TDS

Tax Deducted at Source (TDS) is a mechanism under the Income Tax Act where the payer deducts tax at the time of making certain payments and remits it to the government on behalf of the recipient. In financial markets, TDS applies to dividend income, interest from fixed deposits and bonds, and certain other investment-related payments.

For equity investors, TDS on dividends is particularly relevant since the shift to the classical dividend taxation system in April 2020. Companies now deduct TDS at 10% on dividend payments exceeding INR 5,000 per financial year per shareholder. If the shareholder does not furnish PAN, the TDS rate increases to 20%. This applies to dividends from listed Indian companies paid through NSDL and CDSL.

Bank fixed deposit interest attracts TDS at 10% if total interest from a bank exceeds INR 40,000 per financial year (INR 50,000 for senior citizens). Interest on corporate bonds and debentures also attracts TDS at 10%. For government securities and Treasury Bills held in demat form, interest is generally credited without TDS, though the income is still taxable.

TDS is not the final tax - it is an advance payment. If actual tax liability exceeds the TDS deducted, the difference is paid at the time of filing. If actual liability is lower (common for investors in lower tax brackets), the excess is claimed as a refund. Form 26AS and the Annual Information Statement (AIS) on the Income Tax portal show all TDS credits linked to a PAN.

For NRIs investing in Indian markets, TDS rates differ: 20% on dividends (or lower under Double Taxation Avoidance Agreements), and STCG and LTCG are also subject to TDS at applicable rates. NRI investors typically obtain a Tax Residency Certificate (TRC) from their country of residence to claim treaty benefits and lower TDS rates.