The Income Tax department has introduced a tax deducted at source (TDS) to collect tax from various sources of income.
Companies making payments (specified under Income Tax Act) to employees or third parties (deductees) are required to deduct tax at source (Tax Deducted at Source or TDS). It is one of the essential Payroll-related Statutory Compliances. The deductor, deductee and tax department are the parties involved. When a deductor is supposed to make payments that are considered tax deductible, the deductor is bound to cut TDS from that and deposit the same to the Income Tax department. All these are accounted for on a financial year basis, and deductees receive TDS certificates as proof of tax payment.
The employer deducts the tax, every month, from the employees’ salaries. This amount is then deposited at a designated bank authorized to collect taxes on behalf of the Government of India.