TDS or Tax Deducted at Source is the amount of tax that is deducted from your salary by your employer or the deductor. Most of the time, TDS is deducted each month by employers based on tax projections declared by the employee at the beginning of each financial year.
The significance of TDS lies in the fact that it facilitates the following five things –
- Regulates the collection of taxes
- Ensures a regular income to the government
- Lightens the burden of one-time tax payment and instead spreads the whole tax over several months making it easier for the tax-payer
- Provides a convenient mode of tax payment to the payer
- Spreads the reach of income tax collection without the Income Tax Department having to do it all by itself
What is TDS Refund?
Many a times it is seen that investment projections declared during the start of a financial year do not match with the actual investments made at the end of that year.
If there is a mismatch between the total tax deducted at the end of a financial year and the income tax you are supposed to pay for that particular year, a TDS refund arises.
TDS Refund Example:
Sandeep works at an MNC in Bangalore. Last year he was late submitting his documents for LIC premium exemption under section 80C. As a result, his company deducted around Rs.10,000 extra as TDS.
Total tax payable by Sandeep for year 2013-2014 = Rs.30,000
Tax deducted by employer from Sandeep’s salary = Rs.40,000
Tax refund Sandeep is eligible for = Rs.40,000 – Rs.30,000 = Rs.10,000
His total income tax paid for last year turned out to be Rs.30,000 when actually it should have been just Rs.20,000. He ended up paying extra because he could not get his LIC premium receipts on time.
Similarly, Arun could not invest the Rs.40,000 within the timeline set by his employer. He just could not decide on whether to get a long-term fixed deposit or avail a life insurance policy. While he picked his brain about this decision, he missed the cut-off date for tax proof submissions as set by his employer. Eventually he ended up paying more tax even when he did invest that amount before the financial year closed.
These are typical situations that are faced by a lot of people almost every financial year. The only way to get back this extra tax is to file your income tax return. The sooner you file your income tax return, the faster the returns are processed.
Claiming TDS Refund:
- In case your employer deducts more tax than applicable to you as per your IT return filingAs discussed in the example above, a mismatch between tax deducted by employer and the actual tax payable is taken care of when you file your IT return. When you file your income tax return, you are supposed to quote your bank name and IFSC code. This makes it easier for the income tax department to return the excess tax you’ve paid.Quick Tip: For any financial year, if you’re sure that the TDS deducted will surely be more than the total tax payable by you, then under section 197 you can file Form 13 in advance for lower or nil TDS deduction. The response certificate received by income tax officer can then be submitted to the authority who is supposed to deduct TDS for you.
- If your income is below the tax slab and your bank deducts tax on your fixed deposit.In case your income does not fall under the income tax bracket and your bank has deducted tax on your fixed deposit interest, you can recover the tax amount in two ways. First is to declare it in your IT return form and the income tax department will automatically compute the refund and credit it to your bank account.Second way is to fill form 15G and submit it in your bank telling them that your salary is below tax slab and hence no tax should be levied on it.
- If your are a senior citizen with fixed deposit accounts:Senior citizens are exempt from tax deduction on interest earned on fixed deposits. If you are above 60 years of age and have fixed deposit accounts, you are required to fill and submit form 15H to ensure that bank does not deduct income tax on the FD interest earned.Alternatively, you can get the refund credited to your bank account when you file your IT return. The IT department then calculates the tax applicable to you and adjusts the excess tax paid and credits it back to the bank account you’ve mentioned in your IT return form.Quick Tip: When you declare your interest income from fixed deposits at the time of maturity, you declare it as a lump-sum amount. This can result in a hefty tax amount payable and also a higher tax slab (as your income goes up over a period of time). Hence, it is prudent to declare interest income yearly rather than at the time of deposit maturity.
Interest on TDS Refund
Under Section 200A of the Income Tax Act, if the income tax department is late in paying you the tax refund applicable to you, then you are entitled for a simple interest of 6% p.a. on your refund amount. This interest starts accruing from the first month i.e. April of any financial year. However, interest is not paid out if the tax refund is less than 10% of the total tax payable in a year.
The interest earned on tax refund is also taxable since it is considered under ‘income from other sources’.
How to Avoid Tax Filing Hassles?
You can avoid a host of tax issues if you take care of a few simple points.
- Plan your taxes in advance so that you do not have to rush into it at the eleventh hour. It is a good idea to start planning as soon as a financial year begins
- Avoid paying late tax payment charges which are 1% of the tax due
- Manage your tax smartly so that the TDS deducted is almost equal to the tax payable by you. You can avoid refund hassles and delays if you plan your tax this way
- Know all tax exemptions you are eligible for and claim them if required