to a software firm. Compute TDS on each.

Show the solution

Building rent: nature is rent of building; payer is a specified person; so serial number 2(ii)(b) applies at 10%. Threshold is ₹50,000 per month, and ₹60,000 exceeds it.
TDS per month on the building = 10% × ₹60,000 = ₹6,000.
Machine rent: serial number 2(ii)(a) at 2%. The rent of ₹45,000 per month does not exceed the ₹50,000 threshold, so no TDS.
Professional fees: serial number 6(iii) at 10%. ₹80,000 exceeds ₹50,000, so TDS = 10% × ₹80,000 = ₹8,000.
Technical fees: serial number 6(iii)(a) at 2%. ₹1,20,000 exceeds ₹50,000, so TDS = 2% × ₹1,20,000 = ₹2,400.

Answer: Building rent ₹6,000 per month; machine rent nil; professional fees ₹8,000; technical fees ₹2,400.

Example 2

A company (designated person) engages Anil Kumar, an individual contractor, for repair work. During the tax year it credits him four bills of ₹25,000, ₹28,000, ₹27,000 and ₹26,000, in that order. Compute the TDS and state when it arises.

Show the solution

Serial number 6(i) applies. Contractor is an individual, so the rate is 1%.
Test the single-sum threshold of ₹30,000: none of the bills exceeds it.
Test the aggregate threshold of ₹1,00,000: after three bills the total is ₹25,000 + ₹28,000 + ₹27,000 = ₹80,000, which is below the limit, so no tax is deducted on the first three credits.
On crediting the fourth bill, the total becomes ₹80,000 + ₹26,000 = ₹1,06,000, which exceeds ₹1,00,000.
The table gives the rate and thresholds but does not spell out how to apply the aggregate to earlier bills. The usual exam convention is this: once the aggregate exceeds ₹1,00,000, tax is deducted on the entire aggregate at the time of that credit. So TDS = 1% × ₹1,06,000 = ₹1,060.
By this convention, the tax is deducted when the fourth bill is credited, and it covers the earlier bills of ₹80,000 as well as the fourth bill of ₹26,000.

Answer: TDS is ₹1,060. By the usual exam convention, it is deducted at the time of crediting the fourth bill, on the entire aggregate of ₹1,06,000 (including the earlier ₹80,000).

Exam tips

Tabulate the rates and thresholds as one revision sheet by serial number. Most MCQs test a single rate or threshold.
In written answers, always write the serial number, rate, threshold and the test result, then the computation. Each step carries marks.
Read the payer carefully. Whether the payer is a specified person changes the rent rate.
For salary TDS questions, compute the annual tax first, then divide by the number of months. Show the division.
Use the no-deduction table and the declaration rule in section 393(6) as a final check. Some questions are built around a case where TDS does not apply.

Practice questions from Tax Deducted at Source and Tax Collected at Source

TDS on Salary and 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 Salary and Payments to Residents: frequently asked questions

What is the TDS threshold on interest other than interest on securities?

For a bank, co-operative bank or post office under serial number 5(ii), it is ₹1,00,000 for a senior citizen and ₹50,000 for others. For a specified person under 5(iii), it is ₹10,000. The rate is rates in force.

What is the difference between TDS on rent and TDS on professional fees?

Rent has a monthly threshold of ₹50,000 and a rate that depends on the payer and the asset: 2% or 10%. Professional fees are under serial number 6(iii) with a threshold of ₹50,000 for the year and a rate of 10%. Technical fees are 2%.

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

Under section 393(1), it is on the entire amount once the amount or aggregate of amounts exceeds the threshold. The exception is purchase of goods under serial number 8(ii), where tax is only on the sum above ₹50 lakh. For property transfer under 3(i), the tax base is the higher of consideration and stamp duty value.

How is TDS on salary worked out?

TDS on salary is under section 392 of the Income-tax Act, 2025. The employer estimates the employee's tax for the tax year at the rates in force and deducts it across the months. In exam questions, the usual convention is to divide the estimated annual tax by 12, or by the number of months remaining, and adjust for any excess or shortfall earlier.