Tax Deducted Is Income Received: TDS Credit Rules under the Income Tax Act 2025 (Section 396, Rule 203)

Section 396 of the Income-tax Act, 2025 says that tax deducted at source (TDS) is part of your income, even though you never received that money. If a payer pays you Rs 4,50,000 after cutting Rs 50,000 of tax, your income for that payment is Rs 5,00,000. The tax deducted then counts as tax already paid on your behalf, and rule 203 of the Income-tax Rules, 2026 decides who gets the credit and for which tax year.

This guide explains what section 396 covers, the two things it leaves out, how credit is given under section 390(5) and rule 203, and the mistakes that cause credit mismatches. The law is taken from the Act as amended by the Finance Act, 2026 and the Rules, last reviewed on 10 November 2026.

What does "tax deducted is income received" mean?

Section 396 lists two kinds of sums that are deemed to be income received when computing the income of an assessee:

• Clause (a): sums deducted under Chapter XIX (the chapter on collection and recovery of tax, which includes TDS under sections 392 and 393).
• Clause (b): income-tax paid outside India by way of deduction, where the assessee is allowed a credit for it against tax payable under this Act.

"Deemed" means the law treats the amount as received whether or not it reached your bank account. The effect is that you report the gross amount, not the net amount credited. The tax deducted is then claimed as a payment of tax.

What is not treated as income received under section 396?

Section 396 carves out two items from the deeming rule:

Excluded item	Where it is	What it is
Tax paid by the employer on a non-monetary perquisite, at the employer's option	Section 392(2)(a)	The employer pays tax on the whole or part of a perquisite without deducting it from the employee's pay.
Tax deducted on cash payments by a bank, co-operative bank or post office	Section 393(3), Table Sl. No. 5	2% where cash paid out from one or more accounts of a recipient crosses the threshold: Rs 3 crore for a co-operative society, Rs 1 crore for any other recipient.

The second exclusion makes sense when you think about it. A cash withdrawal is your own money coming out of your own account. The tax deducted is not a cut from any income you earned, so it is not added to your income again. Rule 203(7) still gives you the credit, in the tax year in which the deduction was made.

How does TDS become tax paid by you?

Section 390(5) provides that tax deducted or collected at source, once paid to the Central Government, is treated as payment of tax on behalf of the person from whose income it was deducted (or from whom it was collected). Section 401 adds a protection: where tax is deductible at source, the assessee cannot be called upon to pay the tax himself to the extent it has already been deducted.

Credit follows deposit and reporting, not just deduction. Rule 203(1) gives credit on the basis of the information the deductor furnishes to the income-tax authority. Rule 203(8) adds that credit is granted on that information and the claim in your return of income, subject to verification under the risk management strategy of the Board.

Who gets the credit for tax deducted under rule 203?

• TDS: credit goes to the deductee, the person paid or whose account was credited (rule 203(1)(a)).
• TCS: credit goes to the collectee, the person from whom tax was collected (rule 203(1)(b)).
• Income assessable in someone else's hands: if the deductee files a declaration with the deductor saying the income, wholly or partly, is assessable in the hands of another person, the deductor reports the deduction in that other person's name and credit goes to that person, not to the deductee (rule 203(2)). The declaration must carry the other person's name, address, PAN, details of the payment and the reason, and the deductor keeps it (rule 203(3)).
• Certificate: the deductor issues the TDS certificate to the person in whose name credit is shown in the reported information (rule 203(4)).

In which tax year do you get the credit?

Situation	Tax year of credit	Rule
General case	The tax year for which the income is assessable	203(5)
Income assessable over several years	Spread across those years in the same proportion as the income is assessable	203(6)(i)
TCS on a lease or licence relating to more than one year	Spread across the years the lease or licence relates to, in the same proportion	203(6)(ii)
Cash payment TDS under section 393(3), Sl. No. 5 (and TCS under section 394(1), Sl. Nos. 6, 7 and 8)	The tax year in which the deduction or collection is made	203(7)

How does the gross-up work? Three worked examples

Example 1: professional fee with TDS (tax year 2026-27). Assumptions: Ravi, a resident consultant, raises an invoice of Rs 5,00,000 for the year. His client deducts Rs 50,000 as TDS and deposits it, and reports it in the TDS statement under Ravi's PAN. For illustration, assume the tax computed on Ravi's total income is Rs 1,20,000.

Step	Working	Rs
1. Gross fee	As invoiced	5,00,000
2. TDS deducted	Given	50,000
3. Cash received	5,00,000 - 50,000	4,50,000
4. Income treated as received (section 396(a))	Step 1, not step 3	5,00,000
5. Tax on total income (assumed)	Illustrative figure	1,20,000
6. Less: credit for TDS (rule 203)	Step 2	50,000
7. Balance tax payable	1,20,000 - 50,000	70,000

If Ravi had reported only the Rs 4,50,000 he received, his income would be understated by the Rs 50,000 that was deducted.

Example 2: employer pays tax on a perquisite (tax year 2026-27). Assumptions: an employee, Kiran, receives a non-monetary perquisite valued at Rs 2,00,000. Her employer chooses under section 392(2)(a) to pay Rs 30,000 of tax on it from its own funds instead of deducting it from her salary. The Rs 30,000 is an assumed figure for illustration; the actual amount is worked out at the average rate under section 392(2)(b).

Item	Treatment
Perquisite value Rs 2,00,000	Taxable as per the salary provisions
Rs 30,000 paid by employer under section 392(2)(a)	Excluded from the "income received" deeming in section 396, so it is not added to Kiran's income again
Rs 30,000 paid by employer	Construed as if it were tax deducted at source from salary (section 392(2)(b))

Compare this with an ordinary TDS deduction, where the deducted sum is added back as income received.

Example 3: tax withheld abroad (tax year 2026-27). Assumptions: Meena, a resident, earns Rs 1,00,000 from a foreign client, and the foreign payer withholds Rs 10,000 of tax in that country. Under section 396(b) the Rs 10,000 is treated as income received, so Meena reports Rs 1,00,000, provided she is allowed a credit for that foreign tax against Indian tax. The credit itself is governed by the foreign tax credit provisions, which we cover in our guide to double taxation relief and foreign tax credit.

Real-life scenarios

• Rent paid on an annual basis. Meena rents out a flat at Rs 60,000 a month to a tenant who is not a specified person. The tenant deducts 2% under Sl. No. 2(i) at the time of the last month's rent credit or payment (Note 1 to that entry); the rent guide linked here explains the mechanics. The deducted tax is part of Meena's rental income, and she claims it as credit once it shows in her tax credit information. See TDS on rent under the Income-tax Act, 2025.
• Income taxed in a spouse's hands. Arun's name is on a fixed deposit, but the income from it is assessable in his wife Sunita's hands. If Arun files the rule 203(2) declaration with the bank, the TDS is reported under Sunita's PAN and she gets the credit. Without it, the credit shows in Arun's name, and Sunita cannot claim it directly.
• Advance spread over three years. Ravi receives an amount on which Rs 30,000 of tax is deducted, and the income is assessable in equal parts over three tax years. Under rule 203(6)(i), credit is allowed across those years in the same proportion, Rs 10,000 each year, not Rs 30,000 in the year of deduction.
• Cash withdrawal. A company withdraws cash from its bank above the Rs 1 crore limit and the bank deducts tax under Sl. No. 5. That tax is not added to the company's income (section 396 exclusion), and credit is given in the tax year of the withdrawal (rule 203(7)).

Quick reference

Question	Answer	Provision
Is TDS part of my income?	Yes, as income received, except two exclusions	Section 396
Is TDS treated as tax I paid?	Yes, once deposited with the Central Government	Section 390(5)
Can I be asked to pay again?	Not to the extent tax was deducted	Section 401
Who gets the credit?	The deductee, or the other person named in a valid declaration	Rule 203(1), (2)
Which tax year?	The year the income is assessable; spread if assessable over many years	Rule 203(5), (6)
On what basis is it granted?	Deductor's reported information plus your return claim, subject to verification	Rule 203(8)

What are the common mistakes with TDS credit?

• Reporting net receipts as income. Income is the gross amount, with TDS claimed as credit.
• Claiming credit in the wrong year. Credit follows the year in which the income is assessable (rule 203(5)), not simply the year of deduction. The exception is cash payment TDS, which follows the year of deduction (rule 203(7)).
• Claiming credit that is not reported. Credit is based on information furnished by the deductor (rule 203(1)). If the deductor has not deposited or reported the tax, the claim may not match.
• Missing the declaration for income in another person's hands. Without the rule 203(2) declaration, credit goes to the deductee.
• Adding back the excluded items. Tax paid under section 392(2)(a) and cash payment TDS under section 393(3), Sl. No. 5 are outside the section 396 deeming rule.

When a deductor fails to deduct or deposit tax, consequences fall on the deductor. See our note on TDS failure, interest and penalty.

Which certificate and statement show your TDS credit?

Before claiming credit, match your books with two documents. Both are prescribed by the Income-tax Rules, 2026.

• TDS certificate (rule 215). The deductor generates it from the web portal and gives it to you. Form No. 130 is for salary and other payments under section 392 (other than sub-section (7)), due by 15 June after the tax year. Form No. 131 covers most other deductions, within fifteen days from the due date of the TDS statement under rule 219. Form No. 132 (some rent, property and similar deductions) and Form No. 133 (TCS) follow their own timelines in the rule 215 table.
• Annual Information Statement, Form No. 168 (rule 245). It is uploaded to your registered account and carries information on tax deducted or collected at source, among other items such as specified financial transactions and payment of taxes.

If an amount in Form No. 168 or your certificate does not match your books, ask the deductor to correct the information they reported. Credit under rule 203(8) rests on that reported information plus your return claim.

Where is this in the Act?

• Section 396: tax deducted is income received
• Section 390(5) and (6): TDS treated as tax paid on behalf of the person; rule-making power for credit
• Section 392(2)(a) and (b): employer paying tax on non-monetary perquisites
• Section 393(3), Table Sl. No. 5: tax on cash payments by banks and post offices
• Section 401: bar against direct demand on the assessee
• Rule 203: credit for tax deducted or collected at source
• Rule 215: TDS and TCS certificates (Forms 130 to 133); rule 245: Annual Information Statement (Form 168)

How do CA firms keep TDS credit clean across clients?

Most credit problems show up at return time, when a client's books and the reported TDS do not agree. For a CA firm, the useful habit is tracking each client's TDS certificates and credit status through the year. Finexo's practice management software helps you keep client records, tasks and deadlines in one place. It does not compute tax or file returns for you.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.