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What is Tax Deducted At Source (TDS)

What is TDS or Tax Deducted at Source?

Tax Deducted at Source or TDS is one of the modes of collecting tax in India.

According to the Income Tax Act – certain persons in charge of making installments are obliged to deduct charge at source at prescribed rates. This assessment which is deducted must be saved by them to the administration. The beneficiary of wage gets the net sum (after deducted of tax at source).

TDS is deducted in case of employee salary, rent, and payment for professional or contractual services by the deductor and remitted to the Government account. The most common and relatable example of TDS is the monthly deduction from your salary. Based on your income and IDF (Investment Declaration Form) submitted to your company, the TDS is calculated as per the prescribed income tax slab and gets deducted equitably every month from your account.

The two questions that are bound to come to your head at this juncture are, “How is TDS different from Income Tax?” The answer to the first question is that TDS is a part of the income tax you pay. You can look at it as “Pay as you earn” scheme where your company deducts an equitable amount of tax every month from your salary which practically saves you from the burden of making a lump sum tax payment at the end of the financial year.

Once you calculate your tax for a particular financial year and it comes out to be more than the TDS, then the excess amount needs to be paid to the Government as tax. And in cases where the TDS amount deducted is higher than the tax computed, you can file for TDS e-returns.

Section codes defined for TDS

TDS is governed by the Central Board of Direct Taxes under the Income Tax Act, 1961. CBDT is a part of the Indian Revenue Services which come under direct jurisdiction of the Ministry of Finance in India. Now, there are a lot of section codes under which deduction of TDS is defined. But for a layman, the most important ones are –

Section Code Type of Payment Threshold Limit (Rs.) Tax Rate (%)
192 Salary to a resident/NRI - As per the prescribed tax slab for a financial year
193 Interest on securities - 10
194 Dividends earned - 10
194A Interest (other than interest earned on securities) 5000 10
194C Contracts and sub-contracts 30,000 1
194D Insurance commission 20,000 10
194EE Payments for deposits under National Service Scheme 2500 20
194F Payment for repurchase of units of Unit Trust of India or mutual funds 1000 20
194H Brokerage commission 5000 10

*For Individual and HUF

*Threshold Limit – The amount up to which TDS does not need to be deducted.

There are a few exceptions as well. Tax Deducted at Source is not applicable if the payment is being made to the Government, Reserve Bank of India or corporations whose income is exempt from income tax and any mutual funds specified under section 10(23D) of Income Tax Act.

Things you should know about TDS

• As per provisions of section 203A of the IT Act, deductors need to have Tax deduction and collection Account Number (TAN) as it is compulsory to mention when filing TDS returns.
• The deductor needs your PAN number to deduct TDS.
• TDS is deposited using Challan number 281.
• TDS certificates – Form 16 for salaried individuals and Form 16A for non-salaried individuals. These need to be presented to adjust TDS amount paid against the total payable tax.
• Forms for TDS returns – Form 24 for salary related TDS returns and Form 26 for non-salary related TDS returns.
• You can check your TDS details through Form 26AS available online.

WHY IS TDS DEDUCTED?

TDS is an important component of collecting tax. The reasons for deducting TDS can be perceived in the form of benefits that TDS offers: –

1) It promotes the sharing of the responsibilities of tax collection between the Government and deductors (companies or individuals).
2) It helps prevent the malpractice of evading tax.
3) It acts as an effective mode of capital inflow required by the Government to function.

Based on these reasons, it is clear how TDS plays a crucial role in keeping tax evasion in check while financially strengthening the Government to function properly and implement developmental work for the growth of the country.

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