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When Should TDS be Deducted, and Who is Liable to Deduct it?

TDS should be deducted on various transactions, such as salary payments. The liability to deduct TDS rests on employers, financial institutions, businesses, and individuals engaged in specified transactions.

  • 24,154 Views | Updated on: Mar 20, 2024

Tax Deducted at Source (TDS) is a mechanism employed by the Indian government to collect taxes at the source of income, ensuring a steady revenue stream and minimizing tax evasion. Understanding when TDS should be deducted and who bears the responsibility for its deduction is crucial for both businesses and individuals to comply with tax regulations.

TDS was established with the intention of direct taxation straight from the original income. The deductee whose taxable income has been deducted at origin is eligible for a rebate for the sum deducted depending on the details in the deductor’s Form 26AS or the TDS certificate.

What is a TDS?

Tax Deducted at Source (TDS) refers to the deduction of income tax from funds disbursed during specific transactions, such as payments for rent, commission, professional fees, salary, and interest. The individual receiving the income is typically responsible for fulfilling income tax obligations. However, the government employs TDS provisions to ensure that income tax is preemptively deducted by the entities making these payments.

Under TDS, the payer deducts a predetermined percentage from the payment, and the recipient then receives the remaining amount, referred to as the net amount after TDS deduction. Subsequently, the recipient incorporates the gross amount into their total income, and the TDS amount is offset against their final tax liability. This allows the recipient to claim credit for the amount already deducted and remitted on their behalf, streamlining the income tax process and facilitating compliance with tax regulations.

How Does TDS Work?

The person responsible for payment, subject to TDS, withholds a specific percentage of the paid amount as tax and transfers the remaining balance to the recipient. Additionally, the recipient receives an official certificate from the deductor specifying the TDS amount. The deductee can then utilize this TDS amount as a credit for the tax they paid during the relevant financial year.

The deductor is responsible for ensuring the TDS is deposited with the government. Once this deposit is completed, the corresponding amount is reflected in the individual’s Form 26AS/AIS.

When is TDS Deducted, and Who is Responsible for It?

Individuals who make certain payments, as defined by the Income Tax Act, must pay TDS just at the time of the transaction. No TDS should be collected if the person making the payment is a person or a HUF whose finances are not required to be audited. Even if the person or HUF is not subject to a financial audit, people and HUFs who pay rent in excess of ₹50,000 per month must pay TDS at the rate of 5%.

People and HUFs who must deduct TDS at a rate of 5% are exempt from applying for TAN (Tax deduction account number). Your corporation deducts TDS at the applicable income tax slab rates. Banks collect TDS at a rate of 10%. Furthermore, they can collect 20% if they do not have your PAN credentials.

For most payments, TDS rates are specified in the income tax legislation, and TDS is deducted by the payer based on these rates. You will not have to pay any tax if you provide investment proof (for claiming deductions) to your company and your total tax payable is less than the tax limitation. As a result, you should not have any TDS deducted from your wages. Similarly, if your total income is substantially below the tax threshold, you can file Form 15G and Form 15H with your bank to avoid taking TDS from your interest income.

TDS On Insurance Premium

Most insurance plans, whether life insurance or term insurance, do not charge any kind of TDS on premium provided the following conditions are met:

  • TDS on insurance is exempted if the policies were granted on or before March 31, 2012, with an amount assured of at least five times the annual premium paid.
  • The policies, which were issued on or after April 1, 2012, have an amount assured of at least ten times the yearly premium paid.

When Should TDS be Deducted?

Tax Deduction at Source (TDS) is a system implemented by the government to ensure the smooth collection of taxes at the time of income generation. This mechanism helps prevent tax evasion and facilitates the seamless flow of revenue. Knowing when TDS should be deducted is crucial for businesses and individuals to comply with tax regulations.

Salary Payments

Employers are required to deduct TDS from their employees’ salaries based on the applicable income tax slab rates. This deduction ensures that employees’ tax liabilities are fulfilled in a timely manner.

Interest Income

Financial institutions, including banks and post offices, must deduct TDS from individuals’ interest income. This includes interest from fixed deposits, recurring deposits, and other savings schemes.

Rent Payments

Individuals or businesses making rental payments exceeding a specified threshold are required to deduct TDS. The current limit is ₹50,000 per month under Section 194-I of the Income Tax Act.

Commission Payments

When commissions are paid to agents or professionals, TDS is applicable. This ensures that individuals receiving commissions are brought within the tax net, and the government receives its due share.

Consultation Fees

Businesses or individuals engaging in professional services and making payments for consultation, legal services, or technical services exceeding a specified limit are required to deduct TDS.

Insurance Commission

Insurance companies are mandated to deduct TDS on the commission paid to agents or intermediaries. This applies to both life and general insurance.

Final Thoughts

Understanding when TDS should be deducted and who is responsible is fundamental for employers and entities making payments subject to TDS. Compliance with TDS regulations ensures adherence to tax laws and contributes to the efficient and transparent functioning of the financial ecosystem. Staying informed and fulfilling these obligations is paramount for a seamless and lawful financial operation for all stakeholders involved.

Key takeaways

  • Employers are responsible for deducting TDS from employee salaries, ensuring compliance with income tax regulations.
  • Financial institutions deduct TDS on interest income, covering sources like fixed deposits and savings schemes.
  • Individuals or businesses making monthly rental payments exceeding ₹50,000 are liable to deduct TDS.
  • TDS is applicable on commissions paid to agents or professionals, with the responsibility falling on the payer.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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