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The Income Tax Department of India introduced the concept of TDS to collect tax from every source of income. It is the amount deducted from the income of a person by an authorised deductor and remitted to the Central Government.Tax Deducted at Source, commonly known as TDS, is a mode of tax collection by the IT Department in which any individual or company making a payment needs to deduct a certain percentage of tax at the source if the payment exceeds a certain limit. The percentage of deducting TDS is prescribed by the IT Department and the TDS deducted is directly credited to the Central Government’s account.
Incomes On Which TDS Is Collected
TDS is deducted on the payments of the following:
- Salary
- Professional fees
- Consultation fees
- Rent payments
- Commission payments
- Interest payments by bank
Importance Of TDS
Usually, an earning person is liable to pay income tax , if his/her income exceeds the limits of exemption. However, paying a lump-sum amount of tax at one go is not feasible for every individual. TDS enables an individual to pay his/her income tax as and when he/she earns it. From the government’s point of view, TDS ensures that income tax is deducted from an individual in advance at periodic intervals.
Advantages Of TDS
TDS benefits the taxpayers and the government alike. The advantages of TDS are as follows:
- As TDS is collected at the source, it minimises the chances of tax evasion by individuals.
- TDS acts as one of the steadiest sources of revenue for the government.
- Since almost every individual has to pay TDS in one form or other, the base of tax collection gets expanded.
- As TDS gets deducted from one’s income periodically and automatically, paying tax becomes convenient for individuals.
TDS Refund
A TDS refund may arise if the tax paid via TDS is greater than the actual amount of tax payable for the financial year. Since TDS is collected at the source without considering the investments that are eligible for tax deductions, an individual has the opportunity to declare his investments by submitting the proofs and claiming a TDS return.
TDS Return
Filing a TDS return is mandatory for those whose TDS has been deducted. TDS return should be submitted quarterly along with details like the Tax Deduction and Collection Account Number (TAN) of the deductor, Permanent Account Number (PAN) of thedeductee, amount of TDS deducted, type of payment, etc. Depending on the purpose of deduction of TDS, Forms 24Q, 26Q, 26QB, and 26QC need to be filled for filing the TDS returns.
TDS Certificate
The TDS deductor has to issue TDS certificates to the person from whose income TDS had been deducted at the time of payment . Forms 16, 16A, 16B, and 16C are all TDS certificates. Of these, Form 16 is issued by the employers to an employee annually.Similarly, Form 16A is issued by the banks to the depositor for deducting TDS on interest from fixed deposits. Form 16B and Form 16C are issued for deducting TDS on the sale of property and on rent, respectively.
Penalty for Late Filing of TDS Return
- A penalty of Rs.100 will be levied under Section 272A (2) of the Income Tax Act for each day that the returns stay unsubmitted, subject to a limit of the TDS amount.
- Section 234E of the Income Tax Act, 1961 governs the penalty for late submission of TDS (Tax Deducted at Source) returns. According to this section, a penalty of Rs. 200 is levied for each day the TDS return is not filed on time, up to a maximum penalty of the entire TDS amount. It should be noted that the penalty amount cannot surpass the total TDS deducted during the applicable period. For example, if the TDS deducted during a given quarter is Rs. 10,000, the highest penalty for failing to file the TDS return for that quarter is Rs. 10,000.
- If the deductor fails to file the TDS report by the due date, a penalty of Rs.10,000 to Rs.1 lakh will be levied under Section 271H of the Income Tax Act.
- A penalty of Rs.10,000 to Rs.1 lakh will be charged under Section 271H of the Income Tax Act if the deductor provides incorrect information regarding PAN, challan details, TDS amount, and so on.
- If TDS is not paid by the due date, interest will be levied in addition to the penalty under Section 201A of the Income Tax Act.
- If a portion or the entire tax amount is not deducted at the source, interest will be charged at 1.5% per month from the date the tax was deductible to the date the tax was truly deducted.
To prevent interest and penalties for noncompliance, it is critical to file the TDS return by the due date. The TDS return filing deadline varies based on the type of TDS return and the fiscal quarter in which it is filed. As a result, it is strongly advised to submit the TDS return on time in order to avoid any unnecessary penalties and interest charges.
Due dates for filing TDS
| Quarter | Period | Due date for filing |
| Quarter 1 | 1st April to 30th June | 31st July |
| Quarter 2 | 1st July to 30th September | 31st October |
| Quarter 3 | 1st October to 31st December | 31st January |
| Quarter 4 | 1st January to 31st March | 31st May |
Illustration of TDS
Let's say a new business pays the owner of the land Rs. 75,000 in rent each month. The business must deduct Rs. 7,500 owing to the 10% TDS that applies to the amount before eventually paying the owner of the property Rs. 67,500. In this instance, after TDS, the property owner will be receiving Rs. 67,500. The property owner can claim credit for the Rs. 7500 that the business has already deducted by adding the gross sum of Rs. 75,000 to his income.Ready to make the most of your money? Start your tax planning journey now!
FAQS - FREQUENTLY ASKED QUESTIONS
How is TDS calculated ?
In India, as per the Income Tax Act, employers are required to deduct tax at source (TDS) from their employees' salaries. The rate at which TDS is to be deducted is determined by the employee's average rate of income tax. The average rate of income tax is calculated by dividing the total income tax payable, as per the applicable slab rates, by the estimated total income of the employee for the financial year. The employee's estimated total income for the financial year is taken into account for the calculation of the average rate of income tax. This includes not just the salary paid by the employer, but also any other income that the employee may have earned from other sources, such as rental income, interest income, or capital gains.
Based on the estimated total income, the applicable slab rates for income tax are applied to arrive at the total income tax payable by the employee for the financial year.
What are the rules for TDS deduction ?
The Indian tax system imposes a Tax Deducted at Source (TDS) on certain incomes. The TDS is a mechanism by which the tax is deducted at the source itself before the payment is made to the recipient. The rate of TDS depends on the annual income of the recipient.
TDS is not deducted for annual income up to Rs. 2.5 lakh. For income between Rs.2.5-5 lakh, 5% TDS is deducted, and for income between Rs.5-7.5 lakh, 10% TDS is deducted.
What are the two types of TDS certificates ?
Under Section 203 of the Income Tax Act, 1961, it is mandatory for the deductor to issue a certificate, known as Form 16 or Form 16A, to the deductor for tax deducted at source (TDS). This certificate must provide details of the amount that has been deducted as TDS from the deductee's income.
Form 16 is issued by an employer to their employees and contains details of salary paid, tax deducted, and other related information. On the other hand, Form 16A is issued by entities other than an employer, such as banks, to their customers when TDS is deducted on payments like interest, rent, etc.
The purpose of providing these certificates is to enable the deductee to claim credit for the TDS amount while filing their income tax return. It also helps in ensuring that the deductee has paid the correct amount of tax and facilitates easy processing of income tax returns by the tax authorities.
What is TDS for salaried employees ?
The Tax Deducted at Source (TDS) rate applicable to your salary depends on your total income received from your employer during the financial year. The amount of TDS deducted will be based on the tax slab that you fall into, which in turn is determined by your income level.
India's tax system has different tax rates, which apply to different income ranges. Individuals with a higher income fall under a higher tax slab, and accordingly, their TDS deduction rate will be higher.
The TDS rate for salary can range from 10% to 30% based on the applicable tax slab.
What is the difference between TDS and TCS ?
TDS (Tax Deducted at Source) is a tax collection mechanism employed by the Indian government to collect taxes on income at the time of payment. Under this system, a certain percentage of tax is deducted from the payment made by a company or individual to another entity, if the payment amount exceeds a certain threshold limit.
TDS is applicable on a variety of payments such as salaries, rent, professional fees, brokerage, commission, etc. For example, if an individual is paid a salary of Rs. 50,000 per month by a company, the employer may deduct a certain percentage of tax from the salary payment and pay it directly to the government on behalf of the employee.
On the other hand, TCS (Tax Collected at Source) is a tax collected by the seller from the buyer at the time of sale of certain goods or services. TCS applies to the sale of goods such as alcohol, scrap, minerals, and services such as professional consultancy, commission, and brokerage.
How to avoid TDS on salary ?
TDS (Tax Deducted at Source) on salary is a tax deducted by your employer from your salary income and paid to the government on your behalf.
To avoid TDS on salary, you need to follow these steps:
Submit your investment declaration to your employer: At the beginning of every financial year, you need to submit an investment declaration to your employer stating your investment plans for the year. This will help your employer determine the amount of TDS that needs to be deducted from your salary.
Invest in tax-saving schemes: You can invest in various tax-saving schemes like Public Provident Fund (PPF), National Savings Certificate (NSC), Equity-Linked Saving Scheme (ELSS), etc. These investments can be claimed as deductions under Section 80C of the Income Tax Act, 1961, and can help you save tax and reduce your TDS liability.
Claim HRA and other allowances: If you are entitled to House Rent Allowance (HRA) or any other allowances like LTA, Medical Allowance, etc., you can claim deductions for them.
Submit proof of investment and expenses: If you have made any investments or incurred any expenses that are eligible for tax deductions, you need to submit the necessary proof to your employer. By doing so, you can claim the deductions and reduce your TDS liability.
File your tax returns: If your TDS liability is lower than your actual tax liability, you can claim a refund by filing your income tax returns. This will help you get back the excess tax deducted from your salary.
Why is it compulsory to file TDS returns ?
According to Section 206 of the Income Tax Act, all corporate and government deductors are obligated to file their TDS (Tax Deducted at Source) returns electronically, known as e-TDS returns. However, for other deductors who are not corporate or government entities, filing e-TDS returns is not mandatory and remains optional.
Who is eligible for an ITR refund ?
When the amount of taxes paid by a taxpayer exceeds their actual tax liability, which includes interest, they may be entitled to receive an income tax refund. This excess amount can come from various sources such as advance tax, self-assessment tax, or TDS.
What is the minimum amount for a tax refund ?
According to the current procedure, if a demand for payment of an amount less than Rs 100 is made, it will not be enforced or collected by the authority. However, the amount may still be considered as due and can be adjusted against any future refunds that may be due to the taxpayer. In other words, if the taxpayer has a future refund claim, the amount that was not enforced earlier may be adjusted against it. This is a common practice to avoid unnecessary administrative burdens for small amounts.
What is the income limit for ITR ?
Individuals are required to file income tax returns if their total income during the financial year exceeds the exemption limit or if their gross total income is greater than ₹2,50,000, as per income tax laws.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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