TDS or Tax Deduction at Source applies to the amount paid on rent, commission, salary, interest, professional fees and various other things. This reduction is made by the person who is making this kind of payment. So, to put it simply, Tax Deduction at Source was initiated to gather tax directly from the source of an individual’s income. TDS is used as a tool by the government to curtail tax evasion by collecting the tax applicable on an income right at the point it is generated, rather than doing so later. A general rule is that a person who receives an income is subject to paying income tax. In the case of Tax Deduction at Source, the government takes the aid of this provision to ensure that the income tax is subtracted in advance from the payments you make.

The recipient receives the amount that remains after TDS is applied. This amount will be added to his income by the recipient. The TDS amount is balanced against the final tax that he or she is liable to pay. The credit goes to the recipient, which has already been paid on his or her behalf.

When is TDS deducted and by whom?

Any person who makes payments under the Income Tax Act is obliged to apply TDS during the time of making such a payment. The exception is when an individual or HUF is not required to get his/their books audited. In this case, there is no TDS.

But, in case there is a rent payment that exceeds Rs 50,000 per month, individuals or HUF must deduct a 5% TDS. This is irrespective of whether a tax audit is mandatory for the individual or HUF or not. These individuals of HUF do not need to apply for TAN, even if they are liable to deduct a 5% TDS.

One’s employer deducts TDS based on income tax slab rates that are applicable for the individual. Banks subtract a 10% TDS. This might become 20% if your PAN details are not provided. For a majority of the payments, TDS rates are stated in the income tax act. The payer subtracts the TDS based on these rates.

If you produce proofs of investment to your employer to claim deductions, and the total taxable income you have falls beneath the taxable limit, you are not required to pay any tax. In this case, there is no requirement for the deduction of TDS from your income. You can also go to the bank and submit your Form 15G and Form 15H if the total income you have falls short of the taxable limit. By doing this, you ensure that they do not deduct TDS on the interest income you have.

Suppose your net income is beneath the taxable limit and it so happens that you did not manage to send proofs to your employer in time. Or TDS has already been deducted by your employer or bank.  In this scenario, you are eligible to claim a refund of the TDS that has been deducted.

Types of TDS

Here is a list of the various types of TDS-

  • Salary
  • Amount that is kept under LIC
  • Bank Interest
  • Deemed Dividend
  • Brokerage or Commission
  • Commission payments
  • Compensation on an immovable property that is acquired
  • Contractor payments
  • Insurance Commission
  • Interest on securities
  • Interest other than the interest on securities
  • Payment of rent
  • Remuneration that is paid to a director of a company
  • immovable property that is transferred
  • The awards won from games such as crossword puzzles, cards, or lottery.

The due date for depositing TDS

The 7th of the subsequent month is the due date by which TDS is required to be filed to the government. For example, TDS from an individual in May is payable by 7th June.  This is the case with all months except March. TDS in March is eligible to be deposited till 30th April. For rent or buying a new  property, the TDS can be paid within 30 days as calculated from the end of the month during which the TDS is subtracted. TDS must be deposited on government portal using the Challan ITNS-281.

How and when can you file TDS returns?

There are various types of TDS returns and filing them is compulsory for every individual who has TDS. These returns have to be submitted every quarter. You need to provide details such as TAN, the deductee’s PAN, the sum of TDS that was deducted and specify the type of payment.

There are different forms for the filing TDS returns based on the varied purposes for which TDS applies.

What is a TDS certificate?

There are different kinds of TDS certificates like Form 16, Form 16A, Form 16 B and Form 16 C. The entity applying TDS provides a certificate as proof of receipt.

For example, an employer issues Form 16 to at employee. The bank will provide a Form 16 A to a depositor when it deducts TDS on the interest an individual earns from fixed deposits.

Let us look at the different kinds of TDS certificates-

Form type Certificate for Frequency Due date
Form 16 TDS on the payment of salary Yearly 31st May
Form 16 A TDS on non-salary payments Quarterly 15 days from the due date of return filing
Form 16 B TDS on sale of property Every transaction 15 days (from return filing due date)
Form 16 C TDS on rent Every transaction 15 days (from the due date of returns filing)

What is Form 26AS?

It is essential to understand how TDS and your PAN are linked. Deductions of TDS are linked to PAN in the case of the deductor as well as the deductee. If any part of your income has TDS charged on it, you are required to go through Form 26AS for Tax Credit. This form is an integrated tax statement that is provided to all individuals who have PAN. All TDS is linked up with an individual’s PAN. So, this form states the details of TDS on income by different deductors. It does not matter whether these payments are part of your salary, or interest that you earn. All TDS that is connected to your PAN is disclosed here. Form 26AS also has a record of the income tax that has been paid by you directly, whether it is self-assessment tax or advance tax.  This is precisely why it is so essential for you to enter your PAN details correctly, whenever your income is subjected to TDS.

Higher Transparency through SMS alerts

The income tax department has started notifying taxpayers through SMS. The SMS states the amount that has been deducted as TDS against the taxpayer’s PAN.  The SMS alert will indicate the TDS that has been credited against your income through salary, interests and other payments quarterly.  The TDS amount will be added up in your Form 26AS for the financial year in question.

The Finance Ministry took this initiative to enhance transparency and minimize instances of TDS mismatch when the income tax is being filed. Now, the taxpayers can themselves cross-check the information that the SMS provides on TDS with the information provided on their payslips to ensure that they are matching. TDS mismatch is a frequent cause of erroneous filing of income tax.

Are there any times when TDS is not applicable?

Yes, there are times when TDS is not applicable. As stated above, TDS is not deducted for an individual or HUF whose books are not required to be audited, unless they pay rent of above Rs 50,000 per month. TDS is also only applied above a certain level.

TDS on eligible transactions are deducted only in the instance that the payment amount crosses the appropriate threshold level. There will be no deduction of TDS if the value does not surpass the specified limit. Different types of payments have different threshold levels that are specific to them. For example, no TDS is applicable on the interest one receives on fixed deposits from a single bank if the total amount does not cross Rs 10,000 per year from that bank.

Tax liability when TDS has already been applied

TDS from salaries are based on the income tax slab that is applicable for a person. For other types of incomes, TDS rates are specified and range from 10% to 20%. These rates are not calculated based on an individual’s total income. This is why people suffer a TDS in some cases on their receipts.

A person’s actual tax liability is calculated on their total taxable income. Based on taxes calculated, an individual can apply for credit on the deducted TDS on different receipts. You have to subtract the TDS from the actual tax liability to calculate the amount you have to pay to the income tax department. You might even get a refund.