Introduction
The objective behind introducing TDS was to minimize tax evasion. But what is the meaning of TDS? Tax Deducted at Source, also known as TDS, was introduced by the Income Tax department to collect tax when you earn money. Thus, when you generate new income, a certain percentage gets deducted. TDS applies to dividends, interest received, or even salaries.
It was challenging to trace the widespread tax evasion that the Income Tax department was dealing with. However, tax evasion has significantly decreased since the implementation of TDS.
When should TDS be deducted, and who is liable to deduct it?
The IT department introduced TDS (Tax Deducted at Source) to deduct tax from payments received and deposit the money in a government account. The payer is responsible for withholding and depositing the tax with the government. There are two parties in action: the deductee is one whose income is deducted, and the deductor is the one who is deducting. Here’s how the deduction cycle of TDS works:
● As per the Income Tax Act, all the payments that fall under the act are liable for TDS. The only exemption is for the individual or the Hindu Undivided Family. Furthermore, an audit is not required.
● Any individual or Hindu Undivided Family (HUF) paying rent above Rs. 50,000 is required to pay 5% TDS. Regardless of whether your books are audited, the tax will be subtracted. People or companies falling under the 5% TDS bracket are not liable to apply for a Tax Deduction Account Number.
● The answer to “what is TDS in salary” depends on the income tax bracket the employee belongs to, employers may deduct TDS. The bank will deduct 10% of your income from the respective employer. However, there is a 20% deduction if your PAN isn't linked to the bank. According to the TDS rates outlined in the Income Tax Act, the deductor can withhold the salary and submit it to the government later.
● If employees release their total income to their employer and confirm that they do not fall under taxable income, the Tax Deducted at Source (TDS) wouldn’t be levied. People falling below the taxable threshold can submit forms 15H and 15G to the bank to get an exemption from the TDS. In doing so, the bank will not deduct TDS from your income.
● In case you can’t submit forms to the bank or reveal your total income to the employer, you can file for a refund. However, it would help if you revealed your total income tax department to claim a refund.
Example of TDS & Types of TDS
Understanding the implementation of Tax Deduction at Source (TDS) is difficult for many. Thus, let’s understand with the help of an example. Suppose there is a start-up company named A that is paying rent of Rs. 80,000. Now, the TDS rate applicable here would be 10%. Thus, A can deduct Rs. 8,000 and pay the rest of Rs. 72,000 as rent to the landlord. The property owner can treat the Rs. 72,000 as Rs. 80,000 and take credit for the deducted amount.
Furthermore, different types of payments qualify for TDS. For example,
● Salary
● Bank interest
● Brokerage or commission
● Amount under LIC
● Commission payments
● Compensation for acquiring immovable property
● Deemed dividends
● Contractor payment
● Insurance commission
● Payment for rent
● Interest on security
● Interest apart from the interest in securities
● Remuneration paid to the technician such as the director
● Transfer of immovable property
● Winning amount from games such as the lottery
What is TDS in Income Tax?
TDS or Tax Deducted at Source, under the Income Tax Act, 1961, is a type of tax charged on income. In simple words, TDS is the income tax deducted from the payment you receive. The Income tax department states the types of payments for TDS including salaries, commissions, dividends, interests, rent received, and other payments.
Companies or individuals making rent payments are liable to deduct the tax from the salary or the rent and submit it to the tax department. This rule doesn’t apply to the people falling out of the taxable income. However, individuals must reveal their total income to the department, employer, or bank. It is a taxable income for people who do not come under any slab set by the Income tax department.
What are the rules for Tax Deducted at Source?
The tax deducted at the source comes with a set of rules. If you abide by these rules, you will avoid paying penalties, fees, or interest. Here are the rules for TDS set aside by the tax department of India.
● Tax Deducted at Source (TDS) must be deducted at the time of payment. The deductor is liable for payment to deduct and submit it to the government.
● Any delay in paying TDS will imply a penalty of 1% per month till the time payment is made.
● The deductor should submit the deducted amount by the 7th day of the subsequent month. It applies to all who fall under the name of deductor.
● In non-payment of Tax Deducted at Source (TDS), there is a penalty of 1.5% per month until the overdue is paid off.
What are the TDS rates?
The Income Tax in India has different TDS rates depending on the nature of payments.
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How to apply for a TDS refund?
People filing income tax returns know that a TDS refund and an income tax return are the same. However, there is a misconception about TDS being different from an Income tax return. While filing the TDS return, the applicant must reveal bank account details such as account number, IFSC code, etc. Then, the applicant can claim during the annual filing period of the income tax return.
If the deductor has deducted more tax amount than that of filing, you can claim the amount as a refund. For online filing of TDS refund, the applicant must have a Tax Filing and Collecting Return Number (TAN). Importantly, the TAN should be registered for e-filing.
Before heading to the File Validation Utility, ensure the TDS statement is well-prepared using the Return Preparation Utility. Additionally, ensure your Digital Signature Certificate is registered for e-filing. This may only apply to people who are using DSC for e-filing.
This is how you can claim a TDS return online.
Step 1: Visit the official website of the Income Tax Department (https://incometax.gov.in).
Step 2: On the top right, click on “log in” (people who haven't registered will have to create an account).
Step 3: Log in to file the TDS using your user ID, which is your TAN.
Step 4: After logging in, click on “TDS” and select “Upload TDS” from the drop-down menu.
Step 5: A new window will appear wherein you must fill in the form.
Step 6: Click on “Validate” after rechecking the form's fields.
Step 7: Validate your return with DSC or Electronic Verification Code (EVC).
After filing TDS, check the refund column. The refund is processed within six months of filing the ITR. The applicant can also check the refund status on the Income tax portal.
Steps to check TDS Deduction Status
The deductor usually automates the TDS deduction from the deductee’s account. The deductor informs the banks accordingly. Payments like commission on immovable property or anything that occurs once a month/year are deducted immediately while the payment is made. Here is the step-by-step procedure to check the status of your refund.
Step 1: Visit the official website of the Income Tax Department.
Step 2: Login using your details, i.e., TAN
Step 3: Locate “My Account” and click on “view Form 26AS (Tax Credit).”
Step 4: Download the file by selecting the year.
Step 5: The downloaded file will be password protected. The date of birth mentioned in your PAN will be the password for the file. For example, your date of birth mentioned in your PAN is 12.07.1985. Therefore, the password would be 12071985.
Step 6: You can check all TDS details, including deductions and refunds.
What is a TDS certificate?
The certificate released after the TDS deduction is known as the TDS certificate. There are two types of TDS certificates: Form 16 and Form 16 A. As per Section 203 of the IT Act, 1961, the deductor must release a certificate showing the deducted amount from income to the deductee.
Salaried: Form 16 is given to the salaried employee wherein the amount deducted is mentioned. The form contains information about the deductor, total amount, and deducted amount. The certificate must be released before May 31 of the ongoing financial year.
Non-salaried: Form 16A is for non-salaried people. The deductor releases the certificate, which includes all the information about the amount and deducted tax along with his details.
Advantages of TDS
Tax evasion was a severe problem for the department before the implementation of the TDS. Both people evading tax and the department had to go through the cumbersome process of extracting tax. However, since the advent of TDS, things have been less complicated. Here are a few advantages of TDS observed by both the taxpayer and the IT department.
● It helps in controlling tax evasion instances.
● It is a steady source of revenue.
● It is simpler for the deductee as the tax on his/her behalf is already paid.
● The tax collection agencies have felt less burdened since the implementation of TDS.
Frequently Asked Questions
The Tax Deducted at Source (TDS) is deducted at the time of payment generation. Thus, the party generating income is eligible to deduct TDS.
The TDS rate depends upon the nature of the payment and on the slab prescribed by the Income Tax Department.
If the payable salary is less than Rs. 2,50,000 per annum, the employee does not need to pay TDS.