I have recently published articles on TDS on Recurring Deposits and TDS on EPF Withdrawals. I have been receiving lot of comments / queries on TDS (Tax Deducted at Source). I have observed that there are lots of misconceptions on TDS.
Many investors think that TDS deduction removes their tax liability completely. One more misconception is – “No TDS means, no tax liability”.
In this post lets us understand – What is TDS? What are the general misconceptions on TDS?
What is TDS?
Tax Deducted at Source or TDS is a tax collection process by the Income Tax department. It implies collection of revenue at the very source of Income. It is essentially an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.”
Example : You book a Bank Fixed Deposit for Rs 3 Lakh for 1 year @ 10% pa interest rate. You will earn an interest income of Rs 30,000 after one year. Bank will deduct TDS at the rate of 10% i.e., Rs 3,000 (10% of Rs 30,000) and deposits this Rs 3,000 with Income Tax Department (on behalf of you). Bank issues you a TDS certificate (Form 16A) which reflects this deduction.
Misconceptions on TDS
No TDS means no Tax liability
There is a common misconception / myth that if there is no TDS then the schemes or investments are tax-free.
For example – If an employee withdraws his EPF money before 5 years of service and if the withdrawal amount is less than Rs 30,000 then TDS is not applicable.
But, this does not mean that the withdrawal is Tax-free. It is just that there is no need for an employer (Deductor) to deduct TDS on these types of withdrawals. However, the onus of paying taxes (if any) on this EPF amount lies with the employee.
So, whether it is EPF withdrawals within 5 years or National Savings Certificates (5 year tenure) or any other investments, the interest income is taxed until and unless it is specifically mentioned that the income from that scheme is tax free. For example PPF enjoys tax benefit for which its interest is non-taxable.
TDS deduction removes tax liability completely
- It’s a misconception that, if the employer has deducted TDS, you need not worry about filing your income-tax return. Your employer deducts TDS on your salary income only, whereas you may have income from other sources, and you have to include those in your Tax Returns.
- Another misconceptions is – ‘No additional Income-Tax is payable, if taxes are already deducted (TDS) on income’. Actually, depending on nature of income, TDS rates vary. On salaries, employers adjust the rate such that the entire tax liability of the employee is deducted by the year-end. On fixed deposit interest, banks charge TDS at 10 per cent. But if the deposit holder does not provide his permanent account number, banks deduct tax at 20 per cent.
If your income tax slab rate is different to that of the TDS rate then you may have to pay the ‘balance tax’ or in some case you can claim ‘refund’ too. It is advisable to be aware of TDS rates on various incomes that you have.
The TDS rate can be say 10% , whereas your are in the 20% tax slab, in this case you have to pay the differential tax (this can be Advance Tax or Self-Assessment Tax). If you are not a tax assessee then you can claim the TDS amount as refund by filing your Tax Returns. If you are in 10% tax bracket and the TDS rate is also 10% then there is no need to pay any additional tax.
- Most of the Senior Citizens submit Form 15H to avoid TDS. In many cases, senior citizens feel if they have done this, they are not liable to pay tax. But if you have two or three fixed deposits in separate banks and you submit a Form 15G or 15H in all the banks, you will have to pay tax if the total interest from all the fixed deposits exceeds the taxable income limit.
Due to ignorance or misconception many individuals follow some tax saving approaches which are completely illegal i.e. they fail to pay tax on certain incomes which are genuinely taxable. So, this is not tax saving but it is tax evasion. It can be very risky.
Latest TDS Rates FY 2015-16 (AY 2017-18)
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