TDS, commonly referred to as ‘Tax Deducted at Source’ was introduced to collect taxes from the source of generation of income of an individual. The government utilizes TDS as a tool to prevent tax evasion by taxing the income wholly or partially at the time of generation instead of at a later date.
TDS is applicable on various forms of income such as salaries, the commission received, interest received, and others. However, it’s not applicable to all incomes and persons for all the transactions carried out. The Income Tax Act lays down different rates of TDS for different categories of recipients and different payments which you can read here.
TDS basically works on the concept that every individual making a specific amount of payment to another individual need to deduct tax as per the rates prescribed by the Income Tax Act. The amount deducted should be deposited as tax to the government. The person deducting tax is referred to as ‘deductor’ and the one who receives the payment is referred to as the ‘deductee’.
Form 26AS serves as a statement that highlights the amount of tax deducted and the amount deposited in the deductee’s PAN/bank account. Any individual can check the TDS from incomes paid to him/her by accessing Form 26AS.
You need to remember that TDS is applicable only on specific transactions when the value of the payment is above the specified threshold level. There will be no deduction in TDS if the value of money does not cross the level specified by the income tax rules. You can check the details on the official website of Income Tax Department of India.
TDS is applicable only under the following circumstances:
- Income from salary: In this case, the TDS is deducted by the employer while providing a salary. The salary is taken into consideration along with exemptions, deductions and income.
- Income from interest: In this case, TDS is deducted if the total income from interest is above ₹10,000. Tax on recurring and fixed deposits is deducted and deposited by the banks in this case on behalf of the individual. The rate of TDS is 10% if the PAN details have been submitted by the individual in this case; else it is 20%.
- Income from sale of property: Upon disposal of any property, TDS would be applicable if the value of the property is over ₹50 lakhs. The rate of TDS applicable would be 1% of the sale value if PAN details have been furnished. It would be 20% of the sale value if PAN details have not been provided.
- Income from EPF withdrawals: TDS would be applicable to withdrawals made from Employees Provident Fund [EPF] before the end of 5 years of service. However, TDS is not applicable if the amount does not exceed ₹30,000.
Advantages of TDS
TDS is more about paying your taxes as and when you earn. It is a win-win scenario for both the government and the tax-payers. In this case, the tax is deducted while making payments through cheque, credit or cash, which is then deposited with the central agency. Paying TDS to the government –
- Prevents tax evasion
- Widens the tax collection base
- Responsibility sharing for both tax collection agencies and deductor
- Serves as a steady source of revenue for the government
- Easier for the deductee as the tax gets collected and deposited automatically to the central government
In case if an individual has paid excess TDS in comparison to the liable amount, then the deductor can file a refund claim for the excess amount with the Income Tax Department. The TDS deductions are estimated based on numerous factors for individuals based on different income categories.
Penalty for non-deduction of TDS
There are numerous instances where penalty, fees and interest are levied on the non-compliance of the provisions of TDS.
- Non-deduction of TDS
If a person fails to deduct tax at the source, then the Assessing Officer has the power to disallow the whole of such expenditure for ascertaining taxable profits.
- Late deduction of TDS
TDS has to be deducted at the time of payment by the deductor. 1% per month of the TDS amount is charged in case of late deductions. For instance, if the company ABC fails to deduct tax of ₹20,000 on 15th of July but deducts the same of August 1st, then the company has to pay an interest of ₹200 to the government.
- Late payment of TDS
Tax has to be deducted and paid on the 7th of the succeeding month to the government else an interest of 1.5% of TDS amount will be fined to the individual/company in question.
Tax compliance can be a hectic task for individuals who do not have an accounting background. This is when you can utilize good accounting software or take help from companies offering such services in order to prevent being penalized due to non-compliance. You can also use the handy TDS Calculator provided on the official Income Tax of India government website.