Your Ultimate Guide to TDS – Tax Deduction at Source

tax deducted at source

What is TDS? – TDS Meaning

TDS stands for Tax Deducted at Source. TDS is a type of advance income tax which is deducted from the total income before a payment is made. TDS is applicable irrespective of the mode of payments – cash, cheque or credit. The goal of TDS is to collect tax at source itself so that tax evasion is reduced. 

There are two parties to tax collected at source: 

  • Deductor / Payer
  • Deductee / Payee

The ‘Deductor’ is the person who makes the payment. The deductor is responsible for deducting the TDS amount before making payment to the deductee. The deductor then has to deposit the TDS amount with the government. 

The ‘Deductee’ is the person to whom the payment is made. The deductee can claim the TDS as a tax refund while filing their income tax return. 

Why is TDS collected? 

Tax deduction at source is an advance tax which the Government of India levies periodically. Paying a large sum of money as tax at the end of the financial year might be difficult and burdensome for most taxpayers. 

Hence, the Government allows you to pay TDS amount when the income is earned. With the collection of TDS, the government generates a steady source of income. 

Which income is TDS applicable on? 

Tax deduction at source is applicable on the following sources of income: 

  • Salaries
  • Rent
  • Commission earned
  • Interest payment by banks
  • Professional fees
  • Consultation fees

Who is Responsible for Collecting TDS?

The person who makes the payments i.e. ‘the payer’ is responsible for deducting TDS as per Income tax act 1961. The main people responsible for TDS are:

  • Employer: making payment on behalf of the employee.
  • Disbursing and Drawing officer: making payment in case of government offices.
  • Local authorities, companies or corporations: in case of interest on assets.

When is TDS deducted? 

Let’s understand when TDS is deducted with a simple example: 

Rahul invested Rs 6 Lakhs in a bank fixed deposit at 10% p.a. Interest. On maturity, he expected to receive Rs 6,60,000. But instead, the bank gave him only Rs 6,55,500 i.e. after deducting 4,500 as TDS. 

In this case, the bank is the ‘Deductor’ and Rahul is the ‘Deductee’. The bank will deposit the tax collected at source with the government. 

TDS is deducted only when your income is above  a threshold limit. This limit varies for various incomes such as salary, rent, dividend or interest income etc. TDS is not deducted if the income falls below the threshold income tax slab. 

For example: for senior citizens, TDS on FD interest is applicable only if the interest amount exceeds Rs 50,000 in a financial year.

How is TDS calculated?

TDS is mandatory to be paid by individuals earning above a specified threshold. It is a deduction made at the time of payment. 

Let us understand how TDS is calculated assuming TDS rate of 10%. 

Mr Karan, a lawyer, worked as a consultant for ABC Pvt Ltd on a crucial case. The company makes a payment of 50,000/- towards professional fees to Mr Karan. 

While making payment to Karan, ABC Pvt Ltd. will deduct a tax of Rs. 5,000/- and make a net payment of Rs.45,000 only. This is how TDS is calculated. 

TDS rates vary for different types of income.

What are the Current TDS Rates?

The impact of COVID-19 pandemic has led to job loss and financial crisis amongst the citizens. Hence, the Government of India has revised the TDS rates to ensure liquidity in the hands of citizens.

The new TDS rates came into effect on 14th May 2020 and will remain effective till 31st March 2021.

The new TDS rates for the financial year 2020-21

Particular  TDS RATE 

(NORMAL SLAB)

TDS RATE

(14th May 2020- 31st March 2021)

Payment of Salary 10% 10%
Interest on Securities  10% 7.5%
Interest other than interest on securities 10% 7.5%
Insurance Commission 5% 3.75%
Payment in respect of life insurance policy 5% 3.75%
Payments in respect of deposits under National Savings Scheme 10% 7.5%
Commission or brokerage 5% 3.75%
Payment of rent by individual or HUF 5% 3.5%
Fee for Professional or Technical Services (FTS), Royalty, etc. 2% (FTS, certain royalties, call centre)10% (others) 1.5% (FTS, certain royalties, call center) 7.5% (others)
Payment of dividend by Mutual Funds 10% 7.5%
Payment of income by Investment fund 10% 7.5%

Types of TDS & Applicable TDS rates

TDS according to section Type of Payment Deductor Deductee TDS Rate Applicable
Section 192 TDS on salary Any salaried individual Employer According to the applicable Income Tax slab
Section 192A TDS on premature withdrawal of provident funds Any individual Employee 10% of the total sum
Section 193 TDS on the interest earned from securities Any individual Any resident individual 10%
Section 194 TDS on dividends Domestic companies Resident individual 10%
Section 194A TDS on interest earned from investment assets other than securities Individuals except taxpayers and Hindu Undivided Families liable to tax audit during last FY Resident individual 10%
Section 194B TDS applicable on money earned on lottery or similar competition Any individual Any individual 30%
Section 194BB TDS on winning from race horses Any individual Any individual 30%
Section 194C TDS on payments made towards contractors Any individual other than taxpayers and Hindu Undivided Families eligible for tax audit during last FY Any resident person 1% for individuals and Hindu Undivided Family, 2% for other type of taxpayers
Section 194D TDS on insurance commission Insurance aggregator Resident agent 5% for individuals and HUF and 10% for other agents
Section 194DA TDS on payment made towards life insurance policy Any individual Any resident person 1%
Section 194E TDS on payments made towards non-residential sportsperson or association Any individual Sportsperson, association 20%
Section 194EE TDS on payments made towards deposit under NSS Any individual Any individual 10%
Section 194G TDS payable from commission earned from the sale of lottery ticket Any individual Any individual 5%
Section 194H TDS on commission or brokerage earned Any individual except taxpayers and Hindu Undivided Family liable for tax audit Any resident individual 5%
Section 194I TDS on rent Any individual except taxpayers and Hindu Undivided Families liable for tax audit Any resident individual 2%
Section 194IA TDS on funds earned for transfer of immovable asset (except agricultural land) Any individual Any resident individual 1%
Section 194IB TDS on payment of rent by certain individuals and Hindu Undivided Families Any individuals and Hindu Undivided Families Any resident individual 5%
Section 194IC TDS on payment made towards specified agreement Any person Any resident individual 10%
Section 194J TDS on payments made towards any professional or technical services Any individual except taxpayers and Hindu Undivided Families not liable for tax audit during last FY Any resident individual 10% (2% taxes will be charged is the payment is made to a business that operates a call centre)
Section 194LA TDS on payment of compensation because of acquisition of certain immovable asset Any individual Any residential individual 10%
Section 194LB TDS paid towards income earned from infrastructure debt fund interest Infrastructure debt funds National or international organisation 5%
Section 194LBA TDS on income from units of a business trust Business trusts Unit holder, both resident and non-resident individual 10% for resident individuals and 5% for non-residents
Section 194LBB TDS on income earned from units of investment funds Investment funds Unit holders, both resident and non-residents 10% for resident individuals. For non-resident individuals, the tax rates will be calculated as per the current rate
Section 194 LBC TDS on income earned from investments of securitisation trusts Securitisation trusts Investors, both residents and non-residents 25% for individuals and Hindu Undivided Family and 30% for any other type of investor
Section 194LC TDS on income earned from an Indian company Indian companies and business trusts Non-residents 5%
Section 194LD TDS on income earned from certain Government security and bond’s interest Any individual Foreign institutional investor or qualified foreign investor 5%
Section 195 TDS on other types of payment made towards non-organisational entity or foreign company Any individual Specified body As specified by DTAA or Income Tax Act

TDS Returns & Applicable Forms

TDS return is a statement containing details of all TDS deducted and submitted to the Income Tax Department. Let us look at the most used TDS return forms: 

Form No Used By Contains Frequency of Submission
Form 24Q Salaried Individuals  Details of TDS deducted on Salary Quarterly
From 26Q Non-Salaried Professionals Details of TDS deducted on earnings other than salary Quarterly
Form 26QB Sellers of immovable assets (house property) Details of TDS deducted on sale/ transfer of immovable assets (excluding agricultural land)  To be submitted within 30 days of deduction
Form 26QC Renters / Landlords Details of TDS deducted on rent To be submitted within 30 days of deduction
Form 27Q All assessees Details of TDS deducted on interest, dividend income Quarterly

TDS Certificates

The person deducting TDS is responsible for providing a TDS acknowledgement form to the taxpayer. TDS certificate contains details of deductor, deductee,  date of TDS deduction, TDS submission status etc. A TDS certificate is compulsory for tax refund while filing TDS returns. 

TDS Certificate TDS Form Due Date Frequency of Issuance
Form 16 Form 24Q Before 15th June of a financial year succeeding the year when tax was deducted. Annually
Form 16A Form 26Q Within 15 days after submitting form 26Q Quarterly
Form 16B Form 26QB Within 15 days after submitting form 26QB Monthly
Form 16C Form 26QC Within 15 days after submitting form 26QC Monthly

Due Dates for Filing TDS returns

Taxpayers are responsible for submitting TDS deduction form as per different due dates and quarters. 

Here are the latest due date for TDS return for FY 2020-21

Quarter Quarter Period
1st Quarter 1st April to 30th June
2nd Quarter 1st July to 30th September
3rd Quarter 1st October to 31st December
4th Quarter 1st January to 31st March 

At times, individuals might not be aware of the TDS deducted by various deductors in a financial year. This can cause errors calculating overall tax returns. To avoid such errors, form 26AS was introduced by the Income tax department. 

What is form 26AS? 

Form 26AS is a credit statement containing details of total TDS deducted during a financial year. It contains TDS deduction details from all deductors. It also includes details of Tax Collected at Source. It also reflects advance tax, self-self and high value transactions undertaken by the taxpayer. 

How to Find out the total TDS deducted? 

Gone are the days, when you had to run behind various deductors for TDS statements. The Income tax department has made the entire TDS process online. You can find out the total TDS deducted through the following steps: 

Step 1: Visit www.incometaxindia.gov.in  and register as a new user. 

Step 2: Enter your pan number and generate a password

Step 3: Select ‘view form 26AS’ option. 

Step 4: You will be redirected to TRACES – TDS Reconciliation Analysis and Correction Enabling System. Here you will be able to see the total tax deducted and deposited under your pancard number. 

What is TDS Returns? 

Since TDS is deducted across various time frames, at times, taxpayers may pay more tax than required. In such situations, taxpayers can claim a tax refund. 

Taxpayers can file their tax refund along with their tax returns. 

How to Avoid TDS? 

If an individual expects that his total income will be below the exemption limit, then he can ask the deductor or payer to not deduct the TDS by submitting 15G or 15H form. Form 15H is for senior citizens only. Form 15G can be used by all assessees. 

Late filing of TDS returns

TDS returns are to be filed in the last month of the quarter. So, TDS must be filed by 31st July, 

31st October, 31st January & 31st March. A penalty/ fees of Rs 200 per day is applicable under section 234E until the TDS return is filed. 

Assessing Officer, AO can penalise a taxpayer anything between Rs 10,000 to Rs 1,00,000 for late filing of TDS. 

While avoiding TDS is difficult since it is a mandatory direct tax, you can save other direct taxes by selecting the best tax saving options available in India!

TDS & Budget 2021

In Budget 2021, senior citizens, above 75 years with only pension and interest income have been exempted from filing tax returns. Instead, as per section 194P, banks will deduct TDS on pension and interest income directly. 

 

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