Tissue fluid is formed from blood capillaries and tissue metabolism and occupies the spaces between cells. It is formed primarily through the filtration of fluid out of capillaries due to hydrostatic pressure gradients, and reabsorbed based on oncotic pressure gradients, as described by Starling's forces. Edema occurs when there is excessive accumulation of fluid in the interstitial spaces, which can be caused by increased capillary filtration, inadequate drainage, or decreased plasma oncotic pressure due to conditions like heart or liver disease.