TDS or Tax Deducted at Source, is a means of indirect tax collection by Indian authorities according to the Income Tax Act, 1961. TDS is managed by the Central Board of Direct taxes (CBDT), which comes under the Indian Revenue Services (IRS).
TDS is collected as a means to keep a stable revenue source for the government throughout the year, while desisting people from avoiding taxes.
How is TDS Deducted?
Income and expenditure such as salary, lotteries, interests from banks, payment of commissions, rent payment, payments to freelancers, etc. fall under the ambit of TDS. When making payments under these segments, a percentage of the overall payment is withheld by the source that is making the payments. This source, which can be a person or an organization, is known as the Deductor. The person whose payment is getting deducted is called the Deductee. For instance, a deductor is the employer paying salary to an employee (the deductee).
Advantages of TDS:
TDS is based on the principle of ‘pay as and when you earn’. TDS is a win-win scenario for both the taxpayers and the government. Tax is deducted when making payments through cash, credit or cheque, which is then deposited with the central agencies.
- Responsibility sharing for deductor and tax collection agencies.
- Prevents tax evasion.
- Widens the tax collection base.
- Steady source of revenue for the government.
- Easier for a deductee as tax gets automatically collected and deposited to the credit of the central government.
Types and Rates of TDS:
TDS is calculated on the basis of a threshold limit, which is the maximum level of income after which TDS will be deducted from future income/payments. TDS is deducted as a percentage of overall payment, and may range from 1% to 30% of actual payable amount.
Major sections of the Income Tax Act that outline TDS deductions are:
| IT Section | TDS Rate | Threshold limit* |
| Section 192 | According to income slab | According to income slab |
| Section 193 | 10% of income from interests on securities. | NIL |
| Section 194 | 10% of income from deemed dividends | NIL |
| Section 194A | 10% of income from interests other than those on securities | Rs.5,000 |
| Section 194B | 30% of lottery or game-related winnings | Rs.10,000 |
| Section 194BB | 30% of income from horse racing | Rs.5,000 |
| Section 194C | 1% of earning from contracts or sub contracts for individuals and HUF (Hindu Unified Families) 2% for corporates | Rs.30,000 |
| Section 194D | 10% of income from insurance commissions | Rs.20,000 |
| Section 194EE | 20% of payment in NSS deposits | Rs.2,500 |
| Section 194F | 20% of payment made for repurchase of UTI or MF units | NIL |
| Section 194G | 10% of commission earned from selling lottery tickets | Rs.1,000 |
| Section 194H | 10% of commission or brokerage earnings | Rs.5,000 |
| Section 194I | 2% of rent of plant and machinery 10% of rent of land, building, fitting, or furniture | Rs.1.8 lakhs |
| Section 194J | 10% of fees for technical or professional services | NIL |
| Section 194L | 10% of compensation payment made to a resident when acquisitioning some immovable property | Rs.1 lakh |
*Threshold limit denotes the amount of income/profit up to which TDS will not be deducted. TDS will be calculated on value of income up and over threshold limit only.
TDS on income from salaries are deducted on an estimation made at the start of the financial year. The employer is responsible for deducting taxes every month in equal installments. In case the deductee has switched jobs during the fiscal year, the employer will deduct taxes on the basis of all accrued income in the fiscal year. Deductees should be very careful when mentioning their overall income as tax avoidance will be penalised by relevant authorities.
When TDS is not Deducted?
TDs is not collected on payments made to the Reserve Bank of India, the Government of India etc. TDS will not be collected when interest is credited or paid to:
- Central or State Financial Corporations.
- Banking companies.
- Interest paid under Direct Taxes or refund from the IT department.
- UTI, LIC and other insurance or co-operative societies.
- Interests earned from recurring deposit or savings account in cooperative societies or banks.
- Interest in Indira Vikas Party, KVP, or NSC.
- Interest earned in NRE account.
- All institutions notified under no-TDS.
Apart from these, there are other avenues also where TDS may not be applicable, such as interest on compensation from MVCT (Motor Vehicles Claims Tribunal). Therefore, taxpayers are advised to check if their interest income is liable for TDS with a particular institution or not.
TDS Certificate:
As TDS is collected on an ongoing basis, it can be difficult to keep track of deductions by an individual. As per Section 203 of the ITA, the deductor has to furnish a certificate of TDS payment to the deductee/payee. This certificate is also offered by banks making deductions on pension payments etc. The certificate is typically issued at the deductor’s own letterhead. Individuals are advised to request for TDS certificate wherever applicable, and if not already provided.
Refund of Excess TDS Deductions
If a person has been subjected to excess TDS deductions, the deductor can make claims for refund of the excess amount. The difference between the tax deducted and the actual payments made by the deductor, whichever is higher, is accepted as the excess payment, and this amount will be refunded after adjusting against any tax liabilities under Direct Tax Acts.
Quick Takeaways
- TDS denotes the tax deductions at source of an individual’s income/payments. The deductor (employer/contractor etc) is the person who is making payments to the deductee (employee, stock broker etc.).
- TDS helps in reducing tax filing burdens for a deductee and ensures stable revenue for the government.
- In most cases, TDS is collected after a certain threshold limit of earnings has been crossed. The highest TDS of 30% is applicable on winnings from horse races, and lotteries and other games.
- TDS certificate is issued wherever TDS has been collected, typically by the deductor or a bank.
- TDS is exempted on some payments made to government, RBI, cooperative societies etc.
- Refunds can be requested if there are discrepancies in the collected amount and the actual payable amount.