Tax Deducted at Source, or TDS, represents a system established by the Income Tax Act. Under this framework, specific payments such as salaries, rent, interest, and professional fees are subject to tax deduction by the payer, who then forwards this amount to the government. The primary goals of TDS are to facilitate prompt tax collection and enable the government to monitor taxable income streams across the fiscal year.

Key Takeaways

• Individuals making specific payments are obligated to deduct TDS and transfer it to the government.
• A higher TDS rate may be applied if a Permanent Account Number (PAN) is not provided to the payer.
• The deducted TDS amount can be utilized to reduce the overall tax obligation at the fiscal year's conclusion.
• Should the total TDS exceed the actual tax due, the surplus amount is eligible for a refund.

What is TDS? – Meaning and Full Form

TDS, or Tax Deducted at Source, is a mechanism under the Income Tax Act. It requires that tax be withheld by the person or entity making certain payments, including salaries, rent, commission, interest, or professional fees. The individual who deducts the tax is referred to as the deductor, while the recipient of the payment is known as the deductee. The amount withheld is deposited with the Income Tax Department, linked to the deductee's PAN. Although the deductee receives the net payment after TDS, the gross income is the basis for calculating their total tax liability. The TDS already deducted is then credited against the final tax payable. If the cumulative TDS exceeds the actual tax due, the surplus is refunded following the submission of the income tax return.

When is TDS Deducted and by Whom?

Any individual or entity making specific payments outlined in the Income Tax Act must deduct TDS at the time these payments are made. Different types of payments are governed by distinct TDS provisions, each with its own threshold limit. If the total payment within a financial year does not surpass this threshold, no TDS deduction is required. Furthermore, if a payee submits Form 15G or 15H, declaring that their estimated taxable income for the financial year will be below the taxable threshold, then no TDS needs to be deducted.

Example of TDS Application

Consider Shine Pvt. Ltd., which pays Rs 80,000 monthly for office rent to a property owner. According to Section 194I of the Income Tax Act, 1961, TDS must be deducted at a rate of 10%. Therefore, Shine Pvt. Ltd. is required to deduct Rs 8,000 (10% of Rs 80,000) as TDS and pay the remaining Rs 72,000 to the property owner. The property owner, as the income recipient, receives the net amount of Rs 72,000 after this deduction. They will report the gross amount of Rs 80,000 in their income and can claim a credit of Rs 8,000, already deducted by Shine Pvt. Ltd., against their ultimate tax liability.

TDS Rate Information

For details on the applicable TDS rates across various payment types, please consult the TDS rate chart.

Due Date for Depositing TDS to the Government

TDS must be deposited with the government by the 7th of the month following the month in which the tax was deducted. For instance, TDS withheld in June must be deposited by July 7th. However, TDS deducted in March has an extended due date, allowing deposit until May 31st. An exception applies to TDS on property purchases under Section 194-IA, where the due date is 30 days from the end of the month of deduction. Missing the due date can result in interest and penalties under the Income Tax Act.

Quarterly TDS statements must be filed according to the following schedule:

Procedure for Depositing TDS

TDS payments are made through the Income Tax Portal using a TAN login. The facility for direct tax payments has transitioned from OLTAS 'e-payment: Pay Taxes Online' to the 'e-Pay Tax' service on the e-Filing portal. To make direct tax payments, including TDS, individuals should select the 'e-Pay Tax' option on the Income Tax Department's official website: https://www.incometax.gov.in/.

How and When to File TDS Returns

Filing Tax Deducted at Source (TDS) returns is compulsory for all individuals and entities who have deducted TDS. These returns are submitted quarterly and require the submission of various details such as the Tax Deduction Account Number (TAN), the amount of TDS withheld, the type of payment, and the deductee's Permanent Account Number (PAN). Distinct forms are designated for filing returns, depending on the nature of the TDS deduction. The various return forms are:

Understanding TDS Certificates

Forms 16, 16A, 16B, and 16C are all examples of TDS certificates. A person or entity that deducts TDS must issue these certificates to the assessee from whom income tax was withheld during payment. For instance, banks provide Form 16A to depositors when TDS is deducted on interest earned from fixed deposits, while employers issue Form 16 to their employees.

TDS Credits in Form 26AS

TDS deductions are directly associated with the PAN of both the deductor and the deductee. If TDS has been withheld from your income, you should consult Form 26AS, which is a comprehensive tax statement accessible to all PAN holders through the income tax portal. Form 26AS offers a complete overview of all TDS amounts deducted and deposited against your PAN, encompassing payments such as salary, interest, and commission. It also details any advance tax or self-assessment tax you may have paid. Since TDS credit can only be claimed for amounts reflected in Form 26AS, it is essential to ensure your PAN is accurately provided whenever TDS is applicable. Regular verification of your 26AS statement helps confirm that the deductor has correctly deposited the TDS. Failure to reconcile TDS credits can lead to incorrect claims and potential notices from the Income Tax Department, especially crucial for businesses with multiple clients or vendors deducting TDS.

Guide to Uploading TDS Statements

To upload TDS statements on the Income Tax Department's website, follow these steps:

1. Visit the Income Tax website and log in using your TAN.
2. On the dashboard, navigate to e-File > Income Tax Forms > File Income Tax Forms.
3. Select the appropriate form and accurately input all required details.
4. Authenticate the return using either a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

Penalties for Late Filing of TDS Returns

A late fee of ₹200 per day is imposed under Section 234E for delayed submission of TDS/TCS returns to the Income Tax Department (ITD). This fee accrues daily until the return is filed, with a maximum limit equivalent to the total TDS amount. It is imperative to settle this late fee before submitting the TDS/TCS return.

Common Types of TDS

Several income sources are subject to TDS deductions, including:

• Salary
• Payments to Contractors
• Commission Payments
• Sale of House
• Insurance Commission
• Interest on Securities
• Interest (other than on securities)
• Rent Payments
• Professional Fees
• Online Gaming winnings
• Winnings from lotteries, betting, gambling, crossword puzzles, card games, and similar activities.

Distinction Between TDS and Income Tax

The table below outlines the key differences between TDS and Income Tax:

Difference Between PAN and TAN

PAN signifies Permanent Account Number, while TAN stands for Tax Deduction Account Number. TAN must be acquired by the person responsible for deducting TDS, who is the deductor. The deductor is required to cite TAN in all documents related to TDS. In contrast, every citizen, including Non-Resident Indians, can hold a PAN. However, there are exceptions. For instance, in the case of TDS on the purchase of land and building under Section 194-IA, the deductor does not need to obtain a TAN; they can use their PAN for remitting TDS. Similarly, for TDS on rent as per Section 194-IB and TDS on certain payments by Individuals or HUFs under Section 194M, the deductor is permitted to use their PAN instead of TAN for remitting TDS.