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You may have experienced TDS in many forms - Bank FDs, salary payments to vendor payments, TDS seem to infiltrate everywhere. Normally TDS is a tax deduction from the 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 is the short form for tax deducted at source. So, TDS applies at the source of income. For example, when the bank is crediting the maturity value of your fixed deposit to your account, the bank will deduct the applicable TDS on the interest.
The purpose of TDS may have been to reduce the chance of evasion by the recipient of the incomes. But, for an honest taxpayer, it also brings a few benefits.
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:
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:
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.
TDS Rates for Various Regular Payments
Few TDS rates have been temporarily modified after the economic impact of COVID-19. Otherwise, the normal TDS rates on the following payments have been:
| Type of Payment | TDS Rate |
|---|---|
| Salaries | Applicable Slab Rates + Cess |
| Interest from Securities (Bonds & Debentures)* | 10% |
| Interest on deposits* | 10% |
| NSC Maturity Value* | 10% |
| Sale of Mutual Fund Units back to Mutual Fund# | 20% |
| Payment for Professional Services* | 10% |
| Rent Payment by Individuals Over Rs. 50,000 p.m. | 5% |
| Lottery & Other Type of Winnings | 30% |
* Changed at 7.5% from 14th May 2020 due to COVID-19
# Changed at 15% from 14th May 2020 due to COVID-19
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.
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.
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