Wondering What is TDS And How It Works? Here’s What You Need to Know

Aug 08, 2018 | 3 months ago | Read Time: 4 minutes | By iKnowledge Team

TDS stands for ‘tax deducted at source’. It is based on the principle that you pay as you earn. To reduce the chances of any non-compliance, the government introduced TDS to collect income tax at the time it is generated rather than later.

Taxes can be perplexing for most millennials. This is mainly because taxation as a subject does not form a part of the curriculum in schools. You can always avail the services of tax professionals and CAs, but being aware about how it works is essential. So, let’s simplify TDS and understand its mechanism.

As per the Income Tax rules, if a person or company makes payment more than the threshold limit to another person or company, he is required to deduct from it a prescribed percentage as tax to be deposited with the government. The recipient can then claim credit of such tax at the time of calculation of his income tax liability. For example: Person X should make a payment of Rs. 100 to Person Y. Assuming an applicable tax rate of 10%, X will make a payment of Rs. 90 to Y and the balance of Rs.10 to the Government as tax on behalf of Y. This Rs. 10 will be reflected in Y tax credit when X files TDS return. Y can claim Rs.10 as credit from his final income tax liability.

Who is a deductor and deductee?

The person or company who makes the payment after deducting tax is called the deductor. And the person to whom such payment is made is called the deductee. In the above example, Y is the deductee and X is the deductor. The onus of deducting tax and paying it to the government lies with the deductor.

How TDS works?

The deductor deposits the TDS with the government and issues a TDS certificate to the deductee which mentions the amount paid on his behalf as tax. Once deposited, the TDS amount reflects in the income tax department’s records in Form 26 AS of the deductee. As a result, the recipient of income (deductee) receives net amount (after tax deducted). To calculate the final tax liability, recipient has to add the gross amount to his income and the amount deducted at source (mentioned in TDS certificate) is adjusted against his final tax liability. If the final tax liability is lesser than the TDS, he can claim a refund.

What is the difference between TDS and PAN?

If you’re a salaried person, TDS is linked to your PAN as well as the PAN of your employer (the deductor) and it is debited from your salary account via different modes including cash, cheque or credit. It is important that you mention your PAN correctly at places where TDS may be applicable on your income. TDS is deducted at a higher rate (20%) if you fail to provide your PAN to the deductor. So, you must ensure that you have provided the correct PAN.

What kind of payments are eligible for TDS?

TDS is applicable only on certain types of payments like:

  • Remuneration
  • Interest payments by banks
  • Rent
  • Commission
  • Consultation and professional fees

However, payments made towards rent or fees paid to lawyers and doctors do not fall under TDS.
Also, there is no uniform TDS rate. Specific rates are prescribed by the government and they differ based on the types of payments and recipients.

What is TDS return?

A TDS return is a mandatory statement to be submitted to the income tax department. It includes details of tax deducted and deposited by you. Therefore, It is important to file TDS return to keep track of your taxes and maintain a sound financial record. You can file TDS return form online on the income tax website.

The TDS form applicable to you depends on the category of income you belong to.

For example:

TDS on salary- Form 24Q

TDS where deductee is a non-resident or foreign company- Form 27Q

TDS on payment for transfer of certain immovable property- Form 26QB

TDS in other cases- Form 26Q

TDS is required to be filed quarterly and the due dates for each quarter are:

Quarter ending 30th June – 15th July

Quarter ending 30th September – 15th October

Quarter ending 31st December – 15th January

Quarter ending 31st March – 15th May

Failure to abide by the deadlines will attract a penalty charge so ensure timely filing of your TDS return.

When is TDS not deducted?

There are some instances where TDS is not deducted. These include:

  • Payments made to the Reserve Bank of India, the Government of India, etc.
  • Interest credited to Central or State Financial Corporations
  • Banking companies
  • Interest paid under direct tax or refund from the IT department
  • Interests earned from recurring deposit or savings account in cooperative societies or banks
  • Interest earned in NRE account
  • UTI, LIC and other insurance or co-operative societies or banks
  • All institutions notified under no-TDS ambit
  • Interest on compensation from Motor Vehicles Claims Tribunal.

In short, it is advisable to check if your income is liable for TDS with an institution or not.

How to avoid TDS?

If you do not expect your income to exceed the exemption limit, you are not liable to tax and thus no TDS can be deducted from your income. To claim this exemption, you can submit form 15G/15H. You can also submit proof of your investments to the deductor to claim applicable deductions.

What are the advantages of TDS?

Besides being an effective tool to check and control tax-evasion, TDS was introduced because of its various advantages like:

  • It ensures a continuous flow of revenue to the Government as it is collected at regular intervals.
  • It widens the tax reach.
  • Tax gets collected and deposited to the credit of the Government automatically which reduces the tax filing burden of the deductee.

Advt. no.: IA/Jul 2018/4246


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