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TDS: Tax Deducted at Source

Tax Deducted at Source (TDS) is a system implemented by the government to collect taxes at the source of income itself. It serves two primary purposes: revenue collection and ensuring tax compliance. In this comprehensive guide, we will discuss everything you need to know about TDS, including its meaning, filing process, return, due dates, and more.

1. What is TDS?

TDS, or Tax Deducted at Source, is a taxation system where taxes are collected directly from the source of income. This requires a particular tax percentage to be deducted by the payer before the payment is made to the beneficiary. The deducted tax is then given directly to the government.

TDS has two main roles: revenue collection and tax enforcement. It allows for early tax collection from individual or entity earnings, providing the government with regular revenue. It also tracks financial transactions to prevent tax evasion.

2. Applicability of TDS

TDS is applicable to various types of payments such as salary, interest, rent, professional fees, commission, contractual payments, dividends, and more. The rates at which TDS is deducted can vary based on the nature of the payment and the provisions of the Income Tax Act.

3. TDS Deductor and Deductee

Every transaction involves a payor (deductor) and payee (deductee). The deductor removes the TDS from the payment and gives it to the government. The deductee receives the remaining amount post TDS deduction.

The deductor is also referred to as the payer, as they deposit the deducted tax amount to the government on behalf of the deductee. The deductee is commonly referred to as the payee.

4. How TDS Deduction Works

The deductor, after deducting TDS, must issue a TDS certificate to the deductee and deposit the tax amount with the government. The deductee can claim this TDS as a credit when filing their income tax, which is adjusted against their total tax liability.

For instance, when a person's TDS is deducted from their salary by their employer, it's paid to the government monthly. This TDS can then be claimed as a credit when the person files their tax return.

5. Benefits of TDS Deduction

TDS implementation aids the government and taxpayers. It prevents tax evasion by shifting the tax deposit responsibility to the income payer, allowing the government to collect taxes from fewer payers instead of many income receivers.

Another benefit is that the government receives a steady source of revenue throughout the year, rather than waiting until the time of filing tax returns. This helps in maintaining a consistent flow of funds for the government's operations.

From a taxpayer's point of view, TDS offers the convenience of having tax deducted at various points when they receive income during the year itself. This eliminates the need to pay a lump sum amount of tax at the time of filing tax returns.

6. TDS Payment and Due Dates

After deducting the TDS amount, the deductor is required to deposit it with the government within the specified due dates. The due dates for TDS payment vary based on the month of deduction. The payment is made using Challan No. 281.

Here are the due dates for TDS payment:

Month of Deduction

Due Date for Making Payment

April

7th May

May

7th June

June

7th July

July

7th August

August

7th September

September

7th October

October

7th November

November

7th December

December

7th January

January

7th February

February

7th March

March

30th April (Non-Government Deductors) / 7th April (Government Deductors)

7. Penalty for Default in TDS Payment

Failure to comply with the provisions of TDS payment can attract penalties. When TDS is not deducted or deducted but not deposited with the government, interest is levied on the TDS amount.

If TDS is not deducted in whole or in part, interest is levied at a rate of 1% per month or part of the month from the date when tax was required to be deducted till the date of actual deduction.

If TDS is deducted but not deposited with the government, interest is levied at a rate of 1.5% for each month or part of the month.

Additionally, prosecution under Section 276B can be initiated against a defaulter who fails to deduct or deposit TDS. This can result in imprisonment for a minimum of 3 months and a maximum of 7 years, along with a fine.

8. TDS Certificate and Form 26AS

A TDS certificate is issued by the deductor to the deductee as an acknowledgment that tax has been deducted and deposited with the government on their behalf. It contains details of the payment, deductor, deductee, date of tax deduction, and date of its credit to the government.

The deductee can use this certificate to claim the credit or refund of taxes while filing their income tax return.

Form 26AS is an annual statement that contains tax credit information of each taxpayer against their PAN. It includes details of taxes paid, including TDS, and taxes deducted on behalf of the taxpayer. It is important for the details in Form 26AS to match the actual TDS deducted, as any mismatch can lead to penalties or incorrect claims while filing tax returns.

9. How to Claim Credit of TDS

Claiming the benefit of TDS while filing the income tax return is a simple process. The taxpayer needs to download their Form 26AS, which contains all the details of taxes paid and TDS deducted. They should then update these details in their return, which will reduce their total tax liability.

By claiming the credit of TDS, taxpayers can ensure that they are not paying taxes twice on the same income and can avail of any refund due to excess TDS deductions.

10. Exemption from TDS

Exemption from TDS liability is possible when the income is below the basic exemption limit. For resident citizens and Hindu Undivided Families (HUF), Form 15G is used to avoid TDS liability on interest income. For resident senior citizens who are 60 years or above, Form 15H is used.

Non-residents can file an application under Section 195(3) of the Income Tax Act to obtain a certificate of non-deduction or lower deduction of taxes if their income is below the basic exemption limit.

11. TDS Section

Section

Nature of Payment

Section 192

TDS on Salary

Section 192A

Premature EPF withdrawal

Section 193

TDS on interest on securities

Section 194

Payment of dividend

Section  194A

TDS on Interest other than Interest on Securities

Section 194B

Amounts that someone has won through lotteries, puzzles, or games

Section 194BB

Amounts that someone has won from horse races

Section 194C

Payments to contract or sub-contractor – Aggregate Payments

Section 194D

Payment of insurance commission to domestic companies

Section 194DA

Maturity of Life Insurance Policy

Section 194EE

Payment of an amount standing to the credit of an individual under NSS (National Savings Scheme)

Section 194F

Payment of repurchase of unit by UTI (Unit Trust of India) or any mutual fund

Section 194G

Payments or commission on sale of lottery tickets

Section 194H

Commission or brokerage

Section 194I

Rent of land and building,furniture or plant and machinery

Section 194IA

Payment for transfer of immovable property other than agricultural land

 

Section 194IB

Rent payment that is made by an individual or HUF not covered under payment 194I

Section 194IC

Payment that are made under Joint Development Agreement (JDA) to Individual/HUF

Section 194J

Fees paid for professional services & technical services

Section 194K

Payment of income for units of a mutual fund, for example- dividends

Section 194LA

Payment made for compensation for acquiring certain immovable property

Section 194LB

Payment of interest on infrastructure  bonds to Non-Resident Indians

Section 194LBA(1)

Certain income distributed by a business trust among its unit holder

Section 194LD

Payment of interest on rupee-denominated bonds, municipal debt security, and government securities

Section 194M

Amounts paid for contract, brokerage, commission or professional fee (other than 194C, 194H, 194J)

Section 194N

In case cash withdrawal over a certain amount takes place from the bank, and ITR is filed

Section 194O

Amount paid for the sale of products/services by e-commerce service providers via their digital platform

Section 194Q

Payments made for the purchase of goods

Section 194S

TDS on the payment of any crypto or other virtual asset

Section 206AA

TDS for non-availability of PAN

Section 206AB

TDS on non-filers of Income tax return

 

12. Conclusion

Tax Deducted at Source (TDS) is a system for collecting taxes directly from the source of income. This provides consistent revenue to the government and assists with tax compliance. TDS applies to several payment types, and it's the deductor's job to deduct and deposit the TDS with the government. TDS credit can be claimed by taxpayers when filing their income tax return to prevent double taxation. It's important to understand TDS processes, deadlines, penalties, and exemptions for efficient tax compliance.


 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

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