What Is Tax Deducted at Source (TDS)?

Tax Deducted at Source (TDS) is a mechanism of tax collection at the source of income. Under the Income Tax Act, certain individuals, businesses, or entities (called deductors) are required to deduct tax at the time of making specific payments (e.g., salary, rent, professional fees, interest) to another individual or entity (the deductee), and remit this amount directly to the government.

TDS aims to ensure the government receives tax revenue in a timely and regular manner, reducing the possibility of tax evasion and making the process more efficient for both taxpayers and the government.

How TDS Works:

Deduction at Source:

TDS is deducted at the time the payment is made, not at the end of the financial year. For example, when an employer pays a salary to an employee, they deduct TDS before making the payment and remit it to the government.

TDS Rates:

The rate of TDS varies depending on the type of payment being made. For example:

• Salary: TDS is deducted based on the income tax slab rates.
• Interest on Fixed Deposits: TDS is deducted at 10% (if PAN is provided; otherwise, 20%).
• Rent Payments: TDS is deducted at 10% for rent payments above ₹2,40,000 per annum under Section 194I.
• Professional Fees: TDS is deducted at 10% under Section 194J.

The specific rate of TDS is determined by the nature of the payment and the relevant section of the Income Tax Act.

PAN Requirement:

PAN (Permanent Account Number) is generally required for both the deductor and the deductee. In case the deductee does not provide their PAN, the TDS rate is usually higher (e.g., 20%).

Deposit of TDS to Government:

Once the tax is deducted, the deductor is responsible for depositing the amount with the Government. This deposit is generally made on a monthly or quarterly basis.

TDS Certificate (Form 16/Form 16A):

After the TDS is deducted, the deductor provides a TDS certificate to the deductee. For salaried individuals, this is typically provided in Form 16, while for non-salary payments, it is given in Form 16A. These certificates act as proof of the tax deducted and can be used by the deductee to claim credit while filing their income tax return.

TDS Return Filing:

The deductor must file a TDS return to report all deductions made during the quarter. This return is filed quarterly, and failure to do so can result in penalties.

Responsibilities of the Deductor:

Deduction of Tax:

The deductor is responsible for deducting the appropriate amount of tax at the time of payment.

Timely Deposit:

The deductor must ensure that the deducted TDS is deposited with the government within the prescribed time limits.

Issuance of TDS Certificate:

The deductor must issue the TDS certificate to the deductee (Form 16 or Form 16A) after the deduction has been made.

TDS Return Filing:

The deductor is also responsible for filing the TDS return to report the deductions and payments made during the quarter.

Responsibilities of the Deductee:

Provide PAN:

The deductee must provide their PAN to the deductor, as TDS is generally deducted at a higher rate if PAN is not provided.

Claim Credit of TDS:

The deductee can claim credit for the TDS deducted while filing their income tax return. The TDS is adjusted against the total tax liability of the deductee, and any excess tax deducted can be refunded.

Verify TDS Deduction:

The deductee should ensure that the correct amount of TDS has been deducted and that the TDS certificate has been issued.

File Income Tax Return:

The deductee needs to file their income tax return and mention the TDS details in it to ensure the tax credit is properly adjusted.

TDS Provisions Under the Income Tax Act:

Section 192 - TDS on Salary:

Under Section 192, an employer is required to deduct tax at source from the salary paid to employees based on applicable income tax slab rates.

Section 194 - TDS on Payments Other Than Salary:

Section 194 covers various payments like interest, dividends, and professional fees. The deductor is required to deduct tax before making such payments.

Section 194I - TDS on Rent:

If a person is paying rent that exceeds ₹2,40,000 annually, they are required to deduct TDS under Section 194I at the rate of 10%.

Section 194J - TDS on Professional Fees:

Section 194J applies to payments made for professional or technical services. TDS is deducted at 10% on such payments exceeding ₹30,000 annually.

Section 195 - TDS on Foreign Payments:

Under Section 195, TDS is required to be deducted on payments made to non-residents, such as foreign contractors or consultants, for services provided in India.

Penalties for Non-Compliance:

Failure to Deduct TDS:

If a deductor fails to deduct TDS, they may be liable to pay the amount of TDS along with interest under Section 201.

Late Payment of TDS:

If the TDS is not deposited with the government on time, the deductor may be charged interest under Section 234E.

Non-Filing of TDS Return:

Failure to file the TDS return within the due dates can result in penalties and interest charges.

Example:

Let’s say Mr. Ravi is a freelancer and receives professional fees of ₹1,00,000 from a company. The company is required to deduct TDS at 10% (under Section 194J) from the payment.

• TDS Deducted: ₹10,000 (10% of ₹1,00,000)
• The company deposits this ₹10,000 with the government and issues Form 16A to Mr. Ravi as proof of TDS.
• Mr. Ravi can claim this ₹10,000 as credit while filing his income tax return.

Conclusion:

TDS (Tax Deducted at Source) is a crucial mechanism under the Income Tax Act to ensure timely and efficient tax collection. It reduces the risk of tax evasion and provides regular tax inflows to the government. Both the deductor and the deductee have important responsibilities in the TDS system, ensuring that the right amount of tax is deducted and deposited in time, and that the deductee receives credit for the TDS paid.