What is TDS (Tax Deducted at Source)?

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Tax Deducted at Source or TDS is a way of collecting indirect tax by The Government of India, as per the Income Tax Act, 1961. TDS that comes under IRS (Indian Revenue Service) is directly managed by CBDT (The Central Board of Direct taxes).

TDS is collected in order to keep the revenue source stable for the govt. throughout the year. This prevents people from evading taxes.

How is TDS Deducted?

Both Income and expenditure, including salary, interests from banks, lotteries, rent payment, payment of commissions, and payments to freelancers etc. come under the umbrella of TDS. When payments are made under these segments, a percentage of the entire payment is withheld by the (paying) source. The source that is making the payment is called the Deductee, because the payment is being deducted from them. A Deductor , on the other hand, is a person or an organization that deducts tax from the deductee. For example, an employer (the deductor) pays salary to his employee (the deductee).

Advantages of TDS

The amount deducted as the TDS depends on the amount you earn. TDS starts getting deducted after you start earning. Both the government and the Tax-payers get benefitted from TDS. When you make payments through cash, cheque or credit card, a certain amount of tax is deducted, which gets deposited to the central agencies.

The advantages of collecting TDS are highlighted below:

  • It prevents people from evading taxes.
  • It ensures a steady source of revenue for the Government.
  • The Tax Collection base is widened.
  • The burden of responsibility of the Tax Collection Agencies and the Deductor are lessened.
  • It is convenient for the deductee as Tax is automatically deducted.

Types and Rates of TDS

TDS is estimated on the basis of a certain limit, i.e. the maximum level of one’s income after which TDS will be deducted from his/her next income. TDS may range from one to three percent of the actual payable limit and it is deducted as a percentage of the overall income.

 The following sections of the Income Tax Act

Income Tax Sectiona

TDS Rate

Highest limit

192

As per income the tax slab

As per the income slab

 193

10% of income from interests on securities.

NIL

 194

10% of income from deemed dividends.

NIL

194A

10% of income from interests other than those on securities

Rs.5,000

194B

30% of lottery or any game-related winnings

Rs.10,000

194BB

30% of income from racing of horses.

Rs.5,000

194C

1% of earning from contracts or sub contracts for individuals and Hindu Unified Families  (HUF) 2% for corporates

Rs.30,000

194D

10% of income from insurance commissions

Rs.20,000

194EE

20% of NSS deposits

Rs.2,500

194F

20% of payment made for UTI or MF units repurchased

NIL

194G

10% of commission received from selling lottery tickets

Rs.1,000

194H

10% of commission or brokerage earnings

Rs.5,000

194I

2% of rent of machinery and plant
10% of rent of building, land, fitting and furniture

Rs.1.8 lakhs

194J

10% of fees for professional or technical services

NIL

 194L

10% of compensation payment made to a resident while buying some immovable property

Rs.1 lakh

 

*The highest limit refers to the amount of profit or income up to which no TDS will be deducted. Tax will be deducted at Source only when your income or profit exceeds the given threshold limit.

How much TDS will be deducted from your salary is estimated at the beginning of the financial year. The employers are bound to deduct taxes from your salary every month in equal instalments. If, for instance, the deductee changes his job during the fiscal year, taxes will be deducted on the basis of all the accrued income of the present fiscal year. Since tax evaders are penalised, the Deductees should be very honest while mentioning their overall income.

When TDS is not Deducted? 

When you make a payment to the Government of India or the Reserve Bank of India, no TDS is collected. No TDS will be deducted in case of payment made to or received from the followings:

  • LIC, UTI and other insurance or cooperative societies.
  • Banks.
  • Central or State Financial Corporations.
  • Interest in KVP, Indira Vikas Party, or NSC.
  • Refund from income Tax department or Interest paid under Direct Tax.
  • Interests received from recurring deposit or savings account in cooperative societies or banks.
  • Interest received in NRE account.
  • All institutions notified under no-TDS.

Apart from these, there are other institutions where TDS is applicable, for example, interest on compensation from Motor Vehicles Claims Tribunal (MVCT). Taxpayers are required to check whether or not TDS is applicable on their income with a particle institution.

TDS Certificate:

It is not easy to keep track of TDS by an individual as the deductions are collected on an ongoing basis. The deductor gives a TDS payment certificate to the payee/deductee as per Section 203 of the Income Tax Act. Banks also offer this certificate for deductions on pension paymemt etc. The certificate is valid only if it is issued at the deductor’s own letterhead.  Everyone should ask for TDS certificate whenever it is applicable.

Refund of Excess TDS Deductions

The deductor is allowed to claim for refund if an excess amount has been deducted as TDS from a person. The difference between the actual amount that the deductor paid and the amount of tax deducted is considered as the excess amount. This excess amount will be refunded by the authorities.

Highlights

  • TDS refers to the deductions of tax on an individual’ income. The deductor is liable to make payments to the deductee .
  • TDS helps reduce the burden of filing tax for a deductee and make sure that the Government receives stable revenues.
  • TDS is collected after your earning reaches a certain limit. Maximum 30% TDS is applicable on the money won from horse races, lotteries or other games.
  • As soon as TDS has been collected, the Deductor or the bank issues a TDS certificate.
  • The amounts paid to the government, cooperative societies and RBI etc., are exempted from TDS.
  • If any discrepancy is found between the amount collected and the amount payable, one can request for refunds.

Frequently Asked Questions: TDS

What is the minimum salary for the deduction of TDS by the Deductor?

If the employee falls under the income tax slab, TDS will be deducted on his/her salary. In other words, an individual whose income is less than Rs. 2.5 lakh, a senior citizen with a salary that is less than Rs. 3 lakhs and senior citizens (above the age of 80) whose earnings are less than Rs. 5 lakh, do not under the Income Tax Slab. Therefore, no TDS is deducted from their remuneration.

Is it only on salary that TDS is applicable?

No, not only on salary, TDS is deducted from any income from interest on fixed accounts savings account or recessing accounts, from deemed dividends, income from  insurance commissions, or lottery or horse racing or teh prize money won from any such game, repurchase of UTI or mutual fund units, payment in NSS deposits, etc. The details are available in Income Tax Act, Sections 192 to 194L.

How to know the amount deducted as TDS and whether or not it has been credited to me?

The Deductor or your employeer has to provide you the TDS certificate (Form 16 and 16A ). TDS certificates confirm the amount that is deducted as TDS.  Form 26AS can be viewed on the Income Tax e-filling portal as well. 

What action will be taken in case TDS is not deducted by the Deducteor or deposited to the Income Tax Authorities?

As per Section 201 of the Income Tax Act , in case the deductor fails to deduct taxes or deposit the collected amount, he will pay an interest on the amount that is due to be submitted to the government. The interest that is applicable is:  1% for every month or part of a month on the tax that is pending. The due tax will be calculated from the very date on which the tax had to be deducted till the date when that was actually collected. Similarly, 1% and 1.5% for every month or part of a month on the tax pending calculated from the date when the tax was deducted to the date when it is actually paid. As per section 271C, a penalty of the amount equal to the tax not collected or not paid may have to be paid by the deductee.

Will an employee have to pay penalty if the deductor fails to collect or deposit the tax?

No. Only the deductor is responsible for any TDS-related incidents. He has to ensure that TDS is collected properly and submitted to the government. The employees or the deductees have nothing to do with it..

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