TDS or tax deducted at source is a process of collecting Income Tax at source by the GOI (Government of India). It is a deduction of tax from the original 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.”
TDS is calculated and levied on the basis of a threshold limit, which is the maximum level of income after which TDS will be deducted from your future income/payments.
TDS is deducted as per the Indian Income Tax Act, 1961. TDS is controlled by the Central Board for Direct Taxes and it is a part of the Indian Revenue Service Department.
Let us understand about TDS with an example;
You book a Bank Fixed Deposit for Rs 5 Lakh for 1 year @ 10% pa interest rate. You will earn an interest income of Rs 50,000 after one year. Bank will deduct TDS at the rate of 10% i.e., Rs 5,000 (10% of Rs 50,000) and deposits this Rs 5,000 with Income Tax Department (on behalf of you). Bank issues you a TDS certificate (Form 16A) which reflects this deduction. (Read : Understanding your Form 16A)
Besides interest income earned on bank deposits, TDS is levied on various incomes & expenditures. Salary income, lotteries, interest income from post office, insurance commission, rent payment, early EPF withdrawals, sale of immovable property etc. fall under the ambit of TDS.
Tax Deducted at Source : Types & TDS rates for FY 2016-17 (AY 2017-18)
Based on the Budget 2016-17 proposals, following are the revised TDS threshold limits & rate of TDS applicable for the Financial Year 2016-17 (Assessment Year 2017-18).
- EPF (Employees Provident Fund) – TDS is levied on the premature withdrawal of PF. It has been proposed to increase the threshold limit from the existing Rs. 30,000/- to Rs. 50,000/- for the purpose of deducting of TDS. This will be effecgtive from 1st June 2016. (Read : EPF withdrawals & new TDS rules)
- Winnings from Horse Race – The threshold limit has been increased from Rs 5,000 to Rs 10,000.
- Payment of Insurance Commission – The limit has been decreased from Rs 20,000 to Rs 15,000.
- Commission or brokerage – New threshold limit is Rs 15,000 and the existing limit is Rs 5,000 only.
- Payments to contractors – The TDS threshold limit has been proposed to increase from Rs 75,000 to Rs 1 Lakh.
- Payment of NSS Deposits (National Saving Schemes) – TDS rate has been decreased from the existing 20% to 10%.
- Commission on sale of lottery tickets – TDS rate has been decreased from the existing 10% to 5%.
- Commission or brokerage – TDS rate has been decreased from the existing 10% to 5%.
- Payment in respect of Life Insurance Policy – TDS rate has been decreased from the existing 2% to 1%. (TDS at the rate of 2% of maturity proceeds will be deducted in case life insurance policies where the sum assured is less than 5 times of the premium paid for policies issued on or before 31st March 2012 or where the sum assured is less than 10 times of the premium paid for policies issued on or after 1st April 2012.)
Misconceptions on Tax Deducted at Source (TDS)
One of the biggest misconceptions that exist in the mind of many honest taxpayers is that since they receive their salary/ other payment after deduction of Tax at Source (TDS) and thus they are not required to file their Income Tax return (ITR), assuming that their tax liability has been discharged. Following are some of the common 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 50,000 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. (Read : Tax treatment of various financial investments)
- 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 (like interest income from Bank Deposits, rental income etc.,) 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 cases 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.
Like most of us, the Government doesn’t like to wait for its money. It wants us to pay tax dues or at least a portion of it as and when we get our incomes. So, make sure you meet the compliance requirements which are related to TDS.
If you are eligible to submit Form 15G/15H, make sure you do it at the beginning of the financial year itself. Kindly note that false declarations for TDS avoidance can result in penalties and interest charges. So, avoid doing it!
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