For a quick and efficient collection of taxes, the Income-tax Law has incorporated a system of deduction of tax at the point of generation of income. This system is said as “Tax Deducted at Source”, commonly known as TDS. Under this system, tax is deducted at the origin of the income. Tax is deducted by the payer and is paid to the Government by the payer on behalf of the payee. 

The provisions of cutting tax at source are applicable to many payments such as salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc. In respect of payments to which the TDS provisions apply, the payer has to cut the amount of tax at the source on the payments made by him and he has to deposit the tax deducted by him to the credit of the Government.

A payee can approach to the payer for non-deduction of tax at source but for that, they have to furnish a declaration in Form No. 15G/15H, as the case may be, to the payer to the effect that the tax on his estimated total income of the previous year after including the income on which tax is to be deducted will be nil.

Form No. 15G is for the individual or a person (other than a company or firm) and Form No. 15H is for senior citizens.

As per section 40(a)(i) of the Income-tax Act, any sum (other than salary) payable outside India or to a foreigner, which is chargeable to tax in India in the hands of the recipient, shall not be permitted to be deducted if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return.

However, if tax is deducted or deposited in the subsequent year, as the case may be, the expenditure shall be allowed as a deduction in that year. Similarly, as per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance if it is paid without deduction of tax at origin or if tax is deducted but is not deposited with the Central Government till the due date of filing of return.

However, where in respect of any such sum, tax is deducted or deposited in the following year, as the case may be, the spending so disallowed shall be allowed as a deduction in that year.

As per Section 58(1A) (as amended with effect from the assessment year 2018-19), the provisions of section 40(a)(ia) and 40(a)(iia) shall also apply in computing the income chargeable under the head “Income from the the other sources”.

As per section 201 of the Income-tax Act, if a deductor fails to deduct tax at source or after the deducting the same fails to deposit it to the Government’s account then he shall be deemed to be an assessee-in-default and liable to pay simple interest as follows:-

• at one percent for each month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.

The penalty of an amount equal to tax not deducted or paid could be imposed under section 271C​.