The Only Guide You Need to Understand TDS

TDS or Tax Deducted at Source is a common term used in the Income Tax domain. You must have come across this term while filing ITR or on your salary slips. Often, people consider TDS to be another financial jargon used by the government. The reality is thatTDS is a crucial element for the nation’s smooth economic functioning.

Thus, it is important that you know what is TDS, the significance of TDS deduction on salary, its influence on the country’s tax collection, etc. Continue reading this article to gain a thorough insight into the complexities of TDS deduction rules.

Let’s Understand TDS

TDS full form is Tax Deducted at Source. TDS is a system to collect tax from multiple income sources. Using this method, the payer deducts tax at a specific rate from payments made for incomes like salary, rent from properties, bank interests, commission, the amount earned in mutual funds etc. and then remits it to the government as tax. The payee receives the remaining sum. Income tax TDS deduction rates vary depending on the income type and the total payment amount.

Who Should Pay TDS?

The Income Tax Act stipulates that TDS must be deducted while making specific payments and this requirement applies to everyone, whether it is a business, an individual or a government agency.

Although neither the individual nor the HUF is exempted from tax audit, TDS at 5% must be deducted from rent payments exceeding Rs. 50,000/month. In addition, these individuals and HUF do not need to apply for TAN.

Employers deduct TDS as per the applicable income tax slab for salaried individuals. Banks deduct Tax at 10% for yearly interest income of INR 10,000 or more. If you do not furnish PAN information, they are liable to deduct TDS at 20%.

Types of TDS

Depending on the income type and the payment amount, TDS deductions vary significantly. Consequently, the applicable deduction rates also vary. Following the Union Budget 2023–24, here are some types of TDS for different income types:

TDS on Salary – The most popular TDS deduction is applied to salary payments. TDS deduction rate on salary ranges from 0%-30%, depending upon the employee’s income bracket
TDS on Interest- TDS for bank interests depend upon the payment amount and the income type.
TDS on Rent – If the monthly rent exceeds INR 50,000, the TDS applies at the rate of 10%
TDS on Insurance Commission- Insurance commission earning is also in the purview of TDS. In this case, TDS is deducted at 10% for businesses and 5% for individuals
TDS on Professional Fees– If the annual professional fees exceeds INR 30,000, TDS is deducted between 25%-10% depending upon the fee type

Suggested Read: Complete Procedure for ITR e-Filing

What Is the Process of TDS Deduction?

Deduction of TDS is a pretty simple process and can be executed both online and offline. The TDS deduction process involves the following steps:

First, you need to determine your income type and the TDS deduction rate applicable to it
After that, you need to find the amount paid towards the income
Following this, deduct the TDS amount as per the specified rate and then pay it to the government within a specified period
Finally, you will get the TDS certificate, which is your evidence of tax payment

What does a TDS certificate mean?

You must have heard about Form 16 and Form 16A. These are the two forms related to TDS in India.

According to TDS Section 203 of the Income Tax Act of 1961, the payee must receive a certificate outlining the amount deducted as tax. This form must be given to the payee by the payer.

For salaried people: Employers must give salaried workers a Form 16 that includes a statement of the TDS deductions made throughout the financial year. TDS deduction details, including the tax computation, tax deduction, and TDS payment, are included in Form 16. Employers must provide this form to their employees before May 31 of the following fiscal year.
For non-salaried people: Form 16A, which includes all the information on tax computation, TDS deduction, and payments, is given to the payee by the payer for all incomes except salary.

How to Claim a TDS Refund?

The payee can claim a TDS refund if the TDS amount surpasses the tax liability. Here are the steps to do so-

Fill out the income tax return with information about the paid and deducted TDS
The return will be processed, and the Department of Income Tax will check the TDS information
The Income Tax Department will initiate a refund if the sum of TDS deducted exceeds the tax liability
The bank account will be credited with the refund!

What are the Advantages of TDS?

Listed below are some of the advantages of TDS-

It makes sure that people don’t avoid paying their taxes
It provides a steady revenue source to the Government
Since the tax liability is automatically deducted, it is convenient for the payee
The tax-collection burden is significantly reduced on tax-collection agencies

TDS Payment Deadline

TDS should be remitted to the Government on the 7th day of the following month for deductions made in a specific month. For instance, March 2024 TDS deductions have to be paid by April 7 2024.

Unpaid TDS

Payers who fail to deduct or pay TDS within the designated time may be subject to interest charges, penalties, or legal action.

Conclusion

The Indian Government collects tax through multiple income streams and TDS is one of them. Therefore, to avoid the possibility of fines or legal complications, it is crucial that taxpayers thoroughly understand TDS provisions.

TDS deduction and remittance to the Government are mandatory. Therefore, whether you are a salaried worker, a freelancer, or have a business, you have a legal obligation and a civic responsibility to contribute to developing a thriving economy by adhering to TDS regulations of the country.

FAQs

Is PAN required for TDS Payments?

Yes. PAN is required to make TDS payments.

Why is a TDS challan used?

TDS is deposited with the Government primarily through TDS challans.

What happens if an employer doesn’t submit the returns by the deadline?

Under Section 271H, a fine between INR 10,000 and INR 1 lakh will be imposed if an employer doesn’t submit the returns by the specified time.

How much TDS is taken from a salary?

Every employer must deduct TDS on salaries at the employee’s average income tax rate for the entire year. The average Income Tax Rate is defined as Income Tax Liability (determined by Slab Rates) divided by the employee’s Predictable Income for the Assessment Year. The range here is 10% to 30%, depending on your salary, so you can check the amount easily.