What is TDS?

TDS stands for ‘tax deducted at source’ and is a rule governed by the Income Tax Act of India. TDS is applicable for certain types of payments when it exceeds a limit. Applicable rates and thresholds are set by the income tax department.

Tax deducted at source has to be deducted by the individual or company making the payment and should be submitted to the government after deduction. TDS is applicable in the following types of payments:

  • – Salaries
  • – Rent payments after a certain threshold
  • – Commission payment
  • – Consultation fees
  • – Professional fees
  • – Interest payment by banks

In this case, one who deducts TDS from the payment is called the “deductor” and the one receiving the payment is known as the “deductee.” Whether the payment is made is cash, cheque or credit, deduction TDS for certain payments is mandatory. The income tax authority can easily track both the deductor and deductee of TDS as these transactions are linked to their PAN.

How does TDS work?

Whether you are a salaried person, consultant, freelancer, professional or business owner, or whether you are a deductor or deductee, it’s important to understand how TDS works. As a receiver of the payment, you have to be aware of applicable rates and how you can claim a tax refund. As one making the payment, you must be aware of applicable rates, how to deduct and when and how to submit the payments to the government.

If you are a salaried individual, you will receive Form 16 from your employer which details the TDS deducted on your salary during the year and submitted to the government. You can also check Form 26AS on the Income Tax website to find out TDS deducted by your employer or clients on your income. For commission payments, consultation fees and interest payments, you will receive a TDS certificate from the deductor.

Applicable TDS rates for different types of payments

Source: Economictimes.indiatimes.com [1]

TDS is only applicable if payment exceeds a certain level

The Income Tax Act, 1961 has prescribed a threshold limit for tax deduction at source. If the payment is below the threshold, there is no requirement for deducting TDS. Below are a few types and their applicable threshold as per the Income tax website. [2] This table will help you learn about threshold limits and understand how does tax deduction at source work.

Type of Payment Section Threshold (Above)
 

Salaries

 

192

 

Rs. 2.5 lakh for individuals

 

Rs. 3 lakh for senior citizens

 

Rs. 5 lakh for super senior citizens

 

Provident fund balance

 

192A

 

Rs. 50,000

 

Interest paid on debentures

 

193

 

Rs. 5,000 in a financial year

 

Interest from banks

 

194A

 

Rs. 40,000 in a financial year

 

Senior Citizen Savings Scheme

 

194A

 

Rs. 40,000 in a financial year

 

Lottery prize, crosswords and horse races

 

194B, 194BB

 

Rs. 10,000 in a financial year

 

Sum payable under a life insurance policy

 

194DA

 

Rs. 1,00,000 in a financial year

 

Payment of rent

 

194-I

 

Rs. 2,40,000 in a financial year

 

Fee for professional services

 

194J

 

Rs. 30,000 in a financial year

Source: Incometaxindia.gov.in [3]

FAQs on How TDS Works

1. Is the payee (receiver of the payment) liable if the payer does not deduct TDS?

No, the payee is not responsible for the actions of the payer. However, that does not relieve the payee from applicable income tax on his taxable income.

2. What are the duties of the deductor?

One who deducts TDS before making payment to another person has to follow the following steps and rules:

  • – Obtain a Tax Deduction Account Number from the tax department and quote the same in all documents
  • – Deduct TDS at applicable rates
  • – Pay the TDS deducted by the due date to the government
  • – File the periodic TDS statements by due date
  • – Issue TDS certificate or Form 16 to the payee by due date

3. How does the payee find out whether TDS is being paid to the government by the payer?

You can ask the payer to furnish a TDS certificate or check Form 26AS from your e-filing account at https://incometaxindiaefiling.gov.in or use the “View Your Tax Credit” at www.incometaxindia.gov.in

4. What happens if I don’t furnish my PAN to the payer?

If you don’t furnish your PAN number, the payer may deduct tax at the rate of 20% or other rates in force which is higher than the applicable rate.

5. Can I claim TDS while filing my taxes if I have not received a TDS certificate?

Yes, you can still claim TDS if you have not received a TDS certificate from the payer. You can refer to Form 26AS to ascertain the amount of tax deducted from the payment received by you.