TDS (Tax Deducted at Source)

What is Tax Deducted at Source? How Does it work?

Introduction

TDS stands for ‘Tax Deducted at Source’. TDS was introduced to collect tax at the source from where an individual’s income is generated. Lets discuss about TDS in detail.

TDS (Tax Deducted at Source)

What is TDS ?

• Tax Deducted at Source ie. TDS was introduced to collect tax at the source from where an individual’s income is generated. 
• The government uses TDS as a tool to collect tax in order to minimize tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date. 
• TDS is applicable on the various incomes such as salaries, bonus, interest received on bank deposits, interest on securities, commission received, rent or purchase of a property etc. 
• TDS is not applicable to all incomes and persons for all transactions. Different rates of TDS have been prescribed by the Income Tax Act for different payments and different categories of recipients.
• For example, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS but for a Non-resident Indian is subject to TDS. 

Example

• Let us take an example of TDS assuming the nature of payment is professional fees on which specified rate is 10%.
• Suppose Yadnya Ltd makes a payment of Rs.50,000/- towards professional fees to Mr. Rahil, then Yadnya Ltd shall deduct a tax of Rs.5,000/- i.e. 10% of Rs.50,000/- and make a net payment of Rs.45,000/- (50,000/- deducted by Rs.5,000/-) to Mr. Rahil.
• The amount of 5,000/- deducted by Yadnya Ltd will be directly deposited to the credit of the government and it will issue a certificate to Mr. Rahil stating the same.

Objectives of TDS

TDS follows the “pay as your earn” concept. Its basic objectives are as follows :

1. Tax Deducted at Source facilitates the sharing of the tax collection responsibility between the deductor and the government, ensuring a regular inflow of cash to the latter.
2. It enables salaried individuals to pay taxes in easy installments each month, thus preventing them from the burden of lump sum tax payments.
3. TDS empowers the government to receive the necessary funds all year round which aids it in running the country smoothly.
4. It ensures that the tax net is spread wide enough and prevents tax evasion.

How Does TDS Work?

• TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account. 
• The person who is making the payment is responsible for deducting the tax and depositing the same with government. This person is known as ‘deductor’. On the other hand, the person who receives the payment after the tax deduction is called ‘deductee’.
• Form 26AS is a statement which shows the amount of tax deducted and deposited in a person’s name/PAN.  Therefore, an individual can view/check the TDS from incomes paid to him by viewing this Form 26AS.
• Each deductor is also duty bound to issue a TDS certificate certifying how much amount is deducted in the deductee’s name and deposited with the government. 
• Thus, The entity making a payment (which is subject to TDS) deducts a certain percentage of the amount paid, as tax and pays the balance to the recipient. The recipient also gets a certificate from the deductor stating the amount of TDS. The deductee can claim this TDS amount as tax paid by him (i.e. the deductee) for the financial year in which it is deducted. 
• The deductor is duty bound to deposit the TDS with the government. Once deposited this amount reflects in the Form 26AS of individual deductee on the TRACES website linked to the income tax department’s e-filing website. 

TDS Rates As per FY2018-19 (AY2019-20)

• One must note that TDS on specified transactions is deducted only when the value of payment is above the specified threshold level. No TDS will be deducted if the value does not cross the specified level. 
• Different threshold levels are specified by the Income Tax department for different payments such as salaries, interest received on bank deposits and as well as securities, commission received etc. 
• The details regarding TDS rates of different nature of payments and corresponding sections, their respective threshold limits and payee type are mentioned in the above table.

TDS Deduction Exemptions

TDS is exempted from the payment of interest from the following cases :

• Payments in favor of RBI, or towards the central government
• Banking companies
• Financial corporations formed under the finance bill of union government or any state
• Income Tax refund
• Direct taxes interest payment
• LIC, UTI and investments in co-operative societies
• Interests earned in recurring deposit or any savings account held with any commercial banks or cooperative societies
• Interest earned on Indira Vikas Patra (IVP), NSC or KVP
• Interest earned on NRE account
• Any institutions notified as Nil TDS organization

Summary

• Tax Deducted at Source (TDS) is a system of taxation where the person/entity responsible for making specific payments deducts the applicable tax before the payment is credited to the receiver. 
• TDS is applicable on the various incomes such as salaries, bonus, interest received on bank deposits, interest on securities, commission received, rent or purchase of a property etc.