TDS: What is Tax Deducted at Source?

Are you confused about when is TDS deducted and on which amount? Do you find it too complicated to understand and calculate tax deducted at source? This guide is here to help.

Tax deducted at Source (TDS) is a simple concept in which a portion of your earnings is deducted before payment, which is paid to the government.

In this simple guide, we explain the basics of TDS, including its types, rules for TDS deduction, information regarding TDA returns, and more.

TDS Meaning in Tax: What is Tax Deducted at Source?

Tax deducted at source is a type of tax deducted by the government from your earnings or income “before" they are credited to your account to ensure everyone pays the due taxes on time.

TDS applies to all income categories, including salaries, interest earnings, income from gaming, lottery winnings, rental income, and more.

To understand this better, let's look at a simple example below.

Example of TDS Meaning in Tax

Imagine you are a social media agency and charge a fixed monthly payment of ₹45,000 from all your clients. When you submit the invoice to the client, the client's due amount is ₹45,000. However, when the payment gets credited to your account, you notice a lesser payment.

The difference between the invoice amount and the credited amount is called TDS. The client deducts it before releasing your payment and gives it directly to the government.

Benefits of Tax Deducted at Source

• It ensures that the government has a steady source of revenue.
• It ensures proper tax compliance under the Income Tax Act.
• It reduces the responsibility of deductors and agencies for tax collection from individuals and companies.
• It reduces the effort for a payee to make tax payments, as the payer deducts the due TDS before releasing payment.
• It helps avoid late payment penalties.
• It reduces the year-end load of hefty tax liabilities.
• It simplifies the process of tax filing, as TDS deductions are automatically updated to the tax authorities.

Rules for TDS Deduction

When is TDS Deducted?

TDS is deducted before an individual, business, or company releases their due payment to a vendor, individual, etc. All the TDS deductions are made in every quarter and paid to the government.

The tax deduction at source calculation depends on the type of payment. For instance, the rate of TDS deduction is different for salaried employees, rent, interest payments, professional services, and so on. However, there are some cases when TDS deductions are not applicable, and they include -

• Individuals and HUFs whose books are not audited (case-specific).
• No requirement for a TDS deduction if you submit proof that your investment earnings are below the threshold limit.

Who is Liable to Deduct TDS?

The person or entity making the payment is liable to deduct TDS. They deduct a part of the total payment based on the specific TDS rate for your bill category. Every financial year, the TDS collected throughout must be paid to the government.

For example, in a corporate setting, the company is liable to deduct TDS before releasing your salary, professional fees for doctors, consultants, or lawyers, rental payments, and so on.

Types of Tax Deducted at Source

Deduction of Tax At Source From Salary

The TDS rates for salaries are the same as the Income Tax slabs applicable to all individuals. Based on these tax slabs, individuals who earn less than ₹2.5 lakhs have no TDS liability. Similarly, individuals below the age of 60 years who earn ₹2.5-₹3 lakhs have a TDS rate of 5%, and so on.

Find the detailed table for tax slabs in both the new and old regimes below.

Tax Deduction for Fixed Deposit

For TDS in fixed deposit, your interest earnings are taken into consideration, and depending on the total amount, TDS becomes mandatory. Here's all you need to know.

• If your interest earnings from an FD are more than ₹40,000 in a year, the TDS rate applicable to you is 10%, which the bank deducts. However, it is only applicable to individuals below the age of 60 years.
• For individuals above 60 years, the total income earning limit is higher for TDS applicability.
• If you have a PAN card, the tax deducted at source is fixed at 10% of your interest income.
• If you do not have a PAN card, the tax deducted at source is fixed at 20% of your interest income.

Example of Tax Deduction at Source Calculation

Mr Anish is a 40-year-old company manager who earns an interest income of ₹47,000 from his fixed deposit account. Let's calculate his TDS below.

• Earned Income from FD - ₹47,000.
• Applicable TDS Rate - 10%
• Deductible Amount - 10% of ₹47,000 = ₹4,700
• His Final Income = ₹42,300.

All About Returns for Tax Deducted at Source

Eligibility

Any individual, employer, or company that deducts TDS on payments made to other entities are required to file TDS returns. To file TDS returns, you need the following details -

• TAN
• Type of payment (income category)
• Amount of TDS deducted
• PAN details of the payer and payee.
• A valid form.

Frequency to Pay and File Tax Deducted at Source

TDS Forms

Different TDS forms are available to file TDS based on your income or earning category. All these forms also come with a TDS certificate, which you will receive upon successfully filing your returns for tax deducted at source.

Here is a quick list.

TDS Certificates

TDS certificates are issued by all the individuals or companies that deduct TDS from the ones they deduct from. For instance, if your employer deducts TDS from your salary, you will receive the TDS certificate from them at the time of salary payment.

Here is a quick list.

How to Upload TDS Statements Online?

• Step 1 - Visit the official Income Tax website.
• Step 2 - Login using your TAN (Tax Deduction and Collection Account Number).
• Step 3 - On the next page, select e-file > click on Income Tax Returns > select File Income Tax Forms.
• Step 4 - Next, enter all the required information accurately to complete the form.
• Step 5 - Once done, confirm your details using an EVC or DSR.

Penalty for Late Filing of Tax Deducted at Source

Tax compliance is a compulsory requirement for everyone. Therefore, you must file the TDS returns on time. Failure to file it on time will result in a financial penalty of ₹200/every day of delay till the final delay fee reaches the same amount as the due TDS amount.

The total fine payment must not exceed the total TDS amount. Moreover, it is necessary to note that this ₹200 fine is not a penalty but a late filing fee. You must file TDS returns at the earliest to avoid paying hefty late filing fees.

Steps to Check TDS Deduction Status

• Step 1 - Visit the official Income Tax website.
• Step 2 - Log in using your details or TAN number.
• Step 3 - Find and click on the My Accounts tab and then select View Form 26AS.
• Step 4 - Next, select the financial year and download the PDF file.
• Step 5 - Open your downloaded file using your birthdate in this format - DDMMYYYY.
• Step 6 - You can now view all the required details regarding your TDS deductions.

Difference Between TDS and TCS

How to Save Tax with Health Insurance

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Frequently Asked Questions

• Is there any TDS on mutual funds?

  Only dividends earned from mutual funds are eligible for TDS deductions. Other capital gains from mutual funds are not deductible. If you want to skip TDS on mutual fund dividends, you must submit Form 15G (for people below 60 years) or Form 15H (for people above 60 years).

• What all incomes are not liable for TDS?
  • Income from agricultural activities.
  • Income from a savings bank account.
  • Income from pension payments.
  • Income from life insurance plans.
• What happens if I file an incorrect TDS return?

  Under Section 271H, incorrect filing of TDS/TCS returns can result in a minimum penalty of ₹10,000 and a maximum penalty of ₹1,00,000. Thus, you must carefully assess the correct documents and proof of TDS payment before filing returns to avoid such a hefty penalty.

• If my total income is below the threshold limit, how do I prove the same and avoid TDS deductions on my income?

  If your total income is below the threshold limit, you are not eligible for TDS deductions. However, you must submit Form 15G (for people below 60 years) or Form 15H (for people above 60 years) to certify that your income is lower than the taxable amount.

• Can I claim TDS deducted from my income?

  Yes, you must claim the deducted TDS amount as a credit when filing your annual income tax return.

• What is TAN?

  TAN, or Tax Deduction and Collection Account Number, is a unique 10-digit number with alphabet letters allotted to each taxpayer for TDS and TCS purposes.

• What happens if my employer forgets to deduct TDS?

  If an employer or company forgets to deduct applicable TDS before releasing any payment, it will be liable for an interest fine. Under Section 201A of the Income Tax Act, the employer will be charged an interest of 1% per month, starting from the deduction date to the actual date when TDS was deducted.

Disclaimer:

• *T&C Apply. For more details on risk factors, terms conditions, brochure, and exclusions, please read the policy wording and CIS carefully before concluding a sale.
• This is the overall claim settlement ratio for FY 2023-24 without claim outstanding at the start of the financial year as per public disclosure of Reliance General Insurance Co. Ltd.
• The premium mentioned is excluding taxes for single person aged between 5 years to 20 years with individual health policy for Sum Insured of ₹3 lakhs considering no adverse health conditions/pre-existing disease/medical conditions with waiting period of 3 years. For more details, please refer to the policy wordings. Premium used is 2,919/year converted into a month which gives us Rs.243/month (2,919/12).
• Tax benefits are subject to conditions under Section 80D of the Act and amendments thereof. The tax laws are subject to amendments/changes from time to time. Please consult your tax advisor for details.