10 min read
- What is Tax Deducted at Source (TDS)?
- Types of TDS
- Who can deduct TDS, and When it is deducted?
- How to deduct TDS?
- How to deposit TDS?
- What is TDS return?
- How to save TDS?
- How do I get my TDS refund?
- What is done with TDS after it is deducted?
- Difference between TDS and TCS
- TDS Rates
- Conclusion
- FAQs
The term “Tax Deducted at Source (TDS)” can be broken down into two components: “Tax Deducted” and “at Source”. “Tax Deducted” refers to the income tax, while “at Source” indicates that the tax deduction occurs directly at the point of income generation. Therefore, TDS represents the income tax directly from the income source. Let’s dive deep into tax deducted at Source (TDS).
What is Tax Deducted at Source (TDS)?
Tax Deducted at Source (TDS) is the tax collected by deducting it directly from the income source. This system ensures that tax is collected in advance and serves two main purposes: it helps reduce the risk of tax fraud and provides a consistent flow of revenue to the government.
The TDS system is used in India, but many other countries have similar systems for collecting tax at the source. For example, in the United States, it’s called “withholding tax,” in the United Kingdom, it’s known as “Pay As You Earn” (PAYE), and in Australia, it’s referred to as “Pay As You Go” (PAYG).
The amount of TDS can vary depending on the source of income, as it is deducted at rates prescribed by the Income Tax Department. TDS can only be deducted if the payment exceeds the amount specified in the tax regulations. Additionally, the government may adjust TDS rates by amending existing tax laws or introducing new ones.
The entity that deducts the TDS is called “Deductor” and the recipient from whose income the TDS is deducted is called “Deductee”. The process of TDS starts when the Deductor makes a payment to the Deductee. At the time of payment, the Deductor is required to deduct TDS at a specified rate. This deducted amount is then deposited to the Income Tax Department on behalf of the Deductee. Then a TDS certificate is issued to the Deductee, detailing the amount of TDS deducted and deposited with the tax authorities. TDS is not the final tax liability. When filing an income tax return, if the total tax liability is less than the TDS deducted, the excess amount will be refunded. This refund is typically credited to the taxpayer’s bank account within three months from the date of filing the return.
Example: A person named Amit, who works at KPMG with an annual package of 15 lakhs
In India, TDS for a salaried person is deducted based on their respective Tax Slabs. Calculation for Amit:
Annual Income: 15,00,000
Calculation of Income Tax:
Income up to ₹3 lakhs: ₹0
Income between ₹3 lakhs and ₹7 lakhs: 5% of ₹4 lakhs = ₹20,000
Income between ₹7 lakhs and ₹10 lakhs: 10% of ₹3 lakhs = ₹30,000
Income between ₹10 lakhs and ₹12 lakhs: 15% of ₹2 lakhs = ₹30,000
Income between ₹12 lakhs and ₹15 lakhs: 20% of ₹3 lakhs = ₹60,000
Total Tax Liability: 1,40,000 + 5600 (4% health and education Cess)
= 1,45,600
Monthly Salary: ₹15,00,000 / 12 = ₹1,25,000
Approximate TDS per Month: ₹1,45,600 / 12 ≈ ₹12,133
Therefore, the company will deduct INR 12,133 from Amit’s salary per month as TDS and pay him 1,12,867 (instead of 1,25,000)
Types of TDS
Tax Deducted at Source (TDS) is deducted from various types of income sources under the Income Tax Act, 1961. Here are some of the primary income sources on which TDS is deducted:
- Salary
- Interest
- Rent
- Commission/Brokerage
- Dividends
- Royalties
- Professional fees
- Lottery/Gambling
- Insurance commission
- Contractor payment
- Income from pension
- Interest on securities
- Income from horse races
Who can deduct TDS, and When it is deducted?
TDS (Tax Deducted at Source) can be deducted by various entities or individuals depending on the nature of the payment and the applicable tax laws.
Who can deduct TDS:
- Employers: Deduct TDS from the salaries of employees. This is known as TDS on salary.
- Businesses and Organizations: Deduct TDS on payments to contractors, professional fees, rent, and other specified payments.
- Banks and Financial Institutions: Deduct TDS on interest income from deposits.
- Individuals and Entities: Any individual or entity making payments like rent, professional fees, or payments to contractors where TDS is applicable.
- Government Departments: Deduct TDS on payments made for services, contracts, and other specified payments.
When TDS is deducted:
- TDS on Salary: Deducted monthly at the time of salary payment based on the projected annual income and tax slabs.
- TDS on Interest Income: Deducted when the interest is credited to the account or paid, usually quarterly or annually depending on the nature of the deposit.
- TDS on Rent: Deducted when the rent payment is made to the landlord.
- TDS on Professional Fees: Deducted when the payment for professional services is made.
- TDS on Contract Payments: Deducted at the time of making payment to contractors for services rendered.
- TDS on Dividends: Deducted when the dividend is paid out to shareholders.
- TDS on Payments to Non-Residents: Deducted at the time the payment is made to non-residents, based on the provisions of the Income Tax Act and applicable tax treaties.
How to deduct TDS?
To deduct TDS, follow the below-mentioned points:
- Identify payment type: Determine if the payment you are making falls under the category where Tax Deducted at Source (TDS) is applied, if yes then TDS will be deducted otherwise no TDS.
- TDS rates: Refer to the Income Tax Act to confirm the TDS rates for specific payment types.
- Calculate TDS: Determine the total amount of payment to be made, and then apply the applicable TDS rates and deduct the amount of TDS. Example: TDS provision for rent, if the total amount paid exceeds INR 2,40,000 then TDS will be deducted @10%, XYZ Pvt. Ltd. has rented a building from Mr. A, paying INR 30,000 per month. So, in this case, the total amount of rent in a year is 30,000 * 12 = 3,60,000 (TDS will be deducted), XYZ Pvt. Ltd. must deduct 3000 (P.m) as a TDS before paying rent to Mr. A.
Note: For salaries, consider deductions like EPF, professional tax, and tax-saving investments before calculating the TDS (Tax Deducted at Source).
- Deposit TDS: Deposit the TDS amount with the Income Tax Department using the appropriate TDS challan. You can do this online through the Income Tax Department’s website. Ensure you deposit the TDS within the due dates to avoid penalties.
Note: Tax Deducted at Source (TDS) must be deposited to the income tax department by the 7th day of the coming month, except for TDS deducted in March, which should be deposited by 30 April. Example: If TDS is deducted in May then it should be deposited by 7th June.
- File TDS return: File TDS returns through the relevant forms (Form 24Q for salaries, Form 26Q for other payments) with the Income Tax Department. These returns provide details of TDS deductions, deposits, and payments.
- Prepare and issue TDS certificate: Prepare TDS certificates (Form 16 for salary and Form 16A for other payments) that detail the amount of TDS deducted and deposited, and issue the TDS certificate to the deductee.
How to deposit TDS?
Follow the below-mentioned steps to deposit the Tax Deducted at Source (TDS):
- Calculate and Deduct TDS: Determine the type of payment, and applicable rates, and deduct the amount of TDS before making the payment.
- PAN and TAN: Ensure the Permanent Account Number (PAN) of the deductor is valid. Also, If you are responsible for deducting tax (TDS) on behalf of the government – whether as an employer, business, or any other entity then you must have a TAN. If you don’t have a TAN, you need to apply for one. You can complete this process through the NSDL website.
- Fill out the TDS challan: Go to Income Tax Depatmet website > e-pay tax > enter TAN details and mobile number > fill out form 281 with the necessary details > and select the payment type.
- Payment: Complete the payment using your bank’s net banking facility or visit an authorized bank branch.
- Obtain Receipt: Obtain and verify the payment receipt.
- File TDS returns: Submit the quarterly TDS return with the Income Tax Department, including details of the TDS deposited.
Note: Tax Deducted at Source should be deposited on time (on the 7th day of the coming month, except for TDS deducted in March, for which the due date is 30th April). If TDS is not deposited on time, a penalty is applied at a rate of 1.5% per month from the due date until the date of actual payment.
What is TDS return?
A TDS return is a mandatory document filed with the Income Tax Department that details the tax deducted at source by the Deductor. This return confirms that the deducted tax has been deposited with the government. It includes information about the Deductor, Deductee, Payment details, TDS amount, TDS Challan details, etc.
The TDS return is filed by the deductor, which is the person or entity who has deducted TDS from the deductee’s income.
How it is filed: TDS returns are generally filed online through the Income Tax Department’s e-filing portal. Different forms are used based on the types of payment, which are mentioned below:
- Form 24Q: For TDS on salaries.
- Form 26Q: For TDS on payments other than salaries, like interest, professional fees, etc.
- Form 26QB: For TDS on payments made for the transfer of immovable property.
- Form 26QC: For TDS on rent payments.
- Form 27Q: TDS on payments to non-residents.
| TDS Certificates | TDS Return Forms | Due dates of certificate issuance |
|---|---|---|
|
Form 16 |
Form 24Q |
It is issued to the deductee once a year and must be provided by June 15th of the financial year following the year in which the tax was deducted. |
|
Form 16A |
Form 26Q |
It is issued quarterly, within 15 days of filing form 26Q. |
|
Form 16B |
Form 26QB |
It is typically issued within 15 days of filing the Form 26QB. |
|
Form 16C |
Form 26QC |
It is typically issued within 15 days of filing the Form 26QC. |
How to save TDS?
The following are the techniques, you can apply to save or reduce your Tax Deducted at Source amount:
- Section 80C: Section 80C of The Income Tax Act, 1961, provides tax benefits for various types of investments and expenses, such as Life insurance premiums, Public provident funds, National pension scheme, Housing loan principal repayment, etc. By investing in these instruments your taxable income will be reduced, the maximum reduction limit under this section is INR 1.5 lakh per financial year.
- Section 80D: Section 80D of the Income Tax Act, 1961, provides tax benefits for premiums paid on health insurance policies. A maximum deduction is INR 25,000 and in the case of a senior citizen (A person aged 60 years or more), the deduction amount is INR 50,000 in a financial year.
- Section 24B: Section 24(b) of the Income Tax Act, 1961, provides deductions for interest on home loans. The Deduction is allowed on the interest paid on loans for purchasing, constructing, or renovating a residential property. You can claim a maximum of INR 2 lakh per financial year on interest paid on home loans.
- House Rent Allowance (HRA): Under Section 10(13A) of the Income Tax Act, you can claim an HRA deduction if you live in a rented house. This deduction is calculated based on your salary, the rent paid, and the city in which you reside.
- Section 80E: Section 80E of the Income Tax Act, 1961, offers a deduction for interest paid on loans taken for higher education. This includes loans for education beyond the 12th grade, such as undergraduate, postgraduate, and professional courses. The deduction is available for interest paid on loans taken for the taxpayer’s own education, as well as for the education of their spouse or children. There is no cap on the amount of interest that can be claimed as a deduction.
Let’s take a hypothetical example to understand what you need to do after applying for deductions using the above sections of The Income Tax Act, to save your TDS.
Eg: Rahul is a Chartered Accountant working in a company named EY, and his annual package is INR 12 lakh.
TDS calculation for Amit before deductions:
Tax calculation:
Income up to 3 lakh = Nil
3 lakh to 7 lakh (5%) = 20,000
7 lakh to 10 lakh (10%) = 30,000
10 lakh to 12 lakh (15%) = 30,000
+4% (Health and education Cess) = 3200
Total tax liability = 83,200
Monthly TDS = 83,200/12 = 6933
TDS calculation for Amit after deductions:
Amit made investments of INR 1 lakh in the instruments where Section 80C deduction is applicable. So, now his taxable income becomes 12 lakh – 1 lakh = 11 lakh
Tax calculation:
Income up to 3 lakh = Nil
3 lakh to 7 lakh (5%) = 20,000
7 lakh to 10 lakh (10%) = 30,000
10 lakh to 11 lakh (15%) = 15,000
+ 4% (Health and education Cess) = 2600
Total tax liability = 67,600
Monthly TDS = 67,00/12 = 5633
Note: You need to provide proof of your eligible investments or expenditures to your employer, by filling out Form 12BB, outlining the deductions and investments you are claiming. This documentation allows them to adjust the TDS deduction based on your revised taxable income.
You can download Form 12BB from the Income Tax Department’s website, complete it, attach the relevant supporting documents, and then submit it to your employer.
How do I get my TDS refund?
When filing your Income Tax Return (ITR), you can claim a refund for the Tax Deducted at Source (TDS) if the amount of TDS deducted from your income exceeds your total tax liability for the financial year.
Example 1: TDS amount greater than the Tax Liability
Let’s say your total tax liability for the year is ₹20,000. However, based on your Form 26AS, you see that a total of ₹25,000 has been deducted as TDS.
In this case:
- Total Tax Liability: ₹20,000
- TDS Deducted: ₹25,000
Since the TDS deducted (₹25,000) exceeds your tax liability (₹20,000), you are eligible for a refund. The difference between the TDS deducted and your tax liability will be refunded. Refund is initiated usually within 3 months from the date of filing an ITR.
Example 2: TDS amout less than the Tax Liability
Suppose your total tax liability for the financial year is ₹30,000, but the TDS deducted as per your Form 26AS totals ₹15,000.
In this case:
- Total Tax Liability: ₹30,000
- TDS Deducted: ₹15,000
Since the TDS deducted (₹15,000) is less than your tax liability (₹30,000), you will need to pay the difference to fulfill your total tax liability. You will need to pay an additional ₹15,000 to the Income Tax Department to cover your full tax liability.
What is done with TDS after it is deducted?
After TDS (Tax Deducted at Source) is deducted, the deductor deposits it with the Income Tax Department, and it gets recorded and reconciled with the taxpayer’s account. Then, this amount is credited to the government’s Consolidated Fund of India.
The TDS collected becomes part of the government’s current fiscal year’s budget. Then, It is used to finance a wide range of public services and infrastructure projects as outlined in the budget. This includes everything from healthcare and education to transportation and defense.
The government estimates TDS collections based on historical data, economic trends, and forecasts. However, actual TDS collections can deviate from these estimates due to various factors. Consequently, the government may need to make budgetary adjustments throughout the financial year and ensure that spending aligns with available resources.
This TDS deducted from the taxpayer’s income is used to offset their total tax liability when filing the ITR. If the total amount of TDS deducted exceeds the total tax liability in a financial year, then it gets credited to the taxpayer’s bank account, provided at the time of ITR filing.
Difference between TDS and TCS
| Tax Deducted at Source (TDS) | Tax Collected at Source (TCS) |
|---|---|
|
TDS stands for Tax Deducted at Source, it is a system where tax is collected at the point of income generation. the person or entity making a payment, such as salaries, interest, rent, or professional fees, is responsible for deducting tax at the prescribed rates before making the payment to the recipient. The deducted amount is then deposited to the government on behalf of the recipient. |
TCS stands for Tax Collected at Source, is a mechanism where the seller collects tax from the buyer at the time of sale of specified goods or services and remits it to the government. Unlike TDS, which involves deduction from income payments, TCS requires tax collection at the point of sale. |
TDS Rates
| Payment Type | TDS Rate | Sections |
|---|---|---|
|
Salary |
Applicable Tax bracket + 4% Cess |
192 |
|
Interest from Debentures/Bonds |
10% |
193 |
|
Dividend |
10% |
194 |
|
Professionals Fees |
10% |
194J |
|
Rent (Land/Building) |
10% |
194I |
|
Rent (Plant/Machinery) |
2% |
194I |
|
Interest on Other Loans (e.g., bank deposits) |
10% |
194A |
|
Rent paid by individuals (above INR 50,000 p.m.) |
5% |
194IB |
|
Insurance Commission |
5% (HUF and Individuals), 10% (For others) |
194D |
|
Income from Winning the Lottery |
30% |
194B |
|
Acquisition of the Immovable Property |
10% |
194LA |
Conclusion
To wrap things up, understanding Tax Deducted at Source (TDS) is crucial for both individuals and businesses, by getting a clear grasp on how TDS functions—such as who is responsible for deducting it, when it is deducted, and the process for claiming it—you can manage your finances more effectively and avoid unnecessary penalties. Proper knowledge of TDS ensures you stay compliant with tax regulations and can make informed decisions about your financial planning. Investing time in understanding Tax Deducted at Source (TDS) not only helps in avoiding errors but also empowers you to handle your finances with greater confidence and ease.
FAQs
If TDS has been deducted from your income but you have not filed your Income Tax Return (ITR), you may face the following consequences: Delayed refund, Interest and penalties, Legal consequences like notices from the IT department, and Impact on your credit score.
Cess is an additional tax levied by the government on top of the regular income tax or corporate tax. Its purpose is to fund specific welfare schemes or projects. Example: Health and Education Cess (4%).
If your total tax liability is less than the amount of TDS deducted from your income then you are eligible to receive a TDS refund. Usually, a TDS refund is initiated within 3 months from the date of filing the Income Tax Return (ITR).
A TDS challan is a document used to deposit the TDS (Tax Deducted at Source) with the government. The challan includes information such as the amount of TDS, the financial year, the type of tax payment, and the PAN number of both the deductor and the deductee.
Form 15G: Form 15G is for individuals below the age of 60 years, this form is used to request non-deduction of TDS on interest income if their total taxable income falls below the basic exemption threshold.
Form 15H: Form 15H is for senior citizens (60 years and above), this form serves a similar purpose as Form 15G, allowing them to avoid TDS if their total income is below the taxable limit.
If you don’t provide your PAN to your employer, TDS on your salary will be deducted at the maximum rate applicable under the Act, which is often 20%. Additionally, you might face difficulties in claiming tax deductions.
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