Tax Deduction at Source was introduced to collect the tax at the very initiation/generation of Income.
Income tax is payable on total income earned during the Previous year [Previous Year (PY) is a period of 12months beginning April 1 and ending on March 31, immediately preceding the Assessment Year].The Income Tax return (ITR) has to be filed in the Assessment Year [Assessment Year (AY) is defined as the year is which the Income tax return is filed for income earned during the PY].
As most tax assesses would calculate their income at the time of filing the return and would make tax payments only at the time of filing of return, there was a time lag between receipt of Income and payment of tax. It was to mitigate this time lag that the Income Tax Act introduced the Tax Deduction at Source (TDS).
Income tax Act, has laid the responsibility of deduction of tax (At various rates prescribed under section 192, 193 and 194 of the Income Tax Act) by the person making the payment of income. As the names suggest, tax is deducted at source and is deposited with the Income Tax Department.
Further, as the tax is deducted in respect of payments made under various heads, it necessitates the assessee to file a return to claim refund of the tax deducted at source. This results in improved compliance of the Income Tax Act.
Tax of the assesse is thus paid through the PY (previous year) during which it is earned. Like in case of salaried employees, tax is deducted under Section 192 of the Income Tax Act based on exemption details provided by the employee and this is spread throughout the year.