TDS stands for ‘Tax Deducted at source’ it is a system introduced by Income Tax Department. TDS has been introduced to collect tax from the source from where an Individual’s income is generated. As its name suggests, the concept of TDS is to deduct tax at its source.
Let us take an example of TDS: Suppose XYZ Ltd. makes a payment of Rs. 50, 000 towards professional fees to Mr. ABC and TDS rate is 10%, then XYZ Ltd shall deduct a tax of Rs. 5, 000/- and make a net payment of Rs. 45, 000/- to Mr. ABC. The amount Rs. 5, 000 deducted by XYZ Ltd will be directly deposited by XYZ Ltd. to the income tax department.
What is the significance of TDS?
The Government uses TDS as a tool to collect Tax so as to minimize the tax evasion by taxing the income at the time it is generated rather than at a later date. TDS is applicable on the various incomes received such as salaries, interest received, the Commission received etc.
But, TDS is not applicable to all incomes and all persons for all transactions. There are different rates of TDS for different payments and different categories of recipients
What is TDS certificate?
The deductor has to issue TDS certificate to the deductee. There are mainly two types of TDS certificates issued by the deductor.
- Form 16: form 16 is issued by the employer to the employee incorporating details of tax deducted by the employer throughout the year.
- Form 16A: this is issued in all cases other than salary.
When should TDS be deducted?
According to the IT Act, TDS has to be deducted from income either on payment basis or at the time of credit or payment whichever is earlier.
Check below cases where tax has to be deducted while making payment to the payee.
- Winnings from lottery or crossword puzzle
- Winning from horse-race
- Payment in respect of deposits under NSC
- Payments in respect of repurchase of units by mutual fund or Unit trust of India.
- Payment of compensation on acquisition of certain immovable property.
Accept above 7 cases, in all other cases, we need to deduct it at the time of credit or payment whichever is earlier.
For example: in a case of rent, the tax deductor has to deduct TDS either at the time of making payment or at the time crediting his books of account whichever is earlier.
Who has to deduct TDS?
The Person who is responsible for paying income or amount which is subject to TDS as listed to deduct tax at source.
What are the incomes considered for TDS?
IT act specified following incomes from which the payer has to deduct TDS:
- Salary (u/s 192)
- Interest on securities (u/s 193)
- Dividends (u/s 194)
- Interest other than interest on securities (u/s 194A)
- Winnings from lottery or crossword puzzle (u/s 194B)
- Winning from horse-race (u/s 194BB)
- Payment to contractors or sub-contractors (u/s 194C)
- Insurance Commission (u/s 194D)
- Payment to non-resident sportsmen or entertainer or sports association (u/s 94E)
- Payment in respect of deposits under NSC (u/s 194EE)
- Payments in respect of repurchase of units by the mutual fund or Unit trust of India (u/s 194F)
- Commission on sale of lottery tickets (u/s 194G)
- Commission or Brokerage (u/s 194H)
- Rent (u/s 194 I)
- Fees for professional or technical services or remuneration to a director other than salary (u/s 194J)
- Payment of compensation on acquisition of certain immovable property (u/s 194LA)
- Income by way of interest from infrastructure debt fund (u/s 194 LB)
- Other sums payable to non-resident (u/s 195)
- Long-term capital gains on units to an offshore fund (u/s 196B)
- Income from foreign currency bonds or shares of Indian Company (u/s 196C)
- Income from Foreign Institutional Investors from securities (u/s 196D)
- Interest from an Indian company (u/s 194LC)
What is the procedure of TDS?
The individuals who are responsible for paying the TDS have to follow the following procedures:
- Obtain a TAN by applying in from 49B.
- Deduct tax from the income or payment specified above.
- Deposit the deducted amount such income or payment within the time limit as specified to the credit of the central government.
- File your quarterly TDS return with the IT department in accordance with the IT provisions.
- Issue certificate of TDS on or before the specified date (i.e. form 16/16A).
Few important points about TDS:
- If there is a provision under IT Act has not made for deducting income tax at the time of payment, then income tax shall be payable by the assessee directly to the Government of India.
- If the tax deductor has not deducted TDS under IT Act, then it’s the responsibility of the assessee to calculate his/her liability and pay it to the Government of India.
- At the end of the year, assessee needs to check his form 26AS online for the total TDS and has to pay self-assessment tax under section 140A at the time of filing ITR f TDS deducted less than the liability.