What is Tax Deducted At Source?

TDS is a vital form of tax that proves helpful for taxpayers as well as the government. Read on to know more about it.

TDS means Tax Deducted at Source. It is a primary component of direct taxation applied to many types of income to gather taxes at the time of payout. It helps prevent tax avoidance and relieves the taxpayer of the stress of paying taxes at once at the end of the fiscal year (FY). As a result, this method allows the government to receive consistent revenue whilst reducing the financial burden on taxpayers.

Most individuals who are employed need to pay taxes. And for this, they need to be well-versed with different types of taxes levied and how to pay them.

What is TDS?

TDS (Tax Deducted at Source) is a percentage deducted once payment is made. These payments include salary, incentive, rent, mortgage, professional fees, etc.

Types of TDS

1. TDS on purchase of goods

TDS is charged at a rate of 0.1 per cent of the transaction value for items worth more than ₹50 lakhs. This rate could be as high as 5% if the deductee fails to furnish their PAN to the deductor. TDS is deducted when the purchase reflects in the seller's accounts.

2. TDS on professional fees

When certain payments are made to a person in the medical, architectural, legal, medical, or engineering profession, TDS of 10% is levied, according to the norms and regulations of Section 194J of the Income Tax Act, 1961. Accountancy, interior design, advertising, technical consulting, and any other profession recognised by the Board under Section 44AA are examples of additional services.

3. TDS on contractor

The contractor's TDS rate is 1% if the payment is made to an individual or a HUF. It is 2% if the payment is for anybody else.

4. TDS on cash withdrawal

TDS is 2% on cash withdrawals over ₹1 crore if the individual withdrawing the money has filed ITR for any or all three previous AYs. It is 2% on cash withdrawals over ₹20 lakh and 5% on withdrawals over ₹1 crore if the individual withdrawing the money has not filed ITR for any or all three preceding AYs.

5. TDS on interest

Any individual making qualified interest payments per section 194A will be required to deduct 10% TDS. TDS will be deducted at a rate of 20% if the person does not provide a PAN.

6. TDS on dividend income

Dividend income became taxable from April 1, 2020, under the Income Tax Act of 1961. As a result, if a resident individual shareholder receives a dividend of over ₹5,000 in a fiscal year, the TDS levied is 10%.

7. TDS on fixed deposit interest

Considering your FD with a particular bank, the bank calculates your annual interest income. If your interest income reaches ₹40,000, you would be subject to a 10% TDS deduction (₹50,000 when it comes to senior citizens).

8. TDS on brokerage

The TDS rate on profit or brokerage is ten per cent, up from five per cent in the fiscal year 2016-2017. On payments to residents, there is no extra fee or education cess. TDS will be deducted at a rate of 20% if the payee has not submitted their PAN.

9. TDS on PF withdrawal

If you collect EPF balance before five years, TDS is deducted at a rate of 10%. When making a withdrawal, don't forget to include your PAN. If you do not submit PAN, TDS will be deducted at the maximum slab rate of 30%. If your total income, including EPF withdrawals, is tax-free, you can file Form 15G/Form 15H.

10. TDS on savings bank interest

Interest earned on a savings account is taxed under "Income from other sources". Furthermore, Section 80TTA allows a deduction of up to ₹10,000 on such interest income. Hence, the interest generated by more than ₹10,000 is taxable.

Individuals can apply for a TDS refund on the Indian Tax Department (IT) website if applicable. The Income Tax Department will issue a TDS return after filing ITR. The refund could be credited to your bank account in six months. Applicants can also track the progress of their refund on the IRS (IT) official website.

Steps to file TDS Return Online

Filling TDS returns online is much easier now through the online portal. Follow the steps mentions below to fill out the TDS Return online.

1. Begin by filling out Form 27A. Enter all the mandatory details. If you are filling out a hard copy of the form, verify it with the e-TDS return.
2. Subsequently, enter the total amount that you have paid correctly, and it must be cross-verified in the respective form.
3. An organisation must fill out the TAN details correctly in Form 27A while filing TDS returns for a smooth process.
4. Enter accurate details of payment mode, challan number, etc, and the details of the tax paid while filing TDS returns.
5. Use the basic form for filling out e-TDS as it would bring consistency. You must also enter the 7-digit BSR so that it is easier to tally details.
6. If you are filing a physical TDS Return, submit your form at the TIN-FC, which is managed by NSDL (National Securities Depository Limited). However, online fillings can be done at the NSDL TIN official portal. The applicant must use a level 2 digital signature in case the Returns are filed online.
7. If all the information mentioned in the form is correct, NSDL issues a token number or provisional receipt. The provisional receipt works as an acknowledgement for successful TDS filling.

If the TDS Returns are rejected, the applicant receives a non-acceptance memo mentioning the reason for rejection. In case of rejection, an applicant needs to file the TDS Return again.

What are the TDS rates?

The TDS rates depend on the salary of an individual. It can range between 10% to 30% depending on their annual salary slab. Refer to the TDS rate charts for the financial year 2023-24 to know the TDS rates applicable to your salary in detail.

You can access the TDS rate chart on the official portal of the Income Tax Department of India.

What are the rules for Tax Deduction at Source?

Certain rules exist for filing TDS and Income tax returns. If an individual or an organisation satisfy these rules, they can avoid penalties, interest, and fees. Following are the important rules for tax deduction at source.

• The tax deducted at sources must be deducted at the time of payment of the actual amount or the time when it is due, whichever is earlier.  
• A delay in TDS deduction attracts interest at the rate of 1% per month until the deduction of taxes.
• Whether it is a company owner or any employer, everyone must pay the deducted tax to the government’s account on the 7^th day of the following month.
• A non-payment of TDS will attract interest at the rate of 1.5% per month as a penalty until the tax is paid.

TDS Payment Due Date

The Government of India has fixed a deadline for payment of tax deductions each month. Every company, employer, or deductor, who deducts the tax from an employee and individual for providing any services, must deposit the deducted tax on a fixed date every month as mentioned below in the table.

TDS Returns

An individual must file TDS Returns every quarter, otherwise, a penalty of ₹200 will be levied per day until the TDS return is filed as mentioned under Section 234E of the Income Tax Act 1961. Following are the dates for filing TDS returns.

How much tax needs to be deducted from the salary?

Employees’ salary is the most common type of payment made by an employer. However, there is no fixed rate of TDS deduction from salary. The deduction rates depend on the taxable salary slab of an employee. If an employee falls under the taxable salary range, the TDS amount is deducted based on his/her net annual income which excludes a few perks such as HRA, LTA etc.

Depending on the salaries of different employees, the employer calculates tax liability based on the ‘Average Rate of Income’. The average rate is the total tax liability divided by the number of employees in the company. The employer also considers the investment made by employees while calculating tax deductions.

There are some exemptions when calculating the tax deduction, such as –

· Exemption of salary limit – An employer does not deduct tax from an employee if his/her salary is below the threshold taxable salary limit.

· Exempted allowances – Allowances such as HRA (Housing Rent Allowance), LTA (Leave Travel Allowance), and more are considered when calculating the tax deductions.

· Other deductions – Under Section 80C of the Income Tax Act 1961, there are a few exemptions on tax deductions if an employee invests his/her income in certain investment instruments.

Will the TDS amount change during a financial year?

Commonly, the tax on salary is deducted based on the net taxable income, which excludes certain allowances and investments done by the employee. And since the calculation is done based on investment declaration and forecasted salary for the upcoming period, the TDS amount may change in the following situations.

· If the employee switch to a new job

· Declaration of tax-saving investments from the past which were not submitted earlier

· If the actual tax saving investment is less than the amount declared by the employee at the beginning of the year.

· If there is an increment in an employee’s salary or a bonus which resulted in increased salary.

In such cases, the tax authorities will deduct extra taxes in the coming months to balance lower deductions. However, if an individual deducts a higher rate of tax, they will receive a lower deduction in the coming months.

How to apply for a TDS return?

It must be noted that TDS Returns are the same as Income Tax Returns and an employee can claim returns while filing the annual ITR. To file a TDS Return, you must provide accurate bank details, including the IFSC Code and account number.

If some individuals have deducted more tax than they are supposed to, they can file for an income tax refund while filing the annual ITR.

Ensure proper TDS deduction

It is an obligation of every earning individual to undertake TDS filings. It eliminates tax evasion since the tax are deducted at the source.  Moreover, every employer must attentively take the necessary steps to make timely deductions. A delay or non-payment of tax deductions at the source attracts hefty penalties.

Additionally, employees must declare all their investments and produce investment proof and documents to their employers for an accurate tax liability calculation. 

Disclaimer

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