Section 198 of the Income Tax Act, 1961 establishes a fundamental principle that any tax deducted at source (TDS) shall be considered as income received by the payee. This provision ensures that taxpayers get proper credit for taxes already deducted on their behalf.
Key Provisions of Section 198
- Basic Principle
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- TDS is treated as income: The amount deducted as TDS is deemed to be part of the recipient’s incomefor that financial year.
- Grossing up concept: The actual amount received + TDS deducted = Total income chargeable to tax.
- Practical Implications
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- Salary Example: If ₹90,000 is paid after deducting ₹10,000 TDS:
- Total income = ₹1,00,000 (₹90,000 + ₹10,000 TDS)
- ₹10,000 TDS is shown as “tax already paid” in ITR
- Contract Payment Example: Contractor receives ₹1,80,000 after ₹20,000 TDS:
- Gross income = ₹2,00,000
- Taxable income = ₹2,00,000 (with ₹20,000 credit)
- Salary Example: If ₹90,000 is paid after deducting ₹10,000 TDS:
- Exceptions
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- Non-residents: Special provisions apply under Section 195
- Section 194N (cash withdrawals): TDS doesn’t represent income tax liability
How It Works in Tax Computation
| PARTICULARS | AMOUNT (₹) |
| Amount received | 90,000 |
| TDS deducted | 10,000 |
| Gross income | 1,00,000 |
| Less: Deductions | (15,000) |
| Taxable income | 85,000 |
| Tax payable | 8,500 |
| Less: TDS credit | (10,000) |
| Refund due | (1,500) |
Recent Judicial Interpretations
- CIT vs. Tata Chemicals Ltd (2018): Confirmed TDS must be included in total income
- CBDT Circular 3/2018: Clarified TDS credit follows income inclusion
Common Mistakes
- Not grossing up income: Showing only net receipt as income
- Double counting: Including both gross amount and TDS separately
- Missing TDS credits: Forgetting to claim TDS in ITR
Practical Importance
- Ensures proper tax creditfor deducted amounts
- Maintains transparencyin income reporting
- Prevents double taxationof same income
Pro Tip: Always reconcile Form 26AS with your income records to ensure all TDS is properly accounted for in your return.
