What is Tax Deduction at Sources (TDS) or Definition of TDS:-

Tax on income of previous year is usually made on the assessment year. To avoid tax evasion, the Income Tax Act has made provision to collect tax by way of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS).

Tax deducted at source is one of the modes of collecting Income-tax from the assessee in India. TDS is an indirect method of collecting tax from the tax payer/deductor by the income tax department through tax payer. TDS is pre-paid payment of tax in previous year in which incomes receive/accrued. The tax so deducted from the income of the payee is deemed to be payment of Income-tax by the recipient at the time of his assessment. Such amount of tax i.e. TDS will be deducted from Tax Liability at the time of assessment in the assessment year. TDS is final tax payable, when payee fill return, the payee pays the balance if under TDS payment in the previous year or asks for refund if over TDS payment in the previous year. Income & payment of tax both occur in the previous year. Payee is liable to pay tax on income in previous year on previous year income. Under the scheme of TDS, person (payer) is responsible for making payment of income are liable to deduct tax at source at a specified rate from the income (if such income cover under TDS provision issue by Income Tax Act) as per relevant provision of the act and balance income is either to be credited in the account of payee or is handed over. The amount so deducted is to be deposited to the Central Governments’ treasury (either deposited to bank through Challan-281 or make a book transfer without use of challan) within the stipulated time in the name of payee.

For example: -

When any employee is received salary from employer, employer is liable to deduct tax at source before payment (if employee income for this previous year is taxable).