Threshold Limit for TDS Under the Income Tax Act

The threshold limit for TDS (Tax Deducted at Source) under the Income Tax Act in India varies depending on the specific section under which the TDS is deducted. For example, under Section 194C, for contractual payments threshold limit is capped at ₹1,00,000 per financial year or ₹30,000 per payment (whichever is lower). In some cases, the threshold limit is higher for certain types of payees, such as government entities or specified persons (those with turnover below certain limits).

Key Takeaways

• The primary objective behind Tax Deducted at Source (TDS) is to levy income tax at the point of income generation.
• TDS is applicable only when the income exceeds a specified threshold limit. This minimum value varies based on the nature of the transaction.
• Different sections of the Income Tax Act prescribe TDS rates for various types of payments, varying for Indian citizens and Non-Resident Indians (NRIs).
• Not complying with TDS deductions and deposits can lead to financial penalties and tax disadvantages, such as increased tax liability.

The Government of India established TDS, or Tax Deducted at Source, to levy tax on income at the point of generation to reduce revenue evasion and collect tax in real-time as and when the income is received. This tax at source is only deducted on a specific transaction amount. If the income exceeds a threshold limit (minimum value), the tax is deducted, while there is no TDS deduction when the amount does not exceed the threshold.

Threshold Limit in TDS

The threshold limit refers to the amount of payment on which no TDS is payable. TDS provisions only apply if the transaction exceeds the permissible limit. For example, if professional fees do not exceed ₹30,000/-, no TDS is needed to be deducted under Section 194J. So, in this case, the threshold limit is ₹30,000, and TDS must be deducted if the income surpasses that amount. This table shows the threshold limit under different sections:

Need for Tax Deducted at Source (TDS)

TDS, or Tax Deducted at Source, is implemented by the Indian government to collect income tax at the source of income itself. The payer then deposits this deducted amount to the government’s account.

Any individual or entity making specified payments exceeding the threshold limit is responsible for deducting TDS. It includes employers, banks, government agencies, companies making rent payments, etc., but why does the Government need it? The government implements TDS (Tax Deducted at Source) for several important reasons:

Timely Revenue Collection

TDS ensures a steady flow of tax revenue throughout the year instead of a lump sum at the end of the financial year. It helps the government manage its finances more effectively and plan for public expenditures.

Reduces Tax Evasion

By collecting tax at the source, the government minimizes the chances of taxpayers underreporting their income or avoiding taxes altogether. It promotes a fairer and more equitable tax system.

Improves Compliance

Mandatory TDS deduction encourages taxpayers to keep proper records and comply with tax regulations. It also simplifies tax administration and reduces enforcement costs for the government.

Promotes Transparency

TDS encourages transparency in financial transactions, as deductions are reflected in official records accessible to both the deductee and the government.

Reduces Burden on Taxpayers

By paying taxes in smaller installments through TDS, taxpayers avoid a significant tax burden at the end of the year and can manage their finances more effectively.

Promotes Financial Inclusion

TDS deductions create a digital footprint of financial transactions, which can encourage individuals to participate more actively in the formal financial system.

Consequences of Failing to Deduct or Submit the TDS

Failing to deduct or deposit TDS can lead to serious consequences for the deductor, including:

Disallowance of Expense

As per Income Tax Act sections 40(a)(i) and 40(a)(ia), if TDS is not deducted or deposited correctly, the expense (except salary) may be disallowed as a deduction, increasing your taxable income and potentially your tax liability. It applies to both resident and non-resident recipients.

However, if you rectify the mistake by deducting or depositing the tax in a subsequent year, the deduction may be allowed that year.

Interest Charges

Under Section 201, failing to deduct or deposit TDS makes you an “assessee-in-default,” liable to pay simple interest on the tax amount:

• 1% per month from the due date of deduction to the date of deduction.
• 1.5% per month from the due date of deduction to the date of actual payment.

Penalty

Section 271C allows the authorities to impose a penalty equal to the amount of tax not deducted or deposited.

To Sum it Up

Knowing the threshold limits for TDS under the Income Tax Act is crucial for all taxpayers. It helps in efficient tax planning and ensures adherence to legal requirements. As tax regulations may change, consulting tax professionals or referring to official government notifications for the latest information is advisable. Individuals and businesses can contribute to a transparent and robust tax system by staying informed and compliant.