Difference Between TDS and Income Tax Return

Terms and concepts related to income tax laws may seem confusing to first-time taxpayers. In fact, many taxpayers are often confused between TDS and income tax. However, these terms actually differ in terms of meaning as well as collection procedures. The main difference between TDS and income tax is that TDS is tax that’s deducted from the source on the expected tax liability. Income tax, on the other hand, is deducted from the overall annual income/profit of the taxpayer. In this article, we discuss what is TDS in income tax laws, differences between TDS and income tax, and why understanding the two is essential to compute tax liability and returns.

Tax Deducted at Source or TDS is the tax that’s directly deducted from the income of the taxpayer at the very source and remitted to the government. Individuals and organisations (deductors) that make specific payments - like salary, rent, commissions, or professional fees - are mandated to deduct a certain tax percentage at the source before making payment to the recipient.TDS is deducted on the following types of payments:

• Salary
• Commission payments
• Rent payment
• Interest payment by banks on FDs and other deposits
• Professional consultancy fees
• Windfall gains like lottery winnings

To answer the question ‘what is TDS in income tax law?’ in a simple way - it is essentially a type of advance tax that the deductor must deposit with the government. The deductee can claim the deducted TDS as a tax refund after they file their ITR. Collection of TDS helps the government ensure that the tax payable is collected in advance. This helps prevent chances of tax evasion. By collecting tax from the point of income generation, TDS helps ensure a seamless approach to tax collection.

Income tax is the tax charged on the aggregate revenue of individuals and companies during a financial year. The Income Tax Act of 1961 governs the income tax calculation , assessment, and collection procedures. Income tax is applicable to different types of revenue sources, including salary, interest earnings, dividends, profits from business ventures, income from house property, capital gains, etc.Any individual earning over Rs. 2.5 Lakhs (old regime) or Rs. 3 Lakhs (new regime) is liable to pay income tax on their annual earnings. The income tax liabilities of individuals, corporations, estates, and other entities depend on their total annual earnings and the corresponding tax slab rate. Individuals must formally declare their annual income, deductions claimed, exemptions, and taxes paid by filing ITR or Income Tax Returns . Also Read: E-Filing 2.0: New Income Tax E-filing Portal Explained

If you are a salaried employee or self-employed individual, understanding TDS and income tax differences can help streamline the return filing process. Here’s a comprehensive breakdown of the differences between TDS and income tax:

• One of the key differences between TDS and income tax is that the former is deducted periodically at the income source throughout the year, while the latter is paid by the taxpayer at the end of every fiscal year.
• Understanding what is TDS in income tax laws makes it clear that TDS is deducted by the payer - an individual or organisation - and remitted to the government coffers. However, income tax is paid by the taxpayer after assessing their tax liabilities.
• Income tax is a direct tax that’s paid by the taxpayer after assessing their annual tax liabilities. TDS, on the other hand, is an indirect tax that’s calculated and deposited with the government by a third-party (employer or a financial institution).
• Another key difference between TDS and income tax relates to how tax rates are computed for each.The TDS rate applicable is based on the nature of payment specified by the Indian government. The applicable income tax rate depends on the tax slabs prescribed by the income tax laws.
• TDS is applicable on payments like salary, rent, interest, commission, professional fees, etc. Income tax is levied on the assessee’s total annual income, including salary, profits, capital gains, etc.
• TDS involves the obligation to pay taxes even before the individual receives the income to prevent tax evasion. Income tax is levied on the total earnings of assessee’s after the completion of the given financial year.
• Another significant difference between TDS and income tax is in terms of returns filing. The deductor needs to file TDS returns on a quarterly basis, while income tax returns must be filed annually by the assessee.

Taxpayers need to be cognisant of the differences between TDS and income tax to better understand and claim returns. If the tax deducted at source during the financial year is more than the tax payable, then she/he will be eligible for a tax refund. The assessee can file an income tax return indicating the excess tax deducted. Once the ITR is processed and verified by the IT Department, the overpaid amount is returned as a refund. Also Read: What is Advance Tax Payment? - Guide to Advance Tax in India

The TDS vs. income tax debate highlights that while both are connected to an individual’s income, each has a different calculation and collection procedure. While TDS is deducted at source by the person making the payment, income tax needs to be paid by the assessee. As a salaried taxpayer, understanding the differences between TDS and income tax is essential to understand their impact on your tax liability and refund.Ready to make the most of your money? Start your tax planning journey now!