TDS and TAN: Meaning, Rates, Responsibilites and ITR Reconciliation

Introduction

Tax Deducted at Source, commonly known as TDS, is a mechanism through which income tax is collected when specified income is paid or credited. Instead of waiting for the recipient to pay the entire tax while filing the Income Tax Return, the person making the payment deducts tax and deposits it with the Central Government.

TAN, or Tax Deduction and Collection Account Number, identifies the person responsible for deducting or collecting tax. It is used in TDS payments, statements, certificates and other prescribed compliance documents.

TDS is not necessarily the recipient’s final tax liability. The recipient must report the complete income in the Income Tax Return and claim the corresponding TDS credit. Any difference between the TDS claimed in the ITR and the amount appearing in Form 26AS may delay processing, reduce a refund or result in a tax demand.

What is TDS?

TDS means Tax Deducted at Source.

Under this system:

1. A person makes or credits a payment covered by the TDS provisions.
2. That person deducts tax at the applicable rate.
3. The deducted tax is deposited with the Central Government.
4. A TDS statement is filed containing the deductee’s PAN and payment details.
5. The deductee receives credit for the tax while filing the ITR.

The person deducting tax is known as the deductor, while the person whose tax is deducted is known as the deductee.

For most non-salary payments, tax is deducted at the time of credit or payment, whichever occurs earlier. Salary TDS is determined separately on the basis of the employee’s estimated taxable salary and applicable tax rates. 

TDS is only a tax credit

TDS should not be confused with the final taxation of income.

For example, where professional fees of ₹1,00,000 are subject to TDS of ₹10,000:

• Gross professional receipt: ₹1,00,000
• TDS deducted: ₹10,000
• Net amount received: ₹90,000

The professional must ordinarily report the gross receipt of ₹1,00,000, subject to the applicable method of accounting and tax provisions. The ₹10,000 is claimed as tax credit in the ITR; it is not deducted from gross income merely because only ₹90,000 was received.

What is TAN?

TAN stands for Tax Deduction and Collection Account Number.

It is a ten-character alphanumeric number issued by the Income Tax Department to persons responsible for deducting TDS or collecting TCS. A TAN must generally be quoted in:

• TDS and TCS payment challans;
• quarterly TDS and TCS statements;
• TDS and TCS certificates;
• correspondence and other prescribed documents relating to tax deduction or collection.

The Income Tax Department’s TAN facility also allows a taxpayer to verify whether the TAN shown in Form 16, Form 16A or Form 26AS belongs to the correct deductor. 

PAN and TAN are different

A person may therefore have both PAN and TAN.

Is TAN compulsory for every TDS transaction?

TAN is generally compulsory for every person responsible for deducting or collecting tax. Section 397 of the Income-tax Act, 2025 requires a deductor or collector to obtain and quote TAN in the prescribed challans, statements and certificates. 

However, specified one-time or personal transactions may be completed using PAN instead of obtaining TAN. Under the current framework, the exceptions principally cover:

• purchase of specified immovable property;
• rent paid by certain individuals or HUFs not otherwise covered as business deductors;
• specified contractual, commission or professional payments by certain individuals or HUFs;
• specified virtual digital asset transactions; and
• other transactions or persons specifically exempted or notified.

These cases generally use a challan-cum-statement mechanism.

Applying for TAN under the Income-tax Rules, 2026

Under Rule 216:

• a Government entity applies in Form 134;
• a person other than a Government entity applies in Form 135;
• the application should ordinarily be made before the first deduction or collection; and
• where it was not made earlier, it must be made within 30 days from the end of the month in which tax was first deducted or collected. 

Income-tax Act, 1961 and Income-tax Act, 2025 transition

The Income-tax Act, 2025 came into force from 1 April 2026. However, the applicable law depends on the period and transaction involved.

Payments or credits occurring on or before 31 March 2026 continue to be governed by the Income-tax Act, 1961. Where the earlier of payment or credit occurs on or after 1 April 2026, the Income-tax Act, 2025 applies. 

Corresponding TDS provisions

The Department has clarified that the new Act does not introduce a general change in TDS policy. Instead, the earlier provisions have largely been consolidated and presented in a simplified tabular form. Rates and thresholds must nevertheless be checked against section 393, the applicable Finance Act and any subsequent amendment.

Which law applies to the ITR for FY 2025–26?

The Income Tax Return for income earned during FY 2025–26 is filed for AY 2026–27 under the Income-tax Act, 1961, even though the return is filed after 1 April 2026.

Accordingly:

• TDS deducted during FY 2025–26 is claimed in the AY 2026–27 ITR;
• the ITR forms and schedules applicable to AY 2026–27 remain under the 1961 Act; and
• deductions arising from payments or credits on or after 1 April 2026 are governed by the 2025 Act for Tax Year 2026–27. 
   

Common TDS rates and thresholds

The following table summarises selected common TDS provisions applicable to payments to residents under section 393 of the Income-tax Act, 2025.

It is not an exhaustive TDS rate chart. Rates for non-residents, foreign companies, special income and treaty-covered payments may depend on the Finance Act, applicable surcharge and cess, the Income-tax Act and the relevant Double Taxation Avoidance Agreement.

Main responsibilities of a TDS deductor

A deductor’s obligation does not end with deducting tax. 

1. Deduct tax at the correct time

For most non-salary payments, TDS is deducted at the earlier of:

• credit to the recipient’s account; or
• actual payment.

Credit to a suspense account or another account may also trigger TDS where it represents credit to the payee.

For the transition from the 1961 Act to the 2025 Act, the earlier of payment or credit determines which Act applies. A payment credited in March 2026 but paid in April 2026 remains governed by the 1961 Act. 

2. Deposit TDS within the prescribed time

Under Rule 218 of the Income-tax Rules, 2026:

The special 30-day mechanism applies to prescribed transactions such as specified rent, property purchase, personal contractual or professional payments and virtual digital asset transactions. 

3. File the prescribed TDS statement

Quarterly TDS statements are generally due as follows:

Under the Income-tax Rules, 2026, the new form structure includes:

• Form 138 for salary-related TDS statements;
• Form 140 for specified resident non-salary payments;
• Form 144 for specified non-resident payments; and
• Form 141 as the common challan-cum-statement for prescribed one-time transactions.

The underlying quarterly reporting cycle has broadly been retained, although deductors must use the section-table references and form applicable to deductions made from 1 April 2026.

4. Issue the TDS certificate

Rule 215 of the Income-tax Rules, 2026 provides for:

• Form 130 for specified salary TDS, generally by 15 June following the tax year;
• Form 131 for other regular TDS, within 15 days from the due date of the relevant TDS statement; and
• Form 132 for specified challan-cum-statement transactions, within 15 days from the due date of Form 141. 

For deductions governed by the Income-tax Act, 1961, the familiar certificates continue to apply, including Form 16 and Form 16A.

Common TDS and TAN mistakes

Common errors include:

1. Treating TDS as the final tax liability.
2. Reporting only the net amount received instead of the relevant gross income.
3. Claiming TDS that does not appear in Form 26AS.
4. Ignoring income merely because no TDS was deducted.
5. Using PAN where TAN is legally required.

Conclusion

TDS enables the Government to collect tax when income is paid or credited, while TAN identifies the person responsible for complying with the deduction and reporting requirements.

From 1 April 2026, TDS obligations arising from new payments and credits are governed by sections 392 and 393 of the Income-tax Act, 2025 and the Income-tax Rules, 2026. However, the ITR for FY 2025–26 continues to be filed for AY 2026–27 under the Income-tax Act, 1961.

For the recipient, proper reconciliation is as important as deduction itself. Income must be reported correctly, TDS must be matched with Form 26AS, and any discrepancy should be corrected through the deductor before or after filing through the appropriate return or rectification procedure.