Section 518 of the Income-tax Act, 2025: When Is a Person Indemnified for Tax Deduction?

A guide to the statutory protection available when a person lawfully deducts, retains or pays income-tax relating to income that belongs to someone else.

Applicable law: Section 518, Income-tax Act, 2025 (effective from 1 April 2026). This provision is titled Indemnity and corresponds to Section 290 of the Income-tax Act, 1961.
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What Does Section 518 Say?

The section provides:

Every person deducting, retaining, or paying any tax in pursuance of this Act in respect of an income belonging to another person shall be indemnified for the deduction, retention, or payment thereof.

This is a concise, single-provision rule. It does not itself prescribe a tax rate, a filing form or a separate application for indemnity.

How Does the Indemnity Work?

Income-tax law sometimes requires a person to deduct tax from a payment due to someone else, retain an amount towards tax, or pay tax in respect of another person's income. Section 518 protects the person carrying out such a statutory obligation in respect of the deduction, retention or payment made pursuant to the Act.

The essential connection is that the tax action must be in pursuance of the Income-tax Act. The section is not a general authorisation to withhold money at will, nor does it erase unrelated contractual, procedural or statutory obligations.

Relevant Statutory Terms and Definitions

Indemnity: A legal protection against liability for the deduction, retention or payment specified by Section 518. The section does not set out a standalone claims procedure.
Deduction: In this context, taking a tax amount out of a sum otherwise payable to the person to whom the income belongs, where required by law.
Retention: Holding back a tax amount in accordance with an applicable statutory requirement.
Payment: Remitting tax under the Act in relation to income belonging to another person.
Income belonging to another person: Income legally attributable to someone other than the person making the deduction, retention or payment.

These explanations clarify the ordinary operation of Section 518; they are not additional definitions expressly created by that section.

Practical Examples of Section 518

Example 1: Employer deducting tax from salary

Where an employer correctly deducts tax from an employee's salary under the applicable tax-deduction provisions, Section 518 provides protection in relation to that lawful deduction.

Example 2: Payer withholding tax from a professional fee

A business making a payment to a professional may be required to deduct tax at source. If the deduction is made pursuant to the Act, the payer receives the statutory protection for that deduction.

Example 3: Deduction not authorised by law

If a payer withholds an amount that the Act does not authorise, Section 518 should not be treated as an automatic defence. Whether any amount was lawfully deducted must be assessed against the applicable charging and tax-deduction provisions.

What Are the Conditions and Limits?

  • The action must involve tax deducted, retained or paid in pursuance of the Act.
  • The tax must relate to income belonging to another person.
  • The indemnity relates to the specified deduction, retention or payment, rather than every act of the payer.
  • The section does not itself waive tax-deposit, reporting, certificate-issuance or other compliance duties arising under separate provisions.
Practical takeaway: Keep payment records, deduction calculations, challans and certificates, where applicable. They can help establish that the tax action was taken under the law.

Comparison With Section 290 of the Income-tax Act, 1961

Section 518 carries forward the indemnity principle previously contained in Section 290. The parliamentary committee materials describe the new wording as a textual simplification, without a policy change. For a transaction governed by an earlier tax regime, the law applicable to the relevant period should be checked.

Frequently Asked Questions

Does Section 518 protect a person who deducts TDS?

Yes, where the deduction is made pursuant to the Income-tax Act in respect of another person's income. The relevant TDS provision must also be complied with.

Does Section 518 permit any person to withhold tax?

No. The provision supplies indemnity for tax actions taken under the Act; it does not independently create a power to deduct tax.

Is a separate application necessary to obtain the indemnity?

Section 518 does not prescribe a separate application process. The protection arises from the statutory provision when its requirements are met.

Does indemnity excuse failure to deposit tax deducted?

No. The section should not be read as an exemption from separate obligations to deposit, report or account for tax.

What was the corresponding provision in the 1961 Act?

Section 290 of the Income-tax Act, 1961 dealt with indemnity for deduction, retention or payment of tax.

Official Legal Source

Read the Income-tax Act, 2025 as amended by the Finance Act, 2026 for the authoritative statutory text. The applicability of other deduction and compliance provisions depends on the facts of each case.

Last reviewed: 12 November 2026. General legal information; not a substitute for advice on a specific transaction.