What is TDS- Tax Deduction at Source

What is TDS

Are you also confused why your employer deducts a certain amount when paying your monthly salary or freelancing fee, and how it is adjusted against your final tax liability? Do you also advocate for a higher in-hand salary because you believe you’re getting a better deal?

Getting a hang of taxes and how they work can certainly be a tough nut to crack. However difficult it might be, it’s essential to know the way taxes and their deductions work. After all, a significant chunk of your hard-earned money is spent filing taxes. Through this article, we’ll help you understand the nitty-gritty of TDS, how it works, and bust some common myths.

What is TDS?

TDS refers to a mandatory deduction that the payer has to deduct from the total income payable to you - it could be your salary, or your rental income, or even interest on your investments. This deduction is then deposited with the government to offset against your final tax liability.

It serves dual purposes. First, the government likes to collect tax the year it is due. In our current fiscal year, we technically file our income tax returns and pay taxes for the previous year - so their revenue collection suffers. Secondly, it helps the government track income flow and ensures tax is paid. There is a direct conflict of interest between the taxpayer and the government, and there is an incentive to defraud or not pay taxes at all. The government thus eliminates you from the equation and tries to collect money from the person who has to pay you.

The rules of TDS are governed by the Income Tax Act and vary from one income type to another. For example, if your salary exceeds the minimum taxation threshold, your employer will deduct roughly 10%  TDS under section 192B (based on normal slab rates). However, if you’re working as a contractor under 194C, and charging more than Rs. 30,000 per year, the TDS rate will be 1% (for individuals and HUFs) or 2% for all other persons. 

For salaried professionals, your TDS is supposed to be deposited with the government by the 7th of each month following the month in which you have made the deduction. For example, if your TDS is deducted on 15th March, it must be deposited with the Income Tax Department before 7th April. After the deduction, your employer will file the quarterly return on the due dates, which is when it will reflect in your Income Tax portal under form 26AS. So if you want to see how much TDS has been deposited under your name, just log in and view your TDS credits up to the deadline of return filing.

Where is TDS applicable?

TDS rates differ, depending upon the kind of financial activities you undertake, and your total earnings from that activity.

Let us simplify it for you.

Nature of payment

% of TDS for AY 2019-20

Payment of salary (Section 192)

Normal slab rate

Payment of accrued due of EPF Scheme, to Employees which is taxable in their hand (Section 192A)

10%

Interest on securities (Section 193)

10%

Dividend excluding the dividends mentioned in section 115-O (Section 194)

10%

Income received from interest other than “interest on securities” (Section-194A)

10%

Income received from winning lotteries, crosswords, and games, etc. ( Section-194B / Section 194BB)

30%

Payment to contractors / sub-contractors (Section 194C)

2% for payments made to contractors who are not HUFs/individuals and 1% for payments made to contractors/subcontractors who are HUFs/individuals

Insurance commission (Section-194D)

5%

Payment for life insurance policy (Section 194DA)

1%

Rent (Section 194-I)

For plant and machinery - 2%

Land, furniture, fitting and furniture-10%

Payment on transfer of immovable property excluding agricultural land ( Section (194- IA)

1%

Source

For example, if your total estimated tax on salary adds up to Rs. 50,000 based on normal slab rates, your employer will deduct an approximate amount from your salary and pay to the government. 

Banks deduct TDS as well. If you have a Fixed Deposit with a bank with interest income exceeding Rs 10,000, TDS will be deducted. To encourage linking of your PAN card, the government has prescribed a lower tax rate. In the absence of PAN information, you will be subjected to 20% TDS. But, if your income does not qualify for taxable income, you can prevent your fixed deposit interest income from TDS by submitting forms 15G (for individuals) and 15H (for senior citizens above the age of 60).

If you have invested in shares and mutual funds, your gains will not be liable to TDS. However, if you are at the receiving end of any insurance commission, you will be subjected to TDS. As the above table explains, TDS could be applied while purchasing a property, paying rent, or paying a salary to any person.

While filing your income tax return, your final tax liability will be: Tax on Gross Total Income - TDS already deposited

If this figure is negative, you will be entitled to a refund of your TDS, which you’re eligible for once you file your ITR. It is advisable to go for a salary structure that deposits a corresponding amount of tax with the government, otherwise, you will have to deposit additional advance tax to meet your tax liabilities. When employers deposit your TDS, they are saving you from the hassle of paying interest on your accrued income and meeting quarterly advance tax deadlines on a timely basis.

We hope this simplified the topic for you - feel free to ask any leftover questions in comments!

Feb 51/19

(All care has been taken to maintain the accuracy of the information detailed in this blog. Aviva, however, assumes no responsibility about the accuracy of the blog or of the actions taken based on it. Please do refer to the Income Tax Department’s online tax filing site, https://www.incometaxindia.gov.in/Pages/tax-services/file-income-tax-return.aspx, for any further clarifications)

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