TDS is a type of indirect tax collected by Indian Government as per Income Tax Act, 1961. It is managed by the Central Board of Direct Taxes (CBDT). It is collected as per Income Tax Act, 1961 throughout the year.
In this article we will discuss all about TDS, what is TDS, what is the full form of TDS, why TDS is deducted, how TDS is deducted, TDS rates, how to avoid TDS, penalties etc.
What is TDS and how does it work?
If you get good salary then your employer deducted TDS. TDS will be deducted even if you are a large earning professional. Even if you are a businessman, you will have to go through TDS in any transaction. The questions must have arisen in the mind that what is TDS? How TDS is deducted? Why the government deducts TDS?
What is TDS?
TDS means that some percentage of your income is deducted by the payer of your income. Payer is also known as Deductor and you as Deductee.
After deducting the TDS by the deductor, the TDS amount is deposited in the Government account. TDS deducted by the deductor should be reflected by you in your income tax return.
TDS is deducted on many types of payments like Salary, Interest, Dividend, Commission, Professional Fees, Lottery, Rent, Contract Payments etc. From any of these sources, when income is given to you in excess of a specified limit, firstly tax is deducted. This is called TDS. You get the rest of the income.
Full Form of TDS
TDS has a full form – Tax Deducted at Source. It is a means of collecting income tax in India, under the Income Tax Act of 1961.
Why TDS is deducted?
TDS system is beneficial for the government. It is also convenient for taxpayers and companies. The government has implemented the TDS system for the following reasons-
To eliminate the scope of tax evasion
By deducting tax before handing over the income to someone, the scope of tax evasion on that income is eliminated. The tax is already deposited and the account is later (through Income Tax Return).
When the tax is already deposited, then there is neither an attempt to hide that income nor to save tax by trying the wrong way. In other methods of tax payment, people often succeed in tax evasion.
To save taxpayers from outright burden
If TDS is deducted before income, then after every three months, there is no hassle of depositing Advance Tax. People have a general tendency that they spend equal to or more than their income. If you have to arrange a huge amount suddenly to pay tax after a year, it can be difficult.
In the TDS system, most of the tax related processes are handled by the employer or the deductor of TDS. All you have to do is file the return at the end of the year.
To get regular income for government expenses
The government needs a large amount of income for its plans, development programs and administrative expenses. Due to TDS, the government gets a large amount of money at the beginning of the financial year itself. Similarly, TDS gets deposited every month in other big transactions also. Govt. uses it for expenses.
To share the responsibility of collecting tax
The responsibility of deducting TDS lies with the person / institution who is paying the money. Later he deposits it in the government account. The government does not require a separate staff to collect tax. In this way, Govt. manages to share his responsibility.
To increase the scope of tax
Apart from salary, profession and business, people have various means of earning. Through TDS, the government is able to reach all types of income.
How TDS is deducted?
Any institution (which comes under the purview of TDS), which is paying, deducts a certain amount in the form of TDS. The person whose tax has been deducted from income also has the right to obtain TDS deduction certificate.
It is the responsibility of the tax deductor to submit TDS to the government. Once the amount is deposited in the government account, then this amount is shown in Form 26AS of that person.
Whatever TDS you deduct, it is deducted on your PAN number. All these deductions are recorded in Form 26AS through PAN number. Apart from TDS, whatever you deposit in advance tax, it is also recoded in this Form 26AS. While filing the income tax return, you can show these as your tax payment.
What are the TDS rates?
TDS has different rates according to income tax law. It depends on the nature of payment. Here are TDS rates on some incomes –
TDS deducted on a fixed income
Keep in mind that TDS is deducted only on payments above a specified limit. TDS is not deducted if there is no payment in excess of the specified amount.
The Income Tax Department has set some rules for deducting TDS on salary, interest etc. such as if you get less than ₹10,000 interest from FD in a year. You will not have to pay TDS.
When does TDS not get deducted?
TDS is not deducted on payments made to Reserve Bank of India, Government of India. TDS is not deducted even when interest is credited to:
- Central or State Financial Corporation
- Banking companies
- UTI, LIC and other insurance or cooperative societies
- Interest from Indira Vikas Party, KVP, or NSC
- Payment of interest under direct tax or refund from IT department
- Interest earned in NRE account
- Interest earned from recurring deposits or savings accounts in cooperatives or banks.
- All institutions authorized under No-TDS.
How to avoid TDS?
If the income of a person in a financial year is below the basic exemption limit, then he can ask his payer not to deduct TDS by filling TDS Form 15G or Form 15H.
After deducting the TDS, deductor will have to deposit the TDS in the Central Government account before the due date and file its TDS Return within the due date.
If not doing so, interest and penalty can be imposed on the deductor. In addition, the deductor will not get tax exemption for the amount on which TDS is not deducted or deposited after deducting TDS.
The deductor will be charged a fee of ₹200 per day until TDS is deposited and penalties ranging from a minimum of ₹10,000 to a maximum of ₹1,00,000 may be levied.
And if the due date is a holiday, then TDS can be deposited by the deductor on the next day. To cut TDS, the deductor must have a Tax Identification Number (TAN).
So friends, this is all about TDS (Tax Deducted at Source), Full form of TDS, Why TDS is deducted, How is TDS deducted, TDS Rates, How to Avoid TDS etc. We hope you will get benefit from this article. If deducor deducts excess TDS then you can claim refund by filing of Income Tax Return.