TDS: Tax Deducted At Source
TDS stands for Tax Deducted at Source. It is an indirect way of collecting income tax at source by the government of India. TDS is managed by the Central Board for Direct Taxes (CBTD). TDS is levied on incomes earned from incentives and commissions, dividends, payment earned for various services, sale, rent and purchase of immovable property, fixed deposits, etc. The deduction of TDS varies based on the source of your income and it ranges between 1% to 30%. The person on whom the responsibility of deducting tax is imposed has to deduct tax at source at appropriate rates and the deducted sum is deposited to the credit of government of India.
How is TDS Deducted?
Income and expenditure such as salary, lotteries, interests from banks, payment of commissions, rent payment, payments to freelancers, etc. fall under the ambit of TDS. When making payments under these segments, a percentage of the overall payment is withheld by the source that is making the payments. This source, which can be a person or an organization, is known as the Deductor. The person whose payment is getting deducted is called the Deductee. For instance, a deductor is the employer paying salary to an employee (the deductee).
Advantages of TDS:
TDS is based on the principle of ‘pay as and when you earn’. TDS is a win-win scenario for both the taxpayers and the government. Tax is deducted when making payments through cash, credit or cheque, which is then deposited with the central agencies.
- Responsibility sharing for deductor and tax collection agencies.
- Prevents tax evasion.
- Widens the tax collection base.
- Steady source of revenue for the government.
- Easier for a deductee as tax gets automatically collected and deposited to the credit of the central government.
Interest on Late Payment or Non Deduction of TDS
- When fails to deduct TDS – 1% p.m. from the date tax was deductible to the date on which such tax is deducted.
- When fails to deposit TDS – 1.5% p.m. from the date on which such tax is deducted to the date on which such tax is actually
According to Income Tax Act, Interest is not a penalty so it cannot be waived off. The payment must be paid for the failure or late deposit of TDS.
Penalty or Fee for Late filing of TDS Returns
Where a person fails to submit TDS returns with the time he shall be liable to pay a sum of Rs. 200 for every day during which the failure continues. (u/s 234E)
However, the amount of fee or penalty shall not exceed the amount of tax deductible.
For Example: If penalty/fee is Rs. 3000 but TDS is Rs. 2000 then you have to pay Rs.2000.
Penalty or Fee for Non-Filing of TDS Return
If a person fails to submit TDS return or submit incorrect returns, he shall to pay Rs. 10,000 which may extend up to Rs.1,00,000. (u/s 271H)
However, the above penalty u/s 271H will not be levied in the following cases.
- If the person proves that he paid TDS along with interest and fees.
- If the person proves that he submit TDS return before the expiry of a period of one year form the time for delivering such TDS return.
As TDS is collected on an ongoing basis, it can be difficult to keep track of deductions by an individual. As per Section 203 of the ITA, the deductor has to furnish a certificate of TDS payment to the deductee/payee. This certificate is also offered by banks making deductions on pension payments etc. The certificate is typically issued at the deductor’s own letterhead. Individuals are advised to request for TDS certificate wherever applicable, and if not already provided.
Refund of Excess TDS Deductions
If a person has been subjected to excess TDS deductions, the deductor can make claims for refund of the excess amount. The difference between the tax deducted and the actual payments made by the deductor, whichever is higher, is accepted as the excess payment, and this amount will be refunded after adjusting against any tax liabilities under Direct Tax Acts.
- TDS denotes the tax deductions at source of an individual’s income/payments. The deductor (employer/contractor etc) is the person who is making payments to the deductee (employee, stock broker etc.).
- TDS helps in reducing tax filing burdens for a deductee and ensures stable revenue for the government.
- In most cases, TDS is collected after a certain threshold limit of earnings has been crossed. The highest TDS of 30% is applicable on winnings from horse races, and lotteries and other games.
- TDS certificate is issued wherever TDS has been collected, typically by the deductor or a bank.
- TDS is exempted on some payments made to government, RBI, cooperative societies etc.
- Refunds can be requested if there are discrepancies in the collected amount and the actual payable amount.
Frequently Asked Questions: TDS
1. What is the minimum salary one should have for TDS to be deducted by the employer?
Salary needs to be subject to TDS only if the employee falls under the income tax slab. This means that an individual earning less than Rs. 2.5 lakh, senior citizens with a salary of less than Rs. 3 lakh and super seniors (above the age of 80) earning less than Rs. 5 lakh, do not need to pay tax and hence no TDS has to be deducted from their remuneration.
2. Is TDS applicable only on salary?
No. TDS is also applicable on items such as income from interests on savings, fixed and recurring accounts, securities and deemed dividends, income from horse racing and insurance commissions, lottery or game-related prize money, payment in NSS deposits, repurchase of UTI or mutual fund units, etc. The details are available in Income Tax Act, Sections 192 to 194L.
3. How do I know how much TDS has been deducted and whether it has been credited to me?
The employer/deductor is liable to give you a TDS certificate or Form 16 and 16A confirming the amount of tax deducted. You can also log in to your Income Tax e-filing portal and check either your Form 26AS or ‘View Your Tax Credit’ option on the menu.
4. Can I request tax deductors to not subtract tax from an amount and pay the whole amount to me?
Non-deduction of tax at source is possible only if your income is going to be below the minimum income tax slab. If that is the case with you, then you can declare your income as being lower than Rs. 2.5 lakh (or others as applicable to various category of citizens) through Form 15G/15H and provide the form to the deductor. Form 15G is for individuals and Form 15H for senior citizens. You can also apply to the Assessing Officer of the Income Tax Department through Form 13 and get a certificate approving deduction of lower taxes or nil deduction of taxes. But if your income is above the minimum tax rate slab, then you cannot seek exemption from TDS.
5. What will happen if the tax deductor fails to deduct tax or deposit the collected tax with the government?
The deductor will have to pay an interest on the amount due to the government under Section 201 of the Income Tax Act. The interest applicable is: a) 1 percent for every month or part of a month on the tax due, calculated from the date on which the tax had to be deducted to the date when it was actually deducted (ii) at 1 and 1.5 percent for every month or part of a month on the tax pending, calculated from the date when the tax was deducted to the date when it is actually paid. Under section 271C, the deductor may also have to pay penalty of an amount equal to the tax not deducted or not paid.
6. Is an employee responsible if the deductor fails to collect or deposit the tax?
No. The onus of deduction and deposit of tax collected at source lies with the employer/deductor and not an employee or deductee.