When it comes to taxes, two terms often come up—Withholding Tax and TDS (Tax Deducted at Source). Many people think they are the same, especially in India, but they are not. While both involve tax deduction at the time of making a payment, they apply in different situations and follow different rules.
In this blog, we will explain what each of these terms means, how they are applied, and how they differ from each other under Indian tax law.
What is Withholding Tax?
Withholding tax is a general term used all over the world. It refers to the tax that a person or business deducts from a payment made to someone else and deposits with the government.
In India, withholding tax generally comes into play when payments are made to non-residents or foreign companies. This includes the payments like: –
- Royalties.
- Interest.
- Technical or consultancy fees.
- Dividends.
For example, if an Indian company makes a payment to a company in the U.S., it must deduct tax before making the payment. This is called withholding tax. The tax amount is decided based on Indian law or the tax treaty (called DTAA) between India and the country of the recipient.
What is TDS (Tax Deducted at Source)?
TDS is a system introduced by the Indian government to collect tax at the time income is generated, rather than at a later date. Under TDS, a person making certain payments must deduct tax before making the payment.
TDS applies to many kinds of payments, such as:
- Salaries
- Rent
- Contractor payments
- Interest
- Professional fees
- Commission
The deducted amount is deposited with the government. The person receiving the payment can later adjust this tax against their total tax liability when filing their income tax return.
Main Differences Between Withholding Tax and TDS
Here’s a simple table to help you understand the key differences:-
| Point | Withholding Tax | TDS (Tax Deducted at Source) |
| Meaning | A general term for tax deducted at source | A specific provision under Indian tax law |
| Used For | Payments to non-residents | Payments to residents and non-residents |
| Law Governing It | Section 195 of the Income Tax Act | Sections 192 to 196 of the Income Tax Act |
| Common Payments | Royalties, interest, technical fees to foreigners | Salaries, rent, fees, etc. |
| Rate of Tax | As per DTAA or Indian law | As per the Indian Income Tax rules |
| Tax Treaties | Often involved | Usually not involved |
| Compliance | Needs Form 15CA and 15CB (in many cases) | Requires TDS returns and TDS certificates |
| Who Pays It | The Indian payer deducts and deposits it | The Indian payer deducts and deposits it |
| Refund Process | Non-residents can claim it in their own country | Residents claim it while filing their return |
| Thresholds | No fixed minimum limit in many cases | Has set limits before TDS becomes applicable |
Examples
Withholding Tax Example: –
An Indian company pays $10,000 as royalty to a US company. According to the India-US tax treaty, the tax rate on royalties is 10%. So, the Indian company deducts the $1,000 as tax and sends $9,000 to the US company. The $1,000 is deposited with the Indian government. The US company may claim this tax as a credit in its home country.
TDS Example: –
An employer in India pays ₹50,000 salary to an employee. Based on income tax rules, the employer will deduct ₹2,000 as TDS and pay the remaining ₹48,000 to the employee. The ₹2,000 is deposited with the government. The employee can adjust this amount while filing their income tax return.
How Are They Similar?
Although they are different, both TDS and Withholding Tax serve the same basic purposes:
- They help collect taxes early.
- They prevent tax evasion.
- They make transactions traceable.
- They simplify the tax return process for both the payer and the receiver.
Filing and Penalties
Filing Requirements
Withholding Tax: –
- The Indian payer must file Form 15CA before making a payment to a foreign person or company.
- A Chartered Accountant may need to issue Form 15CB to certify that tax has been deducted.
TDS: –
- The payer must file quarterly TDS returns using forms like 24Q (for salary), 26Q (for non-salary), and 27Q (for payments to non-residents).
- The payer must also give Form 16 or Form 16A to the payee as proof of TDS deduction.
Penalties for Not Complying
- If the tax is not deducted or paid on time, interest is charged (1% to 1.5% per month).
- A penalty equal to the amount of tax may be charged.
- Delayed TDS returns attract a late fee of ₹200 per day (up to the amount of TDS).
Cross-Border Importance of Withholding Tax
Withholding tax is very important when Indian businesses deal with foreign companies or individuals. Unless exempted, any payment made outside India must follow the rules of withholding tax. If not handled properly, the business may face double taxation or legal trouble.
TDS, on the other hand, is important for domestic transactions. It applies to salaries, rents, commissions, etc., and helps the tax department track income using PAN and Aadhaar.
Important Forms and Their Use
| Form | Purpose |
| Form 15CA | Declaration for payment to a non-resident |
| Form 15CB | Certificate from CA for foreign remittance |
| Form 16 | TDS certificate for salary |
| Form 16A | TDS certificate for non-salary income |
| Form 26AS | Annual tax statement for the person receiving income |
| Form 24Q | Quarterly TDS return for salary payments |
| Form 26Q | Quarterly TDS return for non-salary resident payments |
| Form 27Q | Quarterly TDS return for non-resident payments |
Conclusion
In short, both Withholding Tax and TDS involve the deduction of tax when a payment is made. However, the main difference lies in who the payment is made to and under what rules.
- TDS is used mostly for domestic payments and is governed by multiple sections of the Income Tax Act.
- Withholding Tax is used mainly for international payments and follows Section 195 and DTAAs.
Understanding these terms and their differences clearly is essential because it can help businesses and individuals stay compliant with the law, avoid penalties, and handle taxes properly.
