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What is Tax Deducted at Source

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May 10, 2023

10 Minutes

Demystifying TDS (Tax Deducted at Source): A Comprehensive Guide

Understanding TDS (Tax Deducted at Source):

TDS, or Tax Deducted at Source, is a pivotal component of India's tax system. It represents the amount deducted by an employer from an individual's income, deposited on behalf of the taxpayer to the Income Tax (IT) Department. This deduction, a percentage of one's monthly income, is mandated at the point of payment. The Income Tax Act of 1961 outlines the liability for individuals or organizations to pay taxes when their income exceeds a specific threshold.

What is Tax Deducted at Source (TDS)?

TDS serves as a form of advance tax levied periodically by the Government of India. The deducted TDS becomes eligible for a tax refund when the taxpayer files their Income Tax Return.

TDS is applicable to various income sources, including:

Salary
Commission
Rent
Interest payments by banks
Professional or consultant fees
Contractor payments
LIC amounts
Compensation for acquiring immovable property
Brokerage or commission
Insurance commission
Interest on securities
Remuneration for company directors, and more.

Examples of TDS Deduction:

Example 1:

Consider Mr. Paul, a self-employed professional. If he receives Rs.40,000 as an advance and another Rs.20,000 upon completing the work, TDS will be deducted from both amounts (10% of Rs.40,000 and 10% of Rs.20,000), resulting in a total taxable amount of Rs.6,000.

Example 2:

If Mr. Paul receives the complete payment after completing the work, TDS of Rs.6,000 (10% of the total sum) will be deducted, and he will receive Rs.54,000 for his services.

How TDS Works and Who Can Deduct It:

The entity making the payment is responsible for the TDS deduction. This individual or organization deducts the specified amount and deposits it with the government within each financial year. TDS rates vary, and it's essential to note that the absence of a PAN attracts a 20% TDS rate unless a specific rate, such as MMR, is mentioned.

TDS Return and Associated Forms:

TDS return is a crucial statement issued post-tax payment, encompassing all TDS deduction transactions in a quarter. Various forms are associated with TDS returns, each serving a specific purpose. Key forms include:

Form 24Q: Details of TDS deducted from salary (Quarterly)

Form 26Q: Details of TDS deducted from earnings except salary (Quarterly)

Form 26QB: Details of TDS deducted on income from the transfer of immovable assets (Monthly)

Form 26QC: Details of TDS deducted from rent payments (Monthly)

Form 27Q: Details of TDS deducted on incomes earned from interest, dividends, or other payable sums (Quarterly)

Acknowledgment forms, provided to taxpayers by the deductor, act as proof of tax payment and are essential for claiming tax credits or refunds during Income Tax Return filing.

Due Dates for Different Forms:

Forms containing TDS deduction details must be submitted according to specific due dates and quarters:

1st Quarter: April 1 to June 30 (Due Date: July 31)
2nd Quarter: July 1 to September 30 (Due Date: October 31)
3rd Quarter: October 1 to December 31 (Due Date: January 31)
4th Quarter: January 1 to March 31 (Due Date: May 31)

Penalty Provisions:

Non-compliance with TDS deduction rules incurs penalties, such as fees and interest on the principal taxable amount. Penalties include:

Regulation Regarding Tax Deduction: 1% interest per month for delayed tax deduction.
Regulation Regarding TDS Payment: 1.5% penalty per month for non or delayed payment.
Regulation Regarding TDS Return Filing: Rs.200 daily penalty (Section 234E) for late filing, not exceeding the total tax amount.

How to Check Deducted TDS Amount:

To verify whether TDS has been deducted, individuals can follow these steps online:

Register as a new user on the official Income Tax Department website.
Enter PAN details and generate a password.
Log in and select the option to view the tax credit statement or Form 26AS.
Access the TDS Reconciliation Analysis and Correction Enabling System to review tax liabilities, including TDS details.

TDS Refund and Non-deduction of Applicable Tax:

Taxpayers eligible for a refund can file a claim during annual Income Tax Return filing. If a taxpayer overpays taxes, the excess amount is refunded with the return. Non-deduction of applicable tax can be requested through methods like Form 15G or 15H, declaring income below the basic exemption limit, or applying for a certificate for deduction of tax at a lower or NIL rate via Form 13.

Latest Updates About TDS:

Stay informed about recent changes and updates:

Section 194BA: Introduces TDS on income from online gaming.
Section 196A: Non-residents earning income from Indian mutual funds can use a Tax Residency Certificate for TDS benefits.
Section 192A: TDS rate decreased to 20% on Provident Fund withdrawal for PAN-less employees.
Section 193: No exemption from TDS on interest from listed debentures.
Section 194N: TDS threshold increased on co-operative society cash withdrawals to Rs. 3 crore.

Conclusion:

Navigating TDS for Fiscal Responsibility:

TDS is a critical aspect of India's taxation framework, ensuring timely contributions and adherence to financial regulations. Understanding TDS intricacies, filing obligations, and recent updates empowers taxpayers to navigate the tax landscape effectively. As TDS regulations evolve, staying informed is essential for financial responsibility and seamless compliance with the Income Tax Act, 1961.