What is Tax Deduction at Source (TDS)?

TDS, or Tax Deduction at Source, is integral to the Indian tax system, ensuring timely and efficient tax collection. By understanding how TDS works, the types of income it applies to, and the process for filing returns and claiming refunds, taxpayers can better manage their tax liabilities and avoid penalties.

Key Takeaways

• TDS applies to various income types, such as salaries, interest on securities, dividends, and winnings from lotteries and games.
• The person or entity making the payment deducts a certain percentage as TDS and deposits it with the government.
• A TDS return is a quarterly statement filed by the deductor detailing the TDS deducted and deposited.
• Certain payments, such as interest on savings accounts, specific dividends, and agricultural income, are exempt from TDS.

TDS meaning in tax, is the collection of tax at the source of income itself. This means that the payer (the person or entity making the payment) withholds a part of your income before it reaches you. This deducted amount is then deposited to the government on your behalf. TDS is a tool for advanced tax collection and helps streamline the process.

What is TDS (Tax Deduction at Source)?

TDS is a mechanism for collecting income tax at the source of income. It is deducted by the person making the payment to another person. For example, an employer deducts TDS from the salary paid to an employee. Similarly, a bank deducts TDS from a customer’s interest income on their deposits.

The TDS full form stands for Tax Deducted at Source, the tax deducted from an individual’s salary before the amount is credited to their account. The employers make this deduction every month. You can claim a TDS refund if the TDS collected is more than what you owe the government.

Types of TDS (Tax Deduction at Source)

Various types of TDS (Tax Deduction at Source) are applicable based on the nature of the payment and the income. Here are the primary kinds of TDS along with their corresponding section numbers under the Indian Income Tax Act, 1961:

• Salary (Section 192): The employer deducts TDS based on the income tax slab rates applicable to the employee’s estimated annual income.

• Interest on Securities (Section 193): TDS is deducted from interest income earned from debentures and bonds.

• Dividends (Section 194): TDS is deducted on dividends paid by Indian companies to shareholders exceeding a specified threshold.

• Winning from Horse Races (Section 194BB): TDS is deducted from winnings from horse races.

• Payment to Contractors/Sub-contractors (Section 194C): TDS is deducted on payments made to contractors and subcontractors for carrying out any work, including the labor supply.

• Payment in respect of Life Insurance Policy (Section 194DA): TDS is deducted from the proceeds of life insurance policies if the amount is not exempt under Section 10(10D).

• Payment to Non-Residents (Section 195): TDS is deducted on various payments made to non-residents, including interest, royalties, technical services, etc.

How Does TDS work?

TDS works on the principle of “pay as you earn.” The person making the payment deducts a certain tax percentage and deposits it with the government. The person receiving the payment receives the net amount after deducting TDS.

For example, let’s say your employer pays you a salary of ₹50,000 per month. If the TDS rate is 10%, your employer will deduct ₹5,000 as TDS and deposit it with the government. You will receive the remaining ₹45,000 as your net salary.

TDS on Salary

TDS on salary is one of the most common forms of TDS in India. The employer deducts it on behalf of the employee. The TDS rate on salary depends on the employee’s income and the tax slab under which they fall. The TDS rate can range from 0% to 30%, depending on the chosen tax regime.

TDS on Interest Income

TDS is also deducted from interest income earned by individuals from various sources such as fixed deposits, recurring deposits, and savings accounts. The TDS rate on interest income also varies based on the source of income.

For example, if the interest earned on fixed deposits is more than ₹40,000 in a financial year, TDS will be deducted at 10%. If the interest earned on recurring deposits or savings accounts is more than ₹10,000 in a financial year, TDS will be deducted at 10%.

Income Tax Liability and TDS

TDS is a way to collect income tax in advance. It is deducted by the person making the payment, and the person receiving it receives the net amount. However, TDS is not the taxpayer’s final tax liability. The taxpayer must file an income tax return at the end of the financial year, and the TDS amount is adjusted against the final tax liability.

If the TDS deducted is more than the final tax liability, the taxpayer can claim a refund for the excess TDS deducted. This brings us to the next topic: how to claim a refund for excess TDS deducted.

TDS Rate

The TDS rate is the percentage of tax deducted at source. It varies based on the type and nature of the payment. The TDS rates are prescribed by the Income Tax Act and are subject to change occasionally.

For example, the TDS rate on salary varies based on income and the tax slab, and the TDS rate on interest income varies based on the source of income.

What is TDS (Tax Deduction at Source) Return?

A TDS (Tax Deducted at Source or Tax Deduction at Source) Return is a quarterly statement submitted by deductors to the Income Tax Department of India detailing the TDS deducted and deposited during the quarter. The return includes information such as the deductor’s and deductees’ PANs, the amount of TDS deducted, and the TDS payment details.

Example Scenario of TDS Return

Let us take an example scenario of TDS return for salary income to understand TDS returns better. For example, Mr. Verma works for ABC Pvt Ltd. In this scenario, company ABC Pvt Ltd is the TDS deductor while the employee Mr. Verma is the TDS payee for their salary.

Scenario: Mr. Verma is an employee of ABC Pvt Ltd. During the financial year 2023-24, Verma’s annual salary was ₹7,00,000. He has submitted investment proofs for ₹1,50,000 under Section 80C (tax-saving schemes). Based on his tax bracket and deductions, the applicable TDS rate for his salary income is 10%.

TDS calculations will be as follows:

In this case, ABC Pvt Ltd, as the deductor, is responsible for filing the TDS return for the quarter in which the TDS was deducted. The return will include details like Mr. Verma’s PAN, amount paid (salary), TDS deducted (₹55,000), and challan details (proof of TDS payment to the government). The TDS return will be filed electronically on the Income Tax Department’s portal.

Types of Payments that are Exempted from TDS

Certain types of payments are exempt from TDS (Tax Deduction at Source) under the Income Tax Act. These exemptions are in place to simplify the tax process and avoid double taxation in some cases. Here are the primary types of payments that are exempt from TDS:

• Interest on Savings Bank Account: Interest earned on savings accounts is exempt from TDS.

• Interest on Government Securities: Interest earned on government securities is generally exempt from TDS.

• Agricultural Income: Income earned from agrarian activities is exempt from TDS.

• Payments to Government: Payments made to the government, including tax payments, are exempt from TDS.

• Payment to Recognized Provident Funds: Payments made to recognized provident funds are exempt from TDS.

• Payment to Notified Institutions and Funds: Payments made to certain notified institutions, funds, or bodies exempt under specific Income Tax Act provisions.

TDS Rates for Various Regular Payments

The TDS rates for different types of payments are prescribed under various sections of the Income Tax Act. Here are the TDS rates for some common types of payments:

Salary (Section 192)

TDS is deducted based on the applicable income tax slab rates.

Interest on Securities and Dividends (Section 193 and Section 194)

10% on interest on securities. 10% on dividend income exceeding ₹5,000.

Winning from Lotteries, Crosswords, and Other Games (Section 194B & 194BB)

30% on winnings from lotteries, crossword puzzles, etc., if the amount exceeds ₹10,000. 30% on winnings from horse races (Section 194BB) if the amount exceeds ₹10,000.

Payment in Respect of Life Insurance Policy (Section 194DA)

5% on the income component of the payment (if the amount exceeds ₹1 lakh).

Fees for Professional and Technical Services (Section 194J)

10% on professional, technical, royalty, and non-compete fees. 2% on payments for call center operations.

Payment for Transfer of Immovable Property (Section 194-IA)

1% on the transfer of immovable property (other than agricultural land) if the sale consideration exceeds ₹50 lakh.

Payments to Non-Residents (Section 195)

Rates vary based on the type of income (e.g., 20% on royalties and 10% on fees for technical services).

What are the Steps for Filing a TDS Return Claim?

You must file a TDS refund claim when the employer deducts more tax than the actual liability. The difference amount can be claimed by filing an income tax return. For successful processing, you must provide the bank account number, bank name, and Indian Financial System Code (IFSC) details. If you know that the TDS is payable in any financial year, you must file Form 13 under Section 197 to benefit from a lower income tax deduction.

How to Claim TDS Refund Online?

You can do it online if you also wonder how to claim a TDS refund on your salary. Claiming a TDS refund online is simple and involves filing income tax returns. It includes the following steps:

• Sign in or sign up on the online e-filing portal of the Income Tax Department,

• Fill in the relevant details in the applicable Income Tax Return (ITR) form.

• On submission of the ITR, the portal generates an acknowledgment.

• E-verify the acknowledgment through the digital signature, net banking account, or an Aadhaar-based One-Time Password (OTP).

How to Claim TDS Refund From Bank?

Another thing you need to know is how to claim a TDS refund in case of a deduction by the bank. If the income tax is less, but the bank has deducted more tax on your fixed deposit, you can claim a refund in two ways:

One way is to declare the income, and the IT department will refund the amount into the bank account.

The other way is to file a Form 15G with the bank so that there is no deduction at the source since your salary does not fall under any tax slab. Also, senior citizens are exempted from paying TDS on fixed deposit interests.

Due Dates for TDS Payments

As a taxpayer, knowing TDS (Tax Deduction at Source) payment due dates is essential to avoid penalties and ensure a smooth tax filing process. Here’s a table summarizing TDS due dates:

Penalties for Late Filing TDS Returns

Filing TDS (Tax Deduction at Source) returns on time is crucial to avoid penalties and ensure smooth tax processing. Here is a breakdown of the penalties you might face for various TDS filing issues:

Non-submission of TDS Return (Section 271A)

This scenario applies if you fail to file the TDS return entirely by the due date. A penalty of ₹100 per day of delay is imposed, capped at the lower total TDS amount deductible or ₹10,000.

Delayed/Non-filing of TDS Returns (Section 234E)

A penalty of ₹200 per day of delay is charged for delayed or non-filing TDS returns. This fine applies if you file the TDS return late, even if you deposited the TDS on time.

Delayed/Non-filing of TDS Statement (Section 271H)

The Assessing Officer imposes this penalty for late or non-filing the TDS statement, which is a more detailed report than the return. The minimum fine is ₹10,000.

Incorrect Details on TDS Return (Section 271H)

The penalty for filing incorrect details on TDS returns is a minimum ₹10,000, which can be extended to ₹1,00,000. For example, you can pay this penalty if you submit a TDS return with inaccurate information, such as PAN details and the deducted amount.

If the TDS Amount is Not Deposited (Section 221)

A penalty of up to 300% of the tax amount is applied with an interest rate of 1.5% per month on the unpaid TDS amount from the due date till payment. It applies if you deduct TDS but fail to deposit it to the government by the due date.

How to Check TDS Refund Status?

Visiting the online e-filing portal helps you know the refund status. You can do so by following the steps mentioned below:

• Log in to your account.
• Check out the section labeled ‘My Account’ and select ‘Refund/Demand Status’.
• It reflects the assessment year, the status, and the mode of payment. In case of rejection, the corresponding reason is mentioned here as well.

What is a TDS Certificate?

A TDS certificate, or a TDS deduction certificate, is a document issued by the tax deductor (the person or entity who deducted TDS from your income) that shows the amount of tax deducted at source (TDS) on a specific payment made to you.

The information in the TDS certificate helps you reconcile your income and taxes deducted. If the TDS deducted is more than your tax liability, you can claim a tax refund while filing the Income Tax Return (ITR). The TDS certificate helps substantiate your claim.

What is the TDS Refund Period?

If the ITR is filed on time, you can expect the refund to get credited to your bank account in three to six months. The credit is also a function of the completion of the e-verification formality. A TDS (Tax Deduction at Source) refund is issued when the amount of tax deducted exceeds the actual tax liability. Investment predictions made at the start of a financial year generally do not match the actual investments made at the end of that year. A TDS refund occurs when there is a discrepancy between the total tax deducted at the end of a financial year and the income tax you must pay for that year.

What is the Interest in a TDS Refund?

In case of delays in refunding the TDS amount, the Income Tax Act entitles you to receive interest. The interest is calculated at a simple rate of 6%. The interest accrual occurs from the first month of the financial year, i.e., April, and is taxable under ‘Income from Other Sources.’ However, the interest is not applicable where the refund amount is lower than 10% of the total tax payable.

How Does TDS Benefit You?

TDS (Tax Deduction at Source) offers several benefits both for taxpayers and the government. Here is how TDS can benefit you as a taxpayer:

Ensures Timely Payment of Taxes

TDS facilitates the timely payment of taxes as the tax is deducted at the source of income. It helps taxpayers avoid a significant tax liability at the end of the financial year.

Reduces Burden of Lump-sum Tax Payment

By deducting tax in smaller amounts from each payment, TDS spreads the tax burden over the year, making it more manageable for taxpayers.

Improves Tax Compliance

Tax is deducted automatically from various income sources, ensuring compliance and reducing the risk of non-payment or underpayment of taxes.

Prevents Tax Evasion

TDS (Tax Deduction at Source) checks against tax evasion by ensuring that tax is collected at the source of income generation, reducing the chances of individuals and businesses hiding income.

How to Claim a Refund on TDS Deducted on PF Withdrawal?

EPF members can claim an EPF refund on withdrawal if their income is less than ₹2,50,000 in a financial year. The taxpayer must show the EPF withdrawal as salary income while filing their tax returns.

How to Claim a TDS Refund on Salary?

TDS (Tax Deduction at Source) on salary is the tax deducted by the employer from the employee’s salary. As a result, your employer deducted your money and deposited it with the government on your behalf. Follow the steps below to get a TDS refund on your salary:

If your employer deducts TDS (Tax Deduction at Source) and your actual tax due, you must file an income tax return. Provide the bank account number, the bank’s name, and the IFSC code. After you file a return claiming a TDS refund, the income tax officer takes a few months to sanction it.

How to Claim a TDS Refund from Previous Years?

To claim TDS (Tax Deduction at Source) refunds from previous years, you have to follow these easy steps:

File Income Tax Returns (ITRs)

Ensure you have filed ITRs for the years you’re claiming a refund. Refiled returns can ensure the refund process is completed on time.

Gather Documents

• Acknowledge receipts for filed ITRs for the relevant years.
• Form 16 (TDS certificate) from your employer or other deductors (like banks) for those years.
• Proof of income and tax deductions claimed (investment proofs, salary slips, etc.).
• Bank account details for receiving the refund.

Filing Correction Request (Optional)

If any discrepancies in your ITRs cause the excess TDS, you can file a revised ITR (Form 16) highlighting the corrections.

e-Verification

Verify your ITR filing electronically using Aadhaar or other methods.

Track Refund Status

You can track your refund status online using the Income Tax Department’s e-filing portal with your PAN details.

Can TDS Amount Change in the Financial Year?

Yes, the TDS amount deducted from your salary or other payments can change during the financial year (FY) for a few reasons:

• Change in income: If your income increases or decreases significantly due to a bonus, salary hike, additional income sources, or a job change, your tax bracket and applicable TDS rate might change.

• Investment proof submission: Submitting investment proofs for tax-saving schemes (like PPF and ELSS) to your employer can lower your taxable income and, consequently, the TDS deducted.

• Changes in TDS rate: While less frequent, the government may revise TDS rates during the FY for specific income sources.

Conclusion

Compliance with TDS (Tax Deduction at Source) regulations benefits the government by securing steady revenue. It also helps taxpayers spread their tax burden over the year, preventing large lump-sum payments at the end of the financial year. Staying informed about TDS rates, exemptions, and filing deadlines is essential for smooth financial and tax management.

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