What is TDS and how does it work?
TDS is applicable on the various incomes received such as salaries, interest received etc. which is deducted when income is generated rather than at later date.
The government uses TDS as a tool to collect tax in order to minimise 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, interest received, commission received 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.
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'. Form26AS is a statement which shows the amount of tax deducted and deposited in a person's name/PAN.
An individual can, therefore, 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.
Click here to read how to view Form 26AS
How TDS works
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 deductees on the TRACES website linked to the income tax department's e-filing website.
Click here to read how TDS on salary works
Rates prescribed for different types of payments
There are different rates for TDS described in the different sections of the Act, depending on the nature of the payments. Some of the incomes subject to TDS are as follows:
|Nature of payment||Relevant Section||TDS rate (rate at which tax is to be deducted at source)|
|Salaries||Section 192||At applicable income tax rates. Inclusive of cess|
|Accumulated taxable part of PF||Section 192A||10%|
|Interest on securities||Section 193||10%|
|Deemed Dividend||Section 194||10%|
|Interest other than interest on securities||Section 194A||10%|
|Winnings from lottery, crosswords or any sort of game||Section 194B||30%|
|Winnings from horse race||Section 194BB||30%|
|Insurance commission received by an individual||Section 194D||5%|
|Life insurance policies not exempt under section 10(10)D||Section 194DA||1% in case payment in FY exceeds Rs 1 lakh|
|Commission or brokerage received except for insurance commission||Section 194H||5% in case payment in FY exceeds Rs 15,000|
|Payment made while purchasing land or property||Section 194IA||1%|
|Payment of rent by individual or HUF exceeding Rs 50,000 per month||Section 194IB||5%|
TDS only applicable above a threshold level
One must remember 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 etc. For example, there will be no TDS on the total interest received on FD/FDs from a single bank if it is less than Rs 10,000 in a year from that bank.
How to avoid TDS
If a person expects that his total income in a financial year will be below the exemption limit, he can ask the payer not to deduct TDS by submitting Form 15G/15H.
While receiving payment which is subject to TDS, deductee is required to provide his PAN details to avoid tax deduction at the higher rates.