Sharekhan Blog

What is Tax Deducted at Source (TDS)?

  • Apr 18, 2024

The Income Tax Act of 1961 states that if a person's or an organisation's income exceeds a specific threshold, they have to pay taxes to the government of India. To know more about TDS and TDS example read on to.

Tax Deducted at Source Meaning

The Indian government uses a process called Tax Deducted at Source (TDS) to collect taxes from income sources. When paying a recipient, the payer deducts a specific proportion of tax, which is then sent back to the government. TDS is applicable to many different types of income, including commissions, rent, interest on fixed deposits, salaries, and more. Understanding TDS is essential for both income payers and recipients in India as it aids in the prevention of tax avoidance.

TDS must be deducted at the tax department's specified rates. The business or individual receiving the money is referred to as the deducted, while the business or individual making the payment after subtracting TDS is referred to as the deductor.

Before making a payment, the deductor must deduct TDS and deposit the proceeds with the government. Regardless of the payment method—cash, check, or credit—TDS is connected to the deductor's PAN and then deducted.

Types of TDS

Below are some of the income sources that are eligible for TDS Types:

  • Remuneration paid to the director of a company, etc.
  • Salary
  • Transfer of immovable property
  • Winning from games like a crossword puzzle, card, lottery, etc.
  • Amount under life insurance.
  • Bank Interest
  • Brokerage or Commission
  • Contractor payments
  • Compensation for acquiring immovable property
  • Commission payments
  • Dividend Declared
  • Interest on securities
  • Interest apart from interest on securities
  • Insurance Commission
  • Payment of rent

Why is the TDS Deduction Done?

1. According to the government, the adoption of TDS is necessary to prevent tax evasion. The person who pays the income, not the recipient, is responsible for depositing the tax under the TDS scheme. This makes it easier for the government to enforce tax laws and monitor taxpayers rather than having to manage a large number of income recipients.

2. Another benefit is that the government receives a consistent stream of income all year long instead of having to wait until tax season to file.

3. From the perspective of the average person, much like yours and mine, taxes are withheld under the TDS system at different times when you earn income during the year. You are, therefore, not required to scrimp pennies and pay the tax all at once.

Also Read about Demat Account and Taxation

How TDS Works and Who Can Deduct It?

There will be a TDS deduction due from the payer. The person or entity has the responsibility of withholding the amount at a designated percentage and submitting it to the government throughout each fiscal year. Additionally, they are accountable for imposing Tax Deducted at Source at the subsequent rate.

In the event that no specific rate (such as MMR) is specified, TDS will be attracted at a rate of 20% in the absence of PAN.

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

1. When you make any kind of payment that the Income Tax Act specifies, TDS will be taken out at that moment. However, if you are an individual or a Hindu Undivided Family (HUF), no TDS will be taken out, and an audit of your books is not necessary.

2. In the event that you are employed as a professional, your employer will deduct TDS in accordance with the relevant income tax slab rates. 10% of TDS will be withheld by the bank that you have an operating account with. Nevertheless, TDS at the rate of 20% will be subtracted if they do not have your PAN information. The Income Tax Act sets the TDS rates for the maximum of payments, and the payer deducts TDS at the fixed rates.

3. If you provide your employer with confirmation of your investments and your total taxable income is less than the total taxable level, you won't have to pay any taxes. Therefore, in this instance, no TDS will be withheld. If your total taxable income is less than the total taxable limit, you can also give the bank Forms 15G and 15H. In this instance, there will be no TDS withheld from your interest income by the bank.

4. If an individual or HUF member pays rent and the total amount owed exceeds Rs.50,000, 5% TDS will be withheld even if your books aren't subject to a tax audit. If 5% TDS is due on your income, you won't need to apply for a Tax Deduction Account Number (TAN).

The Bottom Line

All taxpayers must grasp the notion of TDS in order to prevent any tax-related complications. We hope that this blog post has given you a foundational knowledge of TDS and its different forms. Recall that timely tax payment not only satisfies your civic obligation but also advances national progress.

Team Sharekhan
by Team Sharekhan

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