What is TDS?
Tax deducted at Source (TDS)is a system introduced by Income Tax Department, where person responsible for making specified payments such as salary, commission, professional fees, interest, rent, etc. is liable to deduct a certain percentage of tax before making payment in full to the receiver of the payment. Instead of receiving tax on your income from you at a later date, the govt wants the payers to deduct tax before hand and deposit it with the govt.
As the name suggests, the concept of TDS is to deduct tax at its source. TDS is one kind of advance tax.TDS is deducted at the time of payment in cash or cheque or credit to the payees account whichever happens earlier.TDS has to be deducted at the rates prescribed by the tax department.
The company or person that makes the payment after deducting TDS is called a deductor and the company or person receiving the payment is called the Deductee.It is the deductors responsibility to deduct TDS before making the payment and deposit the same with the government. TDS is deducted irrespective of the mode of paymentcash, cheque or creditand is linked to the PAN of the deductor and deductee.
The recipient of income or deductee receives the net amount (after deducted of tax at source). The recipient will add the gross amount to his income and the amount deducted at source is adjusted against his final tax liability. Basically take credit of the amount already deducted and paid on his behalf.
Example :- Let us take an example of TDS assuming the nature of payment is professional fees on which specified rate is 10%.
XYZ Ltd makes a payment of Rs 50,000/- towards professional fees to Mr. ABC, then XYZ Ltd shall deduct a tax of Rs 5,000/- and make a net payment of Rs 45,000/- (50,000/- deducted by Rs 5,000/-) to Mr. ABC. The amount of 5,000/- deducted by XYZ Ltd will be directly deposited by XYZ Ltd to the credit of the government.
TDS is deducted on the following types of payments:
- Interest payments by banks
- Commission payments
- Rent payments
- Consultation fees
- Professional fees
However, individuals are not required to deduct TDS when they make rent payments or pay fees to professionals like lawyers and doctors.
A deductordeducts TDS at the income tax slab rates mentioned in the income tax act whereas Banks deduct TDS @ 10%or they may deduct @ 20% if they do not have your PAN information.
If you submit investment proofs (for claiming deductions) to your employer and your total taxable income is below the taxable limit you do not have to pay any tax. And therefore no TDS should be deducted on your income. Similarly you can submit Form 15G and Form 15H to the bank if your total income is below taxable limit so that they dont deduct TDS on your interest income.
In case you have not been able to submit proofs to your employer or if your employer or bank has already deducted TDS and your total income is below the taxable limit) you can file a Return and claim a refund of this TDS.
Advantages of TDS:-
- As tax deduction takes place throughout the year, it ensures a continuing flow of revenue to the Government.
- It is a measure to prevent tax evasion.
- It helps in increasing the tax reach as it is deducted at the time of payment itself preventing the commitment of fraud.