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Tax Deducted at Source (TDS)

Tax Deducted at Source (TDS)

Tax Deducted at Source (TDS)
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Full form of TDS is Tax Deducted at Source. You may have experienced TDS in many forms - Bank FDs, salary payments to vendor payments, and TDS seem to infiltrate everywhere. Normally, TDS means an advance tax withheld by the payor from your income, whichever form it is.

So, it ends up reducing your income. Therefore, it should be an important focus when looking to save tax. However, does it mean you need not file an income tax return? Or can the deduction benefit you anywhere? Let’s find out.

What is TDS?

TDS or Tax Deducted at Source is an income tax that is collected from certain payments like rent, salary, commission, interest, professional fees, etc. The person paying the amount should deduct TDS from such a payment.

As per the Income Tax Act, any company or a person is required to deduct tax at the source itself if the money paid exceeds the specified limit. The person who receives a payment also has a liability to pay tax on their income.

The payee will receive credits against the TDS payments, which they can claim against their actual tax liability while filing the annual ITR.

The purpose of TDS may have been to reduce the chances of tax evasion by the recipient of the income. But, for an honest taxpayer, it also brings a few benefits.

Types of TDS

Even when you are making payments as an individual taxpayer, you need to deduct TDS on certain payments. The following type of payments that attract TDS:

a) Salary Transfer
b) Professional Fee
c) Consultation Fee
d) Rent Payments
e) Commission
f) Interest on Securities & Deposits
g) Dividend on company shares and mutual funds
h) Lottery and similar winnings
i) Payment of Royalty
j) Salary Transfer
k) Professional Fee
l) Consultation Fee
m) Rent Payments
n) Commission & brokerage payments
o) Interest on Securities & Deposits
p) Dividend on company shares and mutual funds
q) Lottery, lucky draw and similar winnings
r) Payment of Royalty
s) Director’s Remuneration
t) Transfer of Property
u) Other interest payments

What is a TDS Return?

You make the payments to other parties against their services throughout the year. If these payments to one party exceed the specified limit for the payments made under sections 192 to 195 of the Indian Income Tax Act, you must deduct the applicable TDS amount.

You will need to deposit the deducted TDS amount quarterly along with the respective TDS Return. Depending on the nature of payment (applicable section) you will file a separate TDS form as TDS Return, each quarter.

Example of Tax Deducted at Source

TDS has to be deducted at the applicable rates only. For example, the TDS rate on rent payments to resident individuals and HUFs by resident individuals and HUFs is 5%, when the rent is more than Rs 50,000 p.m.

Thus, if you are living in a rented house and paying Rs 70,000 per month as rent, you should deduct Rs 3500 per month as TDS before paying the rent. You will need to pay Rs 66,500 to the property owner and will deposit Rs. 10,500 every quarter to the CBDT as the collected TDS amount.

Similarly, a firm may deduct TDS on the fees payable to a consultant for the professional services at 10%.

How does TDS Work?

TDS would apply to all taxable incomes except it’ll be deducted at source at a fixed rate. For almost all payments except salary, TDS rate depends on the type of income rather than the amount of payment.

In the case of salary, the employer can estimate the total expected income of the employee. Thus, TDS deduction happens at the applicable slab rate and may change in the middle of the year based on:

1. Changes to income due to bonus, appraisal

2. Submission of investment proof

Pro Tip: With salary TDS deduction a lot of employed taxpayers fail to prepare. These taxpayers end up losing a big chunk of their salaries in the last quarter of the financial year.

So, start your tax-saving investments in April itself, and keep your TDS deductions higher in the beginning. Thus, you will avoid last moment rush for tax saving investments and income loss both.

When should TDS be Deducted and Who is Liable to Deduct it?

Any person including an individual, HUF (Hindu Undivided Family), firm and NRI (non-resident Indian), is expected to deduct tax at source, provided:

  • Any payment made under the five heads of income or as specified under the Income Tax Act, 1961 requires you to deduct TDS. This provision does not apply to individuals and HUFs making such payments unless specified.
  • If you are paying rent of more than Rs 50,000 per month as an individual or HUF taxpayer, you need to deduct TDS at 5%. This applies to all Individual and HUF taxpayers regardless of whether your books need an audit.
  • Employers must deduct TDS from the salary of those employees whose income exceeds the maximum exempt limit. Employees can submit proof of tax-saving investments and expenses to reduce the TDS amount of the employer.
  • Banks will deduct TDS at 10% from the interest payments on fixed deposits. However, if your annual income is below the maximum exempt threshold you can submit Form 15G and 15H to avoid this deduction.
  • You can claim the excess TDS deducted by the employer, banks or any other entity at the time of filing your annual income tax return.

Types of Payments that are Exempt from TDS

Certain payments are exempt from TDS if they do not exceed the specified limit for the TDS deduction. The following types of payments will not attract TDS if they do not exceed the specified limit (for A.Y. 2021-22):

Payment of Interest to senior citizens on

- Bank & post office deposits
- Fixed deposit schemes
- Recurring deposits

Rs. 50,000
Rent payment for land, building or furniture by a non-domestic firm or individual and HUF Rs 2.4 lakhs
Cash withdrawal by resident individual and HUF Rs. 1 crore (Rs 20 lakhs if the person/HUF has not filed ITR for the last three consecutive years)
Payment to resident individuals, contractors & professionals, for service or purchase of goods by resident individual & HUF Rs 50 lakhs
Rent payable by a resident individual or HUF to another resident individual or HUF Rs. 50,000

How and When to File TDS Returns?

You will need to use the appropriate form based on the type of payment on which TDS has been deducted. Corporates and payers making payments to NRIs, usually need to file TDS returns every quarter.

Other payments will require a TDS return within a stipulated time as per the table below:

Transactions reported in the return Due date Form
TDS on Salary Q1 – 31st July
Q2 – 31st October
Q3 – 31st January
Q4 – 31st May
Form 24Q
TDS on all payments made to non-residents except salaries Q1 – 31st July
Q2 – 31st October
Q3 – 31st January
Q4 – 31st May
Form 27Q
TDS on sale of property 30 days from the end of the month in which TDS is deducted Form 26QB
TDS on rent 30 days from the end of the month in which TDS is deducted Form 26QC

TDS Rates for Various Regular Payments

Type of Payment Sections TDS Rate
Salaries 192 Applicable Slab Rates + Cess
Interest from Securities (Bonds & Debentures)* 193 10%
Interest on deposits* 194A 10%
NSC Maturity Value* 194A 10%
Sale of Mutual Fund Units back to Mutual Fund# 112A 20%
Payment for Professional Services* 194J 10%
Rent Payment by Individuals Over Rs. 50,000 p.m. 194IB 5%
Lottery & Other Types of Winnings 194B 30%
Payment to Resident Contractor / Sub-contractor 194C 1% (HUF & Individuals)
2% (Others)
Commission on Insurance 194D 5% (HUF & Individuals)
10% (Others)
Acquisition of immovable property 194LA 10%
Rent payments for Plant, Machinery, Furniture, etc. 194I 2% (Plant, Machinery & Equipment)
10% (Furniture, fixture, land and building)
Commission & Brokerage payments 194H 5%
Commission on the sale of lottery tickets 194G 10%

TDS Payment Due Dates

Anyone deducting TDS from the payments made to another party as income should deposit the amount to the Central Government Account before the 7th of the next month. For example:

TDS Deduction Month Deposit Due Date
April 7th May
May 7th June
June 7th July… and so on
March 30th April

Except for March, where you can deposit the TDS amount by 30th April.

What is a TDS Certificate?

The deducting party issues TDS certificates to the taxpayers. Depending on the type of payment TDS certificates can be issued in the following forms:

TDS Deducted on Form & Frequency Due Date
Salary Payments Form 16, issued annually Before 31st May of the Assessment Year
Non-Salary Payments (interest, vendor payment, consultancy fees, etc.) Form 16A is issued quarterly Within 15 days of filing the due date
Sale of Property Form 16B, issued with every transaction Within 15 days of filing the due date
Rent Payments Form 16C, issued with every transaction Within 15 days of filing the due date

How to File TDS Return online?

You will need a TAN or Tax Deduction & Collection Account Number to file a TDS return. Follow the process below to file your TDS return online:

1. Register your TAN number for e-filing
2. Prepare your TDS return using one of the online portals. You can log in to the incometaxindia.gov.in to generate a TDS payment challan
3. Log in to the net banking and pay the collected due TDS amount
4. You can use a valid DSC (Digital Signature Certificate) to e-file and verify your online TDS return

While filing TDS you also need the PAN and bank account details of the payee. If the payee’s PAN is linked with Aadhaar you can upload your returns using Electronic Verification Code (EVC).

How to Apply for a TDS Return?

The party deducting the TDS can issue a TDS certificate in the applicable Form 16. The deducted TDS amount is reflected in Form 26AS as Tax Credits for the payee (person receiving the amount after TDS deduction).

If you want to claim a TDS return you will need to file your ITR for the assessment year (AY). The applicable credits are adjusted out of your tax payable for the AY. If eligible for a refund, the same will be processed and credited to your bank account within six months.

In case, where the deducted TDS amount does not show up on your Form 26AS, you will need to submit the TDS certificate received from the deductors.

What happens after TDS Deduction?

After TDS deduction the person or firm deducting the TDS needs to deposit the same with the central government. Once deposited the same will reflect on form 26AS of the person who received the income after TDS. All the TDS payments reflecting on your Form 26AS will be automatically adjusted in your taxable income.

The payor should also give you a TDS certificate which you can alternatively use while filing your ITR. Yes, you do need to file your personal ITR even after TDS deduction.

All the deducted TDS gives you tax credits and reduces your tax liability.

So, for example, if you end up paying 30% TDS on a lottery payment of Rs. 300,000 (i.e. you received only Rs. 210,000), and this is your only income in the financial year, when you file your ITR your total tax liability would be zero (Rs. 250,000 being the minimum exempt income). Thus, the excess tax you ended up paying as TDS would be returned to you.

Thus, don’t miss filing your personal ITR, especially after TDS on any of your income.

Also Read - Form 15G & 15H

What if you end up Deducting TDS?

The taxpayers, who are liable to deduct TDS on the payments they make to others, need to file a quarterly TDS return. Filing TDS return is mandatory if you are deducting TDS.

You need to file TDS return on Forms 24Q, 26Q, 26QB or 26QC based on the purpose of TDS deduction each quarter and deposit the deducted amount with CBDT. The return must be filed with the PAN/TAN of the deductor (payor) and PAN/TAN of the deductee.

Filing TDS return will ensure that the deductee’s Form 26AS will be automatically credited.

How does TDS Benefit you?

TDS payments, as we have already seen could be a temporary deduction if your overall tax liability is less than the TDS amount. However, if your income falls in the highest tax bracket, TDS will keep the pressure off your pockets at the end of the year.

Advance tax paid on income will reduce your tax liability at the end of the financial year. Thus, helping you avoid payment delays and penalties.

Penalty for Late Filing TDS Return

CBDT may levy a penalty for delays in submitting your TDS return or statements in the following manner:

a) Non-Submission of TDS Return:

A penalty is levied at Rs 100 per day for the delayed period under Section 272(A) of the Income Tax Act, 1961. The amount of penalty can go up to the actual TDS amount.

b) Delayed/Non-Filing of TDS Returns:

A penalty is levied at Rs 200 per day for the delayed period under Section 234(E) of the Income Tax Act, 1961. The amount of penalty can go up to the actual TDS amount.

c) Delayed/Non-Filing of TDS Statement:

Penalty of Rs 10,000 to Rs 1 lakh under Section 271(H) of the Income Tax Act, 1961. The amount of penalty can go up to the actual TDS amount.

d) Incorrect Details on TDS Return:

Penalty of Rs 10,000 to Rs 1 lakh under Section 271(H) of the Income Tax Act, 1961. The penalty applies if the filed return contains incorrect information about PAN, challan particulars, TDS amount, etc.

e) If the TDS Amount is Not Deposited:

Penalty will also include interest for the undeposited amount under Section 201(A) of the Income Tax Act, 1961. The penalty applies if you fail to deduct TDS in part or full when it was due. The interest of 1.5% p.m. will apply for the delayed deduction.

How to Claim TDS Refund?

You are eligible for a TDS refund when you have paid more tax as TDS deductions than you are liable to as per applicable slab rates. When you file your annual income tax return for the previous year, all the TDS deductions are available as TDS credits under Form 26AS.

Your TDS credits will reduce your final tax payable once you have calculated your taxable income and applicable tax on it. If TDS credits exceed your total income tax liability, you have a refund.

Make sure to provide the correct bank details and IFSC while filing your return. It will enable CBDT to credit the refunds directly to your bank account.

Can the TDS Amount Change in the Financial Year?

The TDS deduction depends on the payment amounts. If you are salaried your TDS amount is estimated on your salary and can change if there is a change in the salary amount. Similarly, TDS deductions can change under the following situations:

- Bonus, increment, change of employment during the financial year
- Change in rent payments or other perquisites
- If you submit investment proofs for a higher tax saving
- TDS for self-employed and consultants will change as per the change in their bill amounts

Overall, your TDS deduction should not be less than 95% of your total tax liability at the end of the year.

FAQs on Tax Deducted at Source (TDS)

The full form of TDS is Tax Deducted at Source. It is a way of collecting advance tax on income-related transfers to individuals and other tax-paying entities.

TDS on salary is deducted on applicable slab rates. You can choose to pay TDS as per the new tax regime or stick to the old tax regime where you can also claim tax-saving investments. Rebate under section 87A is available under both tax regimes.

TDS challan is generated when you file your TDS return. The challan helps you deposit the TDS amount under the correct classification code when you deposit the money to the Central Government account.

Yes, PAN is necessary for TDS payments. Without PAN you may face higher TDS rates.

Usually, PAN is needed for almost all TDS transactions. In the case you cannot submit PAN immediately you can apply for a PAN and submit the application number in the meantime. In a few cases like interest payments by banks, not furnishing PAN or the application number will attract a higher TDS deduction.

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