Tax Deducted At Source Tds

What is Tax Deducted at Source (TDS)?

Tax Deducted at Source (TDS) can seem complex. This guide simplifies TDS, explaining its benefits, how it works, and how it can save you money.

Written by : Shipra Chaudhary

Reviewed by : Jasmeet Bedi

Jasmeet Bedi

2021-10-14

10843 Views

17 minutes read

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The full form of TDS is Tax Deducted at Source. You may have experienced TDS in many forms - Bank FDs, salary payments and vendor payments, and TDS seem to infiltrate everywhere. Normally, TDS means an advance tax withheld by the payor from your income, whichever form it is.

So, it ends up reducing your income. Therefore, it should be an important focus when looking to save tax. However, does it mean you need not file an income tax return? Or can the deduction benefit you anywhere? Let’s find out.

Table of Content

What is TDS Meaning?

TDS or Tax Deducted at Source is an income tax that is collected from certain payments like rent, salary, commission, interest, professional fees, etc. The person paying the amount should deduct TDS from such a payment.

As per the Income Tax Act, any company or a person is required to deduct tax at the source itself if the money paid exceeds the specified limit. The person who receives a payment also has a liability to pay tax on their income.

The payee will receive credits against the TDS payments, which they can claim against their actual tax liability while filing the annual ITR.

The purpose of TDS may have been to reduce the chances of tax evasion by the recipient of the income. But, for an honest taxpayer, it also brings a few benefits.

Types of TDS

Even when you are making payments as an individual taxpayer, you need to deduct TDS on certain payments. The following types of payments attract TDS:

CategoryDescriptionExample
Salary & WagesIncome received for regular employmentSalary Transfer 
Professional FeesFees earned for professional servicesProfessional Fee 
Consultation FeesFees charged for providing advice or expertiseConsultation Fee 
Rental IncomeIncome received from renting propertyRent Payments 
Commissions & BrokeragePayments earned for facilitating transactionsCommission, Commission & brokerage payments 
Investment IncomeEarnings from invested fundsInterest on Securities & Deposits, Dividend on company shares and mutual funds 
WinningsMoney won through games or competitionsLottery, lucky draw and similar winnings 
Royalty IncomePayments received for the use of intellectual propertyPayment of Royalty
Director's RemunerationCompensation paid to company directorsDirector’s Remuneration
Property SalesIncome from the sale of propertyTransfer of Property 
Other InterestInterest income not covered elsewhereOther interest payments (u)

What is a TDS Return?

You make the payments to other parties against their services throughout the year. If these payments to one party exceed the specified limit for the payments made under sections 192 to 195 of the Indian Income Tax Act, you must deduct the applicable TDS amount.

You will need to deposit the deducted TDS amount quarterly along with the respective TDS Return. Depending on the nature of payment (applicable section) you will file a separate TDS form as TDS Return, each quarter.

Example of Tax Deducted at Source

TDS has to be deducted at the applicable rates only. For example, the TDS rate on rent payments to resident individuals and HUFs by resident individuals and HUFs is 5% when the rent is more than Rs 50,000 p.m.

Thus, if you are living in a rented house and paying Rs 70,000 per month as rent, you should deduct Rs 3500 per month as TDS before paying the rent. You will need to pay Rs 66,500 to the property owner and will deposit Rs. 10,500 every quarter to the CBDT as the collected TDS amount.

Similarly, a firm may deduct TDS on the fees payable to a consultant for the professional services at 10%.

How does TDS Work?

TDS applies to all taxable income except salary, which is deducted at source at a fixed rate. For almost all payments, the TDS rate depends on the type of income rather than the amount of payment.

In the case of salary, the employer can estimate the total expected income of the employee. Thus, TDS deduction happens at the applicable slab rate and may change in the middle of the year based on the following:

  1. Changes to income due to bonus, appraisal
  2. Submission of investment proof

Pro Tip: Many employed taxpayers fail to prepare for salary TDS deduction, which means they lose a big chunk of their salaries in the last quarter of the financial year.

So, start your tax-saving investments in April itself, and keep your TDS deductions higher in the beginning. Thus, you will avoid last moment rush for tax saving investments and income loss both.

How Does TDS Benefit You?

Tax Deducted at Source (TDS) acts like a pay-as-you-earn scheme for income tax. Here's how it benefits you:

  • Reduces Your Tax Liability at Year-End: The TDS already deducted from your income is pre-credited when you file your income tax return. This means you've already paid some of your taxes throughout the year, potentially reducing your final tax liability.
  • Avoids Late Payment Penalties: If your final tax liability is low or zero, thanks to TDS, you won't be penalised for late tax payments.
  • Reduces Tax Burden: TDS spreads out your tax payments throughout the year, making it potentially easier to manage your finances than a large lump sum payment at tax filing time.
  • Simplifies Tax Filing: With TDS already deducted, your income tax return might be less complex, especially if you have multiple sources of income where TDS applies.

Overall, TDS can be a helpful tool for managing your tax burden and avoiding penalties. But remember, it's still crucial to understand your tax obligations and file your return accurately.

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

Any person, including an individual, HUF (Hindu Undivided Family), firm and NRI (non-resident Indian), is expected to deduct tax at source, provided:

  • Any payment made under the five heads of income or as specified under the Income Tax Act, 1961 requires you to deduct TDS. This provision does not apply to individuals and HUFs making such payments unless specified.
  • If you are paying rent of more than Rs 50,000 per month as an individual or HUF taxpayer, you need to deduct TDS at 5%. This applies to all Individual and HUF taxpayers regardless of whether your books need an audit.
  • Employers must deduct TDS from the salary of those employees whose income exceeds the maximum exempt limit. Employees can submit proof of tax-saving investments and expenses to reduce the TDS amount of the employer.
  • Banks will deduct TDS at 10% from the interest payments on fixed deposits. However, if your annual income is below the maximum exempt threshold, you can submit Forms 15G and 15H to avoid this deduction.
  • You can claim the excess TDS deducted by the employer, banks or any other entity at the time of filing your annual income tax return.

Types of Payments Exempt from TDS

Certain payments are exempt from TDS if they do not exceed the specified limit for the TDS deduction. The following types of payments will not attract TDS if they do not exceed the specified limit (for A.Y. 2021-22):

Payment of Interest to senior citizens on

  • Bank & post office deposits
  • Fixed deposit schemes
  • Recurring deposits
Rs. 50,000
Rent payment for land, building or furniture by a non-domestic firm or individual and HUFRs 2.4 lakhs
Cash withdrawal by resident individual and HUFRs. 1 crore (Rs 20 lakhs if the person/HUF has not filed ITR for the last three consecutive years)
Payment to resident individuals, contractors & professionals, for service or purchase of goods by resident individual & HUFRs 50 lakhs
Rent payable by a resident individual or HUF to another resident individual or HUFRs. 50,000

How and When to File TDS Returns?

You will need to use the appropriate form based on the type of payment on which TDS has been deducted. Corporates and payers paying NRIs usually need to file TDS returns every quarter.

Other payments will require a TDS return within a stipulated time as per the table below:

Transactions reported in the returnDue dateForm
TDS on SalaryQ1 – 31st July
Q2 – 31st October
Q3 – 31st January
Q4 – 31st May		Form 24Q
TDS on all payments made to non-residents except salariesQ1 – 31st July
Q2 – 31st October
Q3 – 31st January
Q4 – 31st May		Form 27Q
TDS on sale of property30 days from the end of the month in which TDS is deductedForm 26QB
TDS on rent30 days from the end of the month in which TDS is deductedForm 26QC

In order to file a TDS online, you will need a TAN or Tax Deduction & Collection Account Number to file a TDS return. Follow the process below to file your TDS return online:

  1. Register your TAN number for e-filing

  2. Prepare your TDS return using one of the online portals. You can log in to incometaxindia.gov.in to generate a TDS payment challan

  3. Log in to the net banking and pay the collected due TDS amount

  4. You can use a valid DSC (Digital Signature Certificate) to e-file and verify your online TDS return

While filing TDS you also need the PAN and bank account details of the payee. If the payee’s PAN is linked with Aadhaar you can upload your returns using Electronic Verification Code (EVC).

TDS Rates For Various Regular Payments
 

Type of PaymentSectionsTDS Rate
Salaries192Applicable Slab Rates + Cess
Interest from Securities (Bonds & Debentures)*19310%
Interest on deposits*194A10%
NSC Maturity Value*194A10%
Sale of Mutual Fund Units back to Mutual Fund#112A20%
Payment for Professional Services*194J10%
Rent Payment by Individuals Over Rs. 50,000 p.m.194IB5%
Lottery & Other Types of Winnings194B30%
Payment to Resident Contractor / Sub-contractor194C

1% (HUF & Individuals)

2% (Others)

Commission on Insurance194D

5% (HUF & Individuals)

10% (Others)

Acquisition of immovable property194LA10%
Rent payments for Plant, Machinery, Furniture, etc.194I

2% (Plant, Machinery & Equipment)

10% (Furniture, fixture, land and building)

Commission & Brokerage payments194H5%
Commission on the sale of lottery tickets194G10%

TDS Payment Due Dates

Anyone deducting TDS from the payments made to another party as income should deposit the amount to the Central Government Account before the 7th of the next month. For example:

TDS Deduction MonthDeposit Due Date
April7th May
May7th June
June7th July… and so on
March30th April


Except for March, where you can deposit the TDS amount by 30th April.

What is a TDS Certificate?

The deducting party issues TDS certificates to the taxpayers. Depending on the type of payment, TDS certificates can be issued in the following forms:

TDS Deducted onForm & FrequencyDue Date
Salary PaymentsForm 16, issued annuallyBefore 31st May of the Assessment Year
Non-Salary Payments (interest, vendor payment, consultancy fees, etc.)Form 16A is issued quarterlyWithin 15 days of filing the due date
Sale of PropertyForm 16B, issued with every transactionWithin 15 days of filing the due date
Rent PaymentsForm 16C, issued with every transactionWithin 15 days of filing the due date

How to Apply for a TDS Return?

The party deducting the TDS can issue a TDS certificate in the applicable Form 16. The deducted TDS amount is reflected in Form 26AS as Tax Credits for the payee (person receiving the amount after the TDS deduction).

If you want to claim a TDS return you will need to file your ITR for the assessment year (AY). The applicable credits are adjusted out of your tax payable for the AY. If eligible for a refund, the same will be processed and credited to your bank account within six months.

In case the deducted TDS amount does not show up on your Form 26AS, you will need to submit the TDS certificate received from the deductors.

What Happens After TDS Deduction?

After TDS is deducted from your income, here's what happens:

The Deductor's Responsibility:

  • Depositing TDS: The entity responsible for deducting TDS, called the deductor (like your employer, bank, or company you received a commission from), is obligated to deposit the collected TDS to the government within a specified timeframe. This timeframe typically falls within the 7th of the next month.
  • TDS Return Filing: The deductor must also file a TDS return electronically with the Income Tax department. This return details the TDS deducted from various sources (like salaries, commissions, etc.) and the corresponding Permanent Account Number (PAN) of the deductee (the person whose income the TDS was deducted from).
  • Information Sharing: Form 16/18/26Q: Once the TDS is deposited and the return is filed, the deductor will provide you with a document like Form 16 (for salary income), Form 18 (for other income like freelancing fees), or Form 26Q (a consolidated statement for various TDS deductions). This document reflects the amount of TDS deducted from your income.

Your Responsibility:

  • Income Tax Return Filing: When you file your income tax return, you need to consider the TDS amount reflected in the Form 16/18/26Q you received. This pre-filled information helps simplify the process.
  • Tax Credit: The TDS you've already paid is a credit against your overall tax liability.  In simpler terms, it reduces the amount of tax you might owe the government.
  • Refund or Additional Tax: If the total TDS deducted throughout the year exceeds your final tax liability, you are eligible for a tax refund from the government. Conversely, if the TDS is less than your tax liability, you may need to pay the remaining tax amount.

Thus, don’t miss filing your personal ITR, especially after TDS on any of your income.

What If You End Up Deducting TDS?

The taxpayers, who are liable to deduct TDS on the payments they make to others, need to file a quarterly TDS return. Filing TDS return is mandatory if you are deducting TDS.

You need to file a TDS return on Forms 24Q, 26Q, 26QB or 26QC based on the purpose of TDS deduction each quarter and deposit the deducted amount with CBDT. The return must be filed with the PAN/TAN of the deductor (payor) and the PAN/TAN of the deductee.

Filing a TDS return will ensure that the deductee’s Form 26AS will be automatically credited.

How does TDS Benefit you?

Tax Deducted at Source (TDS) acts like a pay-as-you-earn scheme for income tax. Here's how it benefits you:

  • Reduces Your Tax Liability at Year-End: The TDS already deducted from your income is pre-credited when you file your income tax return. This means you've already paid some of your taxes throughout the year, potentially reducing your final tax liability.
  • Avoids Late Payment Penalties: If your final tax liability is low or zero, thanks to TDS, you won't be penalised for late tax payments.
  • Reduces Tax Burden: TDS spreads out your tax payments throughout the year, making it potentially easier to manage your finances than a large lump sum payment at tax filing time.
  • Simplifies Tax Filing: With TDS already deducted, your income tax return might be less complex, especially if you have multiple sources of income where TDS applies.

Overall, TDS can be a helpful tool for managing your tax burden and avoiding penalties. But remember, it's still crucial to understand your tax obligations and file your return accurately.

Penalty for Late Filing TDS Return

CBDT may levy a penalty for delays in submitting your TDS return or statements in the following manner:

  • Non-Submission of TDS Return: A penalty is levied at Rs 100 per day for the delayed period under Section 272(A) of the Income Tax Act, 1961. The amount of penalty can go up to the actual TDS amount.
  • Delayed/Non-Filing of TDS Returns: A penalty is levied at Rs 200 per day for the delayed period under Section 234(E) of the Income Tax Act, 1961. The amount of penalty can go up to the actual TDS amount.
  • Delayed/Non-Filing of TDS Statement: Penalty of Rs 10,000 to Rs 1 lakh under Section 271(H) of the Income Tax Act, 1961. The penalty amount can go up to the actual TDS amount.
  • Incorrect Details on TDS Return: Penalty of Rs 10,000 to Rs 1 lakh under Section 271(H) of the Income Tax Act, 1961. The penalty applies if the filed return contains incorrect information about PAN, challan particulars, TDS amount, etc.
  • If the TDS Amount is Not Deposited: The penalty will also include interest for the undeposited amount under Section 201(A) of the Income Tax Act, 1961. The penalty applies if you fail to deduct TDS in part or full when it is due. The interest of 1.5% p.m. will apply for the delayed deduction.

How to Claim TDS Refund?

You are eligible for a TDS refund when you have paid more tax as TDS deductions than you are liable to as per applicable slab rates. When you file your annual income tax return for the previous year, all the TDS deductions are available as TDS credits under Form 26AS.

Your TDS credits will reduce your final tax payable once you have calculated your taxable income and applicable tax on it. If TDS credits exceed your total income tax liability, you have a refund.

Make sure to provide the correct bank details and IFSC while filing your return. It will enable CBDT to credit the refunds directly to your bank account.

Can the TDS Amount Change in the Financial Year?

The TDS deduction depends on the payment amounts. If you are salaried, your TDS amount is estimated on your salary and can change if there is a change in the salary amount. Similarly, TDS deductions can change under the following situations:

  • Bonus, increment, change of employment during the financial year
  • Change in rent payments or other perquisites
  • If you submit investment proofs for a higher tax saving
  • TDS for self-employed and consultants will change as per the change in their bill amounts

Overall, your TDS deduction should not be less than 95% of your total tax liability at the end of the year.

Wrapping Up

 

  • Tax Deducted at Source (TDS): acts as a pay-as-you-earn scheme for income tax in India. While it reduces your take-home income initially, it offers several benefits:
  • Reduces Year-End Tax Liability: TDS pre-credits your tax payments, potentially lowering your final tax amount.
  • Avoids Late Payment Penalties: If TDS covers your tax liability, you won't face penalties for late tax payments.
  • Manages Tax Burden: Spreading out tax payments throughout the year can be easier to manage than a large lump sum at tax filing time.
  • Simplifies Tax Filing: Pre-credited TDS information in your tax return can simplify the filing process.

Remember, filing your income tax return is crucial, even with TDS deductions. If your TDS payments exceed your tax liability, you may be eligible for a refund.

Glossary

  • Deductor: The entity responsible for deducting TDS from payments they make (e.g., employer, bank).
  • Deductee: The person whose income has TDS deducted (e.g., employee, freelancer).
  • TAN (Tax Deduction and Collection Account Number): A unique alphanumeric code is required for entities deducting and collecting TDS.
  • Form 16/18/26Q: TDS certificates issued to deductees reflecting the amount of TDS deducted.
  • Form 26AS: A statement reflecting all tax-related information, including TDS credits.
  • TDS Return: A document filed electronically by the deductor detailing the TDS deducted and the deductee's PAN.
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FAQs on Tax Deducted at Source (TDS)

The full form of TDS is Tax Deducted at Source. It is a way of collecting advance tax on income-related transfers to individuals and other tax-paying entities.

TDS on salary is deducted on applicable slab rates. You can choose to pay TDS as per the new tax regime or stick to the old tax regime where you can also claim tax-saving investments. Rebate under section 87A are available under both tax regimes.

TDS challan is generated when you file your TDS return. The challan helps you deposit the TDS amount under the correct classification code when you deposit the money to the Central Government account.

Yes, PAN is necessary for TDS payments. Without PAN you may face higher TDS rates.

Usually, PAN is needed for almost all TDS transactions. In the case you cannot submit PAN immediately you can apply for a PAN and submit the application number in the meantime. In a few cases like interest payments by banks, not furnishing PAN or the application number will attract a higher TDS deduction.