What is TDS, why it is deducted and to whom?

what is tax deducted at source?

When a person pays certain types of income, such as salary, commission, rent, professional fees, interest, etc., they deduct a specific amount known as Tax Deducted at Source (TDS). The person who makes the payment deducted the TDS and the receiver of income receives the balance net amount. The recipient will add the gross amount to their income, and they will adjust the amount of TDS against their final tax liability. The recipient takes credit for the amount already deducted and paid on his behalf.

Why is TDS deducted and who deducts the TDS?

  • If any person making payments mentioned under the Income Tax Act is liable to deduct TDS at the time of making such payments. But HUF (Hindu Undivided Family) does not need to deduct TDS as it does not require auditing of their books.
  • If you are a salaried employee then your employer will deduct TDS as per the Income tax slab. However, If you submit IT Declarations/Savings (for claiming deductions) to your employer and if your total taxable income is below the taxable limit then you need not have to pay any tax.
  • In the Form 26AS statement, you can see the amount of tax deducted and deposited in a person’s name/PAN in a particular financial year.
  • Suppose you failed to submit IT Declarations/Savings to your employer and they deducted the TDS, you can file a return and claim a refund of it if the total taxable income is below the total tax limit.
  • If an individual pays a rent amount exceeding Rs. 50,000 per month, the person making the payment will deduct a TDS of 5%, even if their books are not liable for a tax audit. Also, the individuals falling under deductions of 5% TDS are not eligible to apply for TAN (Tax Deduction Account Number).
  • Banks deduct TDS at 10% for working accounts and 20% if they do not have your PAN information. For most of the payments, the Income Tax Act sets the TDS rates, and the payer deducts TDS as per the specified rates.
  • If your total taxable income is below the tax limit, you can submit Form 15G and Form 15H to the bank. In such a case the bank will not deduct any TDS on your interest income.

What is a TDS Return?

Payments exceeding the tax limit require TDS deduction under Income Tax Act sections 192 to 195. After deducting the amount you have to deposit the deducted TDS amount quarterly along with the respective TDS Return.

How Does TDS or Tax deduction at source Work?

TDS or Tax deducted at source is applicable to all taxable incomes at a fixed rate, except salary, to which the TDS rate depends on the type of income rather than the amount of payment.

In terms of salary, TDS deduction happens at the applicable slab rate and may vary in the middle of the year based on changes to income due to bonuses or appraisals.

Most of the employed taxpayers fail to prepare in advance and end up losing a big amount of their salaries in the last quarter of the financial year. So it is advisable to start your tax-saving early to reduce TDS deduction and to avoid last moment rush for tax-saving investments.

Following are a few payments when TDS must be deducted by the payer:

  • Payment of Salary
  • Interest payment on debentures and other securities
  • Dividend payments
  • Lottery winnings, prize money, etc.
  • Commission income
  • Consultation & Professional fee
  • Rent on building (only when exceeding Rs 50,000 p.m.)
  • Payment to NRI on any investments
  • Payment to contractors/vendors

When to File TDS Returns?

TDS Transactions Due Date TDS Form Form Certificate
TDS on Salary Q1 – 31st July Form 24Q Form 16
Q2 – 31st October
Q3 – 31st January
Q4 – 31st May
TDS on all payments made to non-residents except Salaries Q1 – 31st July Form 27Q Form 16A
Q2 – 31st October
Q3 – 31st January
Q4 – 31st May
TDS on sale of property 30 days from the end of the month in which TDS is deducted. Form 26QB Form 16B
TDS on rent 30 days from the end of the month in which TDS is deducted. Form 26QC Form 16C

How can TDS Benefit you?

Tax paid on income in advance will reduce your tax deduction amount at the end of the financial year which helps you to avoid payment delays and penalties.

TDS Calculation

Calculation of  TDS : (Basic + Allowances – Deductions) *12 – (IT Declarations + Standard deductions)

The percentage of TDS will be based on income slab rates.

e-filing for TDS Return

While e-filing the file should be in a clean text ASCII format with ‘txt’ as filename extension.

Download the free software to prepare the return file using the utilities provided by NSDL or third-party software.

Once you prepare the file, validate it using the File Validation Utility (FVU) provided by NSDL. You can either submit the generated .fvu file at TIN-FC or upload it on the TIN website.

E-payment of TDS:  Provides an online option to pay taxes online. Required to have net-banking services from any of the authorized banks.

Penalty for late filing of TDS Return: If an individual fails to file TDS or tax deducted at source return within due time, he/ she will need to pay a fine of Rs. 200 per day until the return is filed. The fee is applicable for every day until the fine amount is equal to the total liable TDS Amount.

Late TDS filing or incorrect PAN, TDS details incur a penalty of Rs. 10,000 to Rs. 1 Lakh.