What is TDS (Tax Deducted at Source)?

TDS is collected in order to keep the revenue source stable for the govt. throughout the year. This prevents people from evading taxes.

How is TDS Deducted?

Both Income and expenditure, including salary, interests from banks, lotteries, rent payment, payment of commissions, and payments to freelancers etc. come under the umbrella of TDS. When payments are made under these segments, a percentage of the entire payment is withheld by the (paying) source. The source that is making the payment is called the Deductee, because the payment is being deducted from them. A Deductor , on the other hand, is a person or an organization that deducts tax from the deductee. For example, an employer (the deductor) pays salary to his employee (the deductee).

Advantages of TDS

The amount deducted as the TDS depends on the amount you earn. TDS starts getting deducted after you start earning. Both the government and the Tax-payers get benefitted from TDS. When you make payments through cash, cheque or credit card, a certain amount of tax is deducted, which gets deposited to the central agencies.

The advantages of collecting TDS are highlighted below:

• It prevents people from evading taxes.

• It ensures a steady source of revenue for the Government.

• The Tax Collection base is widened.

• The burden of responsibility of the Tax Collection Agencies and the Deductor are lessened.

• It is convenient for the deductee as Tax is automatically deducted.

Types and Rates of TDS

TDS is estimated on the basis of a certain limit, i.e. the maximum level of one’s income after which TDS will be deducted from his/her next income. TDS may range from one to three percent of the actual payable limit and it is deducted as a percentage of the overall income.

 The following sections of the Income Tax Act

*The highest limit refers to the amount of profit or income up to which no TDS will be deducted. Tax will be deducted at Source only when your income or profit exceeds the given threshold limit.

How much TDS will be deducted from your salary is estimated at the beginning of the financial year. The employers are bound to deduct taxes from your salary every month in equal instalments. If, for instance, the deductee changes his job during the fiscal year, taxes will be deducted on the basis of all the accrued income of the present fiscal year. Since tax evaders are penalised, the Deductees should be very honest while mentioning their overall income.

When TDS is not Deducted? 

When you make a payment to the Government of India or the Reserve Bank of India, no TDS is collected. No TDS will be deducted in case of payment made to or received from the followings:

• LIC, UTI and other insurance or cooperative societies.

• Banks.

• Central or State Financial Corporations.

• Interest in KVP, Indira Vikas Party, or NSC.

• Refund from income Tax department or Interest paid under Direct Tax.

• Interests received from recurring deposit or savings account in cooperative societies or banks.

• Interest received in NRE account.

• All institutions notified under no-TDS.

Apart from these, there are other institutions where TDS is applicable, for example, interest on compensation from Motor Vehicles Claims Tribunal (MVCT). Taxpayers are required to check whether or not TDS is applicable on their income with a particle institution.

TDS Certificate:

It is not easy to keep track of TDS by an individual as the deductions are collected on an ongoing basis. The deductor gives a TDS payment certificate to the payee/deductee as per Section 203 of the Income Tax Act. Banks also offer this certificate for deductions on pension paymemt etc. The certificate is valid only if it is issued at the deductor’s own letterhead.  Everyone should ask for TDS certificate whenever it is applicable.

Refund of Excess TDS Deductions

The deductor is allowed to claim for refund if an excess amount has been deducted as TDS from a person. The difference between the actual amount that the deductor paid and the amount of tax deducted is considered as the excess amount. This excess amount will be refunded by the authorities.

Highlights

• TDS refers to the deductions of tax on an individual’ income. The deductor is liable to make payments to the deductee .

• TDS helps reduce the burden of filing tax for a deductee and make sure that the Government receives stable revenues.

• TDS is collected after your earning reaches a certain limit. Maximum 30% TDS is applicable on the money won from horse races, lotteries or other games.

• As soon as TDS has been collected, the Deductor or the bank issues a TDS certificate.

• The amounts paid to the government, cooperative societies and RBI etc., are exempted from TDS.

• If any discrepancy is found between the amount collected and the amount payable, one can request for refunds.

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