Sections 198 and 199: TDS as Income Received and Credit for Tax Deducted
Sections 198 and 199 of the Income-tax Act, 1961 explained how tax deducted at source is treated while computing income and how credit is allowed for tax deducted and paid to the Central Government. From 1 April 2026, the corresponding provisions are principally contained in Sections 396 and 390(5) and 390(6) of the Income-tax Act, 2025.
Section 198 of the Income-tax Act, 1961: Tax deducted is income received
Section 198 provided that sums deducted under the relevant tax deduction provisions were, for computing the income of the assessee, deemed to be income received. In practical terms, TDS is generally a method of collecting tax and does not ordinarily reduce the amount of income that is required to be recognised merely because part of the payment has been withheld as tax.
The provision contained statutory exceptions. Tax paid by an employer under former Section 192(1A) was not deemed to be income received for this purpose. Tax deducted under former Section 194N was also excluded from the deemed-income rule.
With effect from 1 April 2025, the 1961 Act provision was expanded to cover income-tax paid outside India by way of deduction where the assessee is allowed credit against tax payable under the Act, subject to the statutory exceptions.
Section 199 of the Income-tax Act, 1961: Credit for tax deducted
Section 199 provided the complementary rule for TDS credit. A deduction made under the relevant provisions and paid to the Central Government was treated as payment of tax on behalf of the person from whose income the deduction was made, or the other person specified by the section, as applicable.
Former Section 199(2) similarly dealt with tax paid to the Central Government under Section 192(1A), treating it as tax paid on behalf of the person in respect of whose income that payment was made.
Section 199(3) empowered the Central Board of Direct Taxes to prescribe rules for giving TDS credit, including circumstances in which credit may be given to a person other than the person referred to in the principal provisions and the year for which the credit is to be allowed.
Current law: Section 396 of the Income-tax Act, 2025
Section 396 of the Income-tax Act, 2025 carries forward the principle that specified tax deductions are deemed to be income received for computing the assessee's income. It covers sums deducted under the relevant TDS Chapter and also specified income-tax paid outside India by way of deduction where credit is allowed against tax payable under the Act.
The current provision also preserves specified exclusions, including the categories expressly identified in Section 396. Accordingly, the statutory text for the relevant tax year should be checked before applying the deemed-income rule.
Current law: Section 390 and credit for tax deducted
Under the Income-tax Act, 2025, Section 390 contains the general framework concerning deduction of tax and its treatment. Section 390(5) provides the statutory basis for treating tax deducted and paid to the Central Government as payment of tax on behalf of the person to whom the relevant provision applies. Section 390(6) authorises rules concerning the manner and year in which credit is to be given and related matters.
The practical principle therefore continues: where tax has validly been deducted and deposited, the applicable TDS credit is taken into account against the taxpayer's tax liability in accordance with the Act and Rules.
Relationship between income received and TDS credit
| Issue | 1961 Act | Current 2025 Act |
|---|---|---|
| Tax deducted treated as income received | Section 198 | Section 396 |
| Credit for tax deducted | Section 199 | Principally Section 390(5) and 390(6) |
| Core effect | The statutory scheme separates recognition of the gross income from credit for tax withheld and paid on the taxpayer's behalf, subject to the applicable exceptions and rules. | |
What is TDS?
Tax Deducted at Source, commonly called TDS, is a tax collection mechanism under which a person responsible for making a payment deducts tax at the stage prescribed by law and remits the deducted amount to the Central Government on behalf of the recipient. The applicable rate, threshold, timing and compliance requirements depend on the nature of the payment and the governing TDS provision.
How to verify TDS credit
Taxpayers should reconcile the tax deducted with the information available through the Income Tax e-Filing system, including the applicable tax credit information and statements, and with TDS certificates furnished by the deductor. A mismatch between income reported, TDS deducted and credit reflected in official records may require correction by the deductor or other action under the applicable procedure.
Official Income Tax resources
For authoritative and current information, refer to the Income Tax Department, the Income Tax e-Filing Portal, the Income-tax Act, 2025, the Income-tax Act, 1961 as amended by Finance Act, 2025, and the Income Tax Department TDS guidance for deductors.
Updated: 29 September 2026. This article provides a general explanation of the statutory provisions. The applicable treatment depends on the tax year, nature of income, deduction provision, taxpayer and the law and rules governing the transaction.