WHAT IS TDS?
TDS is a method used by the Indian government to collect taxes at the source of income. This means that when you receive certain types of payments, a portion of the tax is deducted before you get the money. This helps ensure that taxes are collected in advance and reduces the chances of tax evasion.
HOW DOES TDS WORK?
- Specified Payments: TDS is applicable on various types of payments, including:
- Salaries
- Interest on deposits, bonds, and other investments
- Rent on land, buildings, and equipment
- Professional fees (consulting, legal, medical, etc.)
- Commission and brokerage
- Royalties
- Contractual payments
- Deduction at Source:
- Identification: The payer (deductor) identifies the payment subject to TDS.
- TDS Rate: The deductor determines the applicable TDS rate based on the payment type, deductee’s tax status, and payment amount.
- Calculation: The deductor calculates the TDS amount by applying the TDS rate to the payment amount.
- Deduction: The deductor deducts the TDS amount from the payment amount before paying the recipient.
- Payment: The deductor pays the recipient the payment amount minus the TDS amount.
- Deposit to Government:
- Online Payment: The deductor logs in to the government’s tax payment portal and initiates the payment process.
- Furnishing Details: The deductor provides required details, including TAN, payment details, deductee details, TDS rate, and amount.
- Payment Confirmation: The deductor confirms the payment and receives a payment acknowledgement number.
- Deposit: The payment is deposited into the government’s account, and the TDS amount is credited to the deductee’s tax account.
- Challan Generation: The system generates a challan (receipt) as proof of TDS deposit.
Why is TDS Important?
- Steady Flow of Revenue:
- TDS ensures that the government receives a continuous stream of revenue throughout the financial year. Instead of waiting for annual tax returns, the government collects taxes at the source of income, which helps in maintaining a stable cash flow.
- This steady inflow of funds is essential for the government to manage its expenditures, fund public services, and undertake development projects without facing liquidity issues.
- Tracking Financial Transactions:
- TDS acts as a mechanism to track financial transactions. When tax is deducted at the source, it creates a record of the transaction, which is reported to the tax authorities.
- This helps in identifying and monitoring various income streams of taxpayers, ensuring that all taxable income is accounted for and reported.
- Ensuring Tax Compliance:
- By mandating TDS, the government ensures that taxes are collected on time and reduces the chances of tax evasion. It places the responsibility of tax deduction on the payer, making it harder for the payee to avoid taxes.
- Regular TDS deductions and deposits also encourage taxpayers to maintain accurate financial records and comply with tax regulations, thereby fostering a culture of compliance.
- Reducing Tax Evasion:
TDS helps in curbing tax evasion by ensuring that taxes are deducted at the source before the income reaches the taxpayer. This minimizes the chances of underreporting income or avoiding taxes altogether. - Simplifying Tax Collection
For the government, TDS simplifies the tax collection process. Instead of chasing individual taxpayers for dues, the government collects taxes directly from the source of income, which is more efficient and less resource-intensive. - Providing Tax Credit
Taxpayers receive a TDS certificate (Form 16 or Form 16A) which they can use to claim tax credits while filing their annual income tax returns. This ensures that the tax deducted at source is credited against their total tax liability, preventing double taxation.
WHEN IS TDS DEDUCTED?
TDS is deducted at the time of making specified payments. However, individuals or HUFs (Hindu Undivided Families) whose business turnover does not exceed ₹1 crore or professional receipts do not exceed ₹50 lakhs are generally not required to deduct TDS, except in certain cases like rent payments exceeding ₹50,000 per month.
Key Points on TDS Deduction:
- Threshold Limits: TDS is only deducted if the payment exceeds certain threshold limits specified under the Income Tax Act. For example, TDS on salary is deducted if the salary exceeds the basic exemption limit.
- Rates of TDS: The rate at which TDS is deducted varies depending on the type of payment. For instance, TDS on salary is deducted as per the income tax slab rates applicable to the employee, while TDS on interest earned from fixed deposits is generally deducted at 10%.
- Individuals and HUFs: As you mentioned, individuals or Hindu Undivided Families (HUFs) whose business turnover does not exceed ₹1 crore or professional receipts do not exceed ₹50 lakhs are generally not required to deduct TDS. However, there are exceptions:
- Rent Payments: If the rent payment exceeds ₹50,000 per month, TDS must be deducted at 5%.
- Payments to Contractors: TDS must be deducted if the payment to a contractor exceeds ₹30,000 in a single payment or ₹1 lakh in aggregate during a financial year.
- Due Dates: The deducted TDS must be deposited with the government by the 7th of the following month. For example, TDS deducted in August must be deposited by September 7th.
- TDS Certificates: The deductor must issue a TDS certificate (Form 16 for salary, Form 16A for other payments) to the deductee, which can be used to claim the deducted amount while filing income tax returns.
TDS Rates
The rates at which TDS is deducted vary based on the type of payment and are specified in the Income Tax Act. For example, TDS on salaries is deducted based on the applicable income tax slab rates, while banks deduct TDS at 10% on interest payment
TDS (Tax Deducted at Source) rates are set by the Income Tax Act and vary based on the type of payment and the nature of the transaction
1. TDS on Salaries
- Rate: Based on applicable income tax slab rates.
- Explanation: Employers deduct TDS on salaries based on the individual employee’s income tax slab, considering any deductions and exemptions available under the Income Tax Act. This means the higher the salary, the higher the TDS rate, aligning with the progressive nature of income tax slabs. Employers are responsible for calculating the tax liability on an estimated annual income basis and deducting TDS accordingly every month.
2. TDS on Interest Income
- Rate: 10%
- Explanation: Banks and other financial institutions deduct TDS at a rate of 10% on interest payments, such as interest on fixed deposits or recurring deposits, provided the interest income exceeds the threshold limit (₹40,000 for general public and ₹50,000 for senior citizens as of the financial year 2023-24). If the recipient’s PAN is not provided, the TDS rate increases to 20%.
3. TDS on Dividends
- Rate: 10%
- Explanation: TDS at 10% is deducted on dividend income paid by companies to shareholders if the dividend exceeds ₹5,000 in a financial year. This ensures that taxes on dividends are collected upfront, though shareholders can adjust this TDS against their final tax liability when filing their income tax returns.
4. TDS on Rent
- Rate: 2% for plant, machinery, or equipment; 10% for land, building, or furniture.
- Explanation: When an individual or entity pays rent exceeding ₹2.4 lakhs per year, they must deduct TDS at 10% if the rent is for land, buildings, or furniture, and at 2% if the rent is for plant, machinery, or equipment. If the rent is paid by certain individuals or HUFs who are not subject to tax audits, TDS is applicable at 5% under Section 194-IB.
5. TDS on Professional Fees
- Rate: 10%
- Explanation: Payments made for professional services, consultancy fees, technical services, or contract payments exceeding ₹30,000 in a financial year attract a TDS of 10%. This applies to payments made to independent professionals like doctors, lawyers, architects, etc., as well as companies providing such services.
6. TDS on Commission and Brokerage
- Rate: 5%
- Explanation: TDS is deducted at 5% on payments exceeding ₹15,000 made to individuals as commission or brokerage. This includes commission on insurance, sales, or other similar transactions.
7. TDS on Purchase of Property
- Rate: 1%
- Explanation: When buying an immovable property (excluding agricultural land) where the purchase value exceeds ₹50 lakhs, the buyer must deduct TDS at 1% on the sale consideration. This ensures that the seller’s capital gains are subject to tax.
