Income tax law | TDS and income computation
Section 198 of the Income-tax Act, 1961: Tax Deducted Is Income Received
Section 198 explains why tax deducted at source (TDS) is generally treated as part of the recipient's income, even though the recipient receives only the net amount. From 1 April 2026, the corresponding rule is in Section 396 of the Income-tax Act, 2025.
1. Meaning of Section 198 under the Income-tax Act, 1961
Section 198, in Chapter XVII of the Income-tax Act, 1961, provides that sums deducted under the relevant tax-deduction provisions are deemed to be income received by the assessee for computing income. Thus, the recipient does not exclude the TDS portion merely because it was withheld by the payer.
Definition - Tax deducted at source (TDS): Tax withheld by a person responsible for making a specified payment and remitted to the Central Government on behalf of the recipient.
Definition - Deemed income received: An amount treated by law as received for income computation, notwithstanding that it was retained as tax rather than paid directly to the recipient.
The treatment of the underlying receipt remains governed by the relevant charging, exemption, timing and computation provisions. Section 198 does not independently make otherwise exempt income taxable.
2. Exceptions and later amendments to Section 198
- Employer-paid tax on non-monetary perquisites: Tax paid by an employer under Section 192(1A) is excluded from deemed income received under the first proviso. The related exemption provisions must also be considered.
- Cash-withdrawal TDS: Tax deducted under Section 194N is excluded by the second proviso. A bank withdrawal is not automatically taxable income merely because tax was withheld.
- Foreign tax withheld: From 1 April 2025, foreign income-tax deducted from income for which a credit is allowed against Indian income-tax is brought within the deemed-receipt rule. This prevents reporting only net foreign income while also claiming credit for the foreign tax.
The original webpage included the basic deemed-receipt rule and the employer-paid tax proviso. The later Section 194N proviso and foreign-tax amendment are included here to reflect subsequent statutory changes.
3. Section 396 of the Income-tax Act, 2025
The Income-tax Act, 2025 applies from 1 April 2026. Section 396, titled Tax deducted is income received, is the corresponding provision. It treats the following as income received for income computation:
- Sums deducted under the tax-deduction chapter; and
- Income-tax paid outside India by deduction where the assessee is allowed a credit against tax payable under the Act.
The statutory exclusion in Section 396 applies to tax paid under Section 392(2)(a) and tax deducted under Section 393(3), Table serial number 5. Read these references with the current text of the Act; they should not be confused with general TDS deductions.
| Period / law | Relevant provision | Key effect |
|---|---|---|
| Income-tax Act, 1961 (earlier years) | Section 198 | Applicable TDS is generally included in gross income, with specified exclusions. |
| From 1 April 2026 | Section 396, Income-tax Act, 2025 | Continues deemed-receipt treatment and addresses qualifying foreign withholding tax and statutory exceptions. |
The Act governing a particular deduction depends on the applicable year and transitional provisions. The Income Tax Department explains that payments or credits on or after 1 April 2026 fall under the corresponding withholding provisions of the 2025 Act.
4. Practical examples
Example 1: Professional fees subject to TDS
Assume professional fees of Rs. 1,00,000 are credited, with Rs. 10,000 deducted as TDS and Rs. 90,000 paid to the professional. Subject to the applicable accounting and tax rules, the professional generally reports gross fees of Rs. 1,00,000, not only the net bank receipt of Rs. 90,000. The Rs. 10,000 may be available as TDS credit.
Example 2: Interest credited after TDS
Where taxable interest is Rs. 20,000 and TDS is Rs. 2,000, the interest income is generally Rs. 20,000. The net payment of Rs. 18,000 does not reduce the gross interest income.
Example 3: Cash withdrawal under the old Section 194N
If TDS was deducted on a cash withdrawal under Section 194N, that withholding alone does not convert the withdrawn principal into taxable income. Its tax treatment depends on the nature and source of the funds.
Example 4: Foreign withholding tax
If qualifying foreign income is Rs. 1,00,000, foreign tax withheld is Rs. 15,000, and the taxpayer claims an allowable Indian foreign-tax credit, the gross income ordinarily cannot be reduced to Rs. 85,000 solely because of the foreign deduction. The availability and amount of credit depend on the applicable foreign-tax-credit rules and treaty, if any.
5. Relationship with TDS credit and reporting
Deemed receipt and tax credit are distinct concepts. Section 198 / Section 396 addresses the gross amount treated as received. The entitlement to TDS credit, the year in which it is available, and the evidence required are governed by the applicable credit and procedural provisions.
- Reconcile gross income with the payer's statement, Form 16 or Form 16A, and the relevant tax information statements.
- Verify TDS credit through the Income Tax e-Filing Portal.
- Check the applicable credit rules and avoid deducting the same withheld tax twice.
- For foreign income, review foreign tax credit eligibility and documentation separately.
6. Official legal references
- Income Tax Department - Section 198 of the Income-tax Act, 1961 (amended text).
- Income-tax Act, 2025, as amended - official consolidated text (Section 396).
- Income Tax Department - Section 393, TDS provisions under the 2025 Act.
- Income Tax Department - TDS transition guidance.
- Income Tax Department - Income-tax Act, 2025 resources.
Editorial note: This is a general explanatory article updated on 27 October 2026. Verify the statutory text, notifications and facts relevant to the applicable tax year before taking a tax position.