TDS Provisions: All about Tax Deducted at Source, Meaning, Payment, Return Filing, and Due Dates
Updated: Sep 24
Tax Deducted at Source (TDS) is a significant component of the Indian tax system. It mandates that a portion of tax be deducted at the time of making specified payments such as rent, commission, salary, professional fees, interest, and more. TDS aims to collect tax at the source of income, ensuring a steady inflow of revenue to the government and minimizing tax evasion. This article explores the complexities of TDS, its provisions, recent updates, compliance requirements, and practical examples to enhance understanding.
Table of Content
TDS Provisions: Recent Updates
Budget 2024 Updates
February 2024:
Section 194BB: Introduction of TDS on earnings from cryptocurrency transactions. The rate is set at 1% of the transaction value.
Section 195A: TDS on dividends distributed by mutual funds to non-residents has been revised to 15% from the previous 20%.
July 2024:
Section 194BC: Enhanced TDS rate of 2% on payments to contractors exceeding INR 50 lakh annually, aiming to curb tax evasion.
Section 196B: New provision for TDS on earnings from digital content creation, set at 10% for transactions exceeding INR 1 lakh annually.
Budget 2023 Updates
Section 194BA: Introduction of TDS on income from online gaming.
Section 196A: Non-residents earning income from mutual funds in India can provide a Tax Residency Certificate to avail of TDS benefits as per the tax treaty rate, instead of the standard 20%.
Section 192A: TDS rate reduced to 20% from the maximum marginal rate on PF withdrawals for employees without a PAN.
Section 193: Removal of TDS exemption on interest from listed debentures, requiring tax deduction on such securities.
Section 194N: Increased TDS threshold on cash withdrawals by cooperative societies from INR 1 crore to INR 3 crore.
Budget 2022 Updates
Section 194S: TDS at 1% on the transfer of virtual digital assets.
Section 194-IA: Amendment for TDS on the sale of immovable property, requiring tax deduction at 1% on the higher of the sum paid/credited or the stamp duty value.
Section 194R: TDS at 10% on perks or benefits provided to residents for business or profession.
TDS Provisions Understanding
What is TDS? Meaning and Full Form
TDS, or Tax Deducted at Source, is an income tax deducted from payments made at the time of certain transactions. This ensures that tax is collected in advance, facilitating smoother tax collection and compliance. Normally, an individual is responsible for paying their income tax at the end of the financial year. However, under the TDS mechanism, tax is deducted by the payer at the time of payment, ensuring that a portion of the tax is remitted to the government in advance.
The recipient of the income receives the net amount after TDS, reports the gross income in their tax return, and claims the TDS as a credit against their final tax liability. This system not only ensures timely tax collection but also helps the government track and monitor transactions effectively.
Example of TDS
Consider Shine Pvt Ltd, which pays office rent of INR 80,000 per month. TDS at 10% means INR 8,000 is deducted, and the net payment to the landlord is INR 72,000. The landlord then adds the gross rent to their income and claims credit for the TDS deducted.
When Should TDS be Deducted and by Whom?
Tax Deducted at Source (TDS) is a deduction that must be made by every individual or entity that makes specified payments under the Income Tax Act. For instance, when the employer makes salary payments, there is a deduction of TDS, and when the bank makes interest payments to depositors, the bank is required to deduct TDS at applicable rates. However, in the case of an individual or a Hindu Undivided Family (HUF) engaged in business whose sales do not exceed INR 1 crore or an individual with professional gross receipts that do not exceed INR 50 lakh, TDS will not be deducted unless the person or HUF makes specified payments. For instance, where rent is paid to a landlord whose monthly rent is over INR 50,000, the payment must have a TDS deduction at 5%.
The TDS rates themselves depend on the specified payments and will be specified under the Income Tax Act. Payment of income subject to a TDS will be in accordance with the specified rates. For example, if you provide the proof for investments to your employer for claiming deduction against the taxable income to be below the basic exemption limit, there will be no TDS deduction from your salary, as there is no tax liability for that year.
Likewise, if your income is less than the taxable limit, you can file Form 15G or 15H with the bank to not deduct TDS from the interest. If the TDS has been deducted by the bank or employer and your total income is below the taxable limit, you can file an income tax return to receive a refund for the excess TDS. The Income Tax Act has listed all the specified payments subject to TDS with applicable rates.
TDS Provisions: Due Dates and Compliance
Due Dates for Depositing TDS
The due date to deposit TDS to the Government is the 7th of the month following the month in which the deduction was made. For instance, TDS deducted during the month of June must be deposited by July 7th. Further, the date of the monthly deposit for the TDS deducted from payments which have been deducted in the month of March will be extended to April 30th.
For TDS deducted on the purchase of property, the due date for it to send payment is within 30 days following the month of deduction.
How to Deposit TDS? Method of Depositing TDS
TDS can be deposited using the Income Tax Portal by using a TAN (Tax Deduction and Collection Account Number) login. The payment facility for the direct tax is now available through the ‘e-Pay Tax’ feature on the e-Filing portal. For direct tax payment (including TDS), visit the official site of Income Tax (www.incometax.gov.in) and click on the ‘e-Pay Tax’ section under Income Tax Department.
When to File TDS Returns?
Filing TDS returns is required for all individuals who have deducted TDS. TDS returns must be submitted quarterly and include numerous details such as the TAN, amount of TDS deducted, kind of payment, deductee's PAN, and so on. In addition, several forms are recommended for submitting returns depending on the purpose of the TDS deduction. The forms for various returns include:
Nature of TDS Transaction | Form Type | Due Dates |
TDS on all payments except salary | Form 26Q | Q1: 31st July |
Q2: 31st October | ||
Q3: 31st January | ||
Q4: 31st May | ||
TDS on salary payments | Form 24Q | Q1: 31st July |
Q2: 31st October | ||
Q3: 31st January | ||
Q4: 31st May | ||
TDS on all payments made to non-residents except salaries | Form 27Q | Q1: 31st July |
Q2: 31st October | ||
Q3: 31st January | ||
Q4: 31st May | ||
TDS on property sales | Form 26QB | 30 days from the end of month of deducting the TDS |
TDS on rent payments | Form 26QC | 30 days from the end of month of deducting the TDS |
TDS Certificates
What is a TDS Certificate?
TDS certificates are issued to the deductee as proof of tax deduction and include details of the amount deducted and deposited with the government. Common TDS certificates include Form 16 (for salary), Form 16A (for non-salary payments), Form 16B (for property sales), and Form 16C (for rent).
Certificate Type | Nature of TDS Transaction | Frequency of Issuing Certificate | Due date |
Form 16 | TDS on salary payment | Yearly | 31st May |
Form 16A | TDS on non salary payment | Quarterly | 15 days from the due date of filing TDS Return |
Form 16B | TDS on property sale | Every transaction | 15 days from the due date of filing TDS Return |
Form 16C | TDS on rent | Every transaction | 15 days from the due date of filing TDS Return |
Types of TDS Certificates
Issuance and Due Dates of TDS Certificates
The due dates for issuing TDS certificates are specified by the Income Tax Act and vary depending on the type of payment. For example, Form 16 for salary payments must be issued annually by May 31st.
TDS Credits and Form 26AS
It is very important and imperative to understand the deduction of TDS which is linked to your PAN (Permanent Account Number). TDS deduction is linked to both the PAN numbers of the deductor and the deductee. If any TDS has been deducted from your income, you must ensure the credits are reflected in the Tax Credit Statement (Form 26AS).
A mismatch in claiming the TDS credits could lead to receiving a defective return notice from the Income Tax for not claiming the correct TDS credit in your Income Tax Return. Therefore please ensure that you are verifying the TDS credits in Form 26AS with the TDS receivables in your books; this is especially true if you have multiple customers or vendors in your business transactions.
TDS Credits and Form 26AS
Importance of Form 26AS
Form 26AS is a complete tax statement generated for the assessee based on his/her PAN, which provides the complete history of TDS deducted on income and is required for cross-verifying TDS credits and the accuracy of tax filings. This form indicates that taxes were deducted and collected by others, as the taxpayer's agent, and deposited in the Government's account. It also ensures that the employer, bank, or others (deductors) deducted and remitted accurate taxes, allowing the taxpayer to claim the appropriate credits during ITR filing.
Linking TDS to PAN
All TDS deductions are linked to the PAN of both the deductor and deductee. Accurate PAN information is essential to avoid discrepancies and ensure proper credit of TDS.
Reconciling TDS Credits
Taxpayers must reconcile TDS credits in Form 26AS with their records to avoid notices from the tax department. Discrepancies can be resolved by ensuring that all TDS deductions are accurately reflected and claimed.
Types of TDS
TDS on Salary
Employers are required to deduct TDS on salary payments at prescribed income tax slab rates relative to the individual. Whereas, other types of income, such as interest income and rent, may be subject to specified TDS rates (which can range from 10% to 20%). TDS rates are typically applicable at the rates specified for each type of income as opposed to relying on aggregate amounts of total annual income. Therefore in some cases, TDS will be applied to certain types of payments. Subsequently, it will still require you to calculate your total annual taxable income based on all sources of income to evaluate TDS calculation from previous payments.
TDS on Payments to Contractors
With respect to payments made to contractor(s), TDS must be deducted at specified rates under Section 194C of the Income Tax Act, 1961. The rate of which would ultimately depend on the kind of contract, and payments. As a guideline, anyone paying money to resident contractors or subcontractors would need to deduct the TDS, irrespective of the kind of payer, be it Company, Individual, or other. The responsibility rests on the payer (or entity) to deduct the prescribed TDS properly to avoid penalties if they fail to do so. Contractors also have the option of applying for a Nil or lower TDS certificate in specified circumstances to avoid excessive TDS being deducted due to an increased cash-flow impact.
TDS on Commission Payments
TDS is applicable on commission payments at a standard rate of 5%.
TDS on Sale of Property
In the case of sale of immovable property, other than agricultural land, for a consideration exceeding INR 50 lakh, the buyer is mandated to deduct tax at the rate of 1% under Section 194IA of the Income Tax Act. The buyer is liable to deduct and pay tax to the government at the rate of 1% on the entire value of the transaction that is in excess of INR 50 lakh. This TDS must also be deposited, so that it can be claimed by the seller in their tax returns.
TDS on Rent Payments
TDS on rent payments are deducted at the rate of 10% where the rent exceeds INR 2.4 lakh for the year, under Section 194-I of the Income Tax Act. If the payee of the rent is an individual or HUF whose accounts are not required to be audited, TDS shall be deducted at the rate of 5% on rent exceeding INR 50,000 per month, in accordance with Section 194-IB. TDS on rent is also applied to other rented properties, such as machinery, land and buildings. The payer of rent must ensure they are properly deducting TDS to avoid any penalties.
Other Common Types of TDS
Other income sources subject to TDS include interest on securities, lottery winnings, professional fees, insurance commissions, and online gaming winnings.
Procedures and Filing
How to Upload TDS Statements?
To upload TDS statements, follow these steps:
Visit the Income Tax Department's website and log in with your TAN.
Navigate to the 'e-File' section and select 'Income Tax Forms'.
Choose the relevant form and fill in the required details.
Validate the return using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).
Common Errors and How to Avoid Them?
Common errors in TDS filing include incorrect PAN details, mismatched TDS amounts, and late filings. These can be avoided by double-checking information, using reliable TDS software, and adhering to deadlines.
Selecting Incorrect ITR Form
Choosing the correct ITR form is important to ensure the income tax department processes your return quickly. The correct form is determined by the income type and taxpayer category and filing the incorrect form may lead to defective return notice to you which requires you to fix in a stipulated time.
For instance, if you are working in a job where your income is below INR 50 lakh and there are no capital gains, you should file ITR-1. If you earn income from a business or profession, ITR-3 is a better fit. Accurate filing allows for a quicker and seamless processing of your tax return.
Entering the Wrong AY (Assessment Year)
Selecting the correct Assessment Year (AY) is important while filing. For instance, for FY 2023-24 the AY would be 2024-25. If it is entered incorrectly, there could be penalties, duplicate tax payment and many other issues that can be avoided.
Incorrect Personal Information
Entering your personal information, such as your name, address, email ID, phone number, PAN, and date of birth incorrectly in the tax return is reflected. Make sure the information matches the information provided in your PAN and to ensure there are no errors. Also, in the event you are expecting a refund, check that your bank account information (account number, IFSC code, and so on) is correct without error in order to avoid delays in receiving the refund.
Failure to Disclose All Income Sources
It is mandatory to report all the incomes in addition to your main forms of revenue. This includes savings account interest, fixed deposit interest, rental income and capital gains arising from the sale of real estate or shares. Also, even if your income is exempt from tax, you will have to mention it too. For example, long-term capital gains on equity shares is exempt up to INR 1 lakh. But, this amount has to be mentioned in the capital gain schedule. Not mentioning any income, however small, whether exempt or taxable can also put you at the risk of a tax audit or penalties.
Manual Data Entry Errors
While filing returns, see that data entered is in the proper format to avoid errors. For instance, dates should be mentioned in DD/MM/YYYY format. Any error here or mentioning incorrect information can hold up the return processing as it would need more time for correction.
Enhancing Transparency with SMS Alerts
Introduction of SMS Alerts by the Income Tax Department
The Income Tax Department has rolled out SMS alerts to inform taxpayers of the Tax Deducted at Source (TDS) against their Permanent Account Number (PAN). The alerts enhance transparency and facilitate taxpayers in accessing TDS credits easily.
Taxpayers receive SMS alerts from the Income Tax Department in the name of "VK-ITDEFL". The SMS contains the information regarding the TDS amount deducted against the individual PAN. Every quarter, the Income Tax Department will send the SMS to notify the taxpayers of the TDS amount credited to their income from sources such as salary, bank interest, and other payments. The details of the TDS are mentioned in Form 26AS for the applicable financial year.
The Ministry of Finance developed this initiative to promote transparency regarding TDS and income tax returns, in order to reduce the mismatches when taxpayers file their returns. Taxpayers are encouraged to compare the SMS information with their payslips or financial records, as TDS mismatches are a prevalent cause of discrepancies in the submission of income tax returns.
Benefits of SMS Alerts for Taxpayers
Reduction of TDS Mismatch: SMS alerts can significantly reduce TDS mismatches for taxpayers, informing them about the deductions done on their behalf and ensuring accurate and timely returns.
Timeliness: Taxpayers will receive alerts about TDS due dates and filing deadlines, which will help avoid late filings or non-compliance.
Enhancement of Compliance: Taxpayers will be continually informed about changes in the tax realm, which will help them comply with tax laws.
Quick Acknowledgment: Taxpayers will receive timely notifications that their returns have been submitted.
Reduction of Penalties: Taxpayers will receive reminders of upcoming payments or upcoming filing deadlines, which will assist them in avoiding penalties.
24/7 Awareness: Taxpayers have an awareness any time of day without having to look up updates as notifications will be sent by text.
Handling Tax Liability with TDS
Calculating Tax Liability with TDS
Tax liability is calculated by aggregating income from all sources and applying the applicable tax rates. TDS deducted can be claimed as a credit against the total tax liability.
How to Calculate Tax Liability by TDS? Total tax liability can be calculated by aggregating the income from all sources and applying the respective rates of tax to it. The TDS on the income paid throughout the year can be claimed as a differential against the total tax liability in the Income Tax Return at the end of the year. TDS is applicable on income like salary, interest income from banks, contract payments, and others. So, first, you would have to calculate the gross income from all sources, and then apply the deductions eligible under Sections 80C, 80D, 80G, and so on. The result of this would be the taxable income on which you would calculate the total tax liability based on the tax slabs applicable to you.
The TDS information that is available on Form 26AS is then added up. Based on the computation of tax liability and the tax payments made, if the TDS is higher than the total tax a refund is claimed. If the TDS is less than the total liability, the taxpayer should discharge the balance as advance tax or self-assessment tax. This method ensures that the liability is properly discharged and you do not end up defaulting on any income tax payments.
Claiming Credit for TDS
Taxpayers can claim a credit for TDS (Tax Deducted at Source) that has been deducted from various types of income when they file their annual income tax returns. This process can help lower overall tax liability or result in a refund if the TDS amount exceeds the liability.
If the TDS does not match with your total tax liability, you will need to calculate your taxable income and file an income tax return (ITR) to claim the TDS credit or request a refund.
During the ITR filing, you must provide your bank details, including the bank name and IFSC code, to facilitate any potential refunds. This enables the Income Tax Department to directly credit any refunds to your bank account.
You can claim the TDS credit using the information from Form 26AS, which details all the tax deducted and deposited against your PAN (Permanent Account Number). After determining your total tax liability, the TDS already paid is deducted from the tax due. If the TDS amount is greater than your tax liability, you can request a refund from the Income Tax Department.
Filing Returns for Refunds
If taxpayers have paid more than the amount of tax necessary, filing for a refund is an essential step. While filing income tax returns, you could claim a refund if the total tax liability from which TDS or advance tax, as reflected on Form 26AS, is deducted.
Filing the ITR well within the deadline will speed up the process of getting an IT refund. Further, tracking a refund status through the website of the Income Tax Department will ease the transaction and avoid delay.
FAQ
Q1. What is the responsibility of the person deducting tax at source?
The deductor must obtain a TAN, deduct TDS at the applicable rate, deposit it with the government, file TDS returns, and issue TDS certificates to the deductee.
Q2. At what rate will TDS be deducted if I do not furnish my PAN?
As per Section 206AA, if PAN is not provided, TDS will be deducted at the higher of the specified rate or 20%.
Q3. What is the difference between TAN and PAN?
PAN (Permanent Account Number) is a unique 10-character alphanumeric identifier issued to taxpayers. TAN (Tax Deduction and Collection Account Number) is issued to entities responsible for deducting or collecting tax at source (TDS/TCS). TAN must be quoted in all TDS/TCS-related documents. A TAN consists of 10 characters, starting with four letters, followed by five digits, and ending with one letter.
In contrast, a PAN includes five letters, followed by four digits, and ends with one letter. While TAN is mandatory for filing TDS/TCS returns, PAN is necessary for filing income tax returns, opening a bank account, and various other financial transactions.
Q4. What are Sections 206AB and 206CCA?
These sections mandate higher TDS/TCS rates for individuals who do not file income tax returns. These provisions, introduced by the Finance Act of 2021, apply when a specified person is paid any sum that is subject to tax deduction or collection at source. Section 206AB pertains to TDS and was introduced after Section 206AA of the Income Tax Act, while Section 206CCA governs TCS.
Q5. What is the TDS rate on salary?
TDS on salary is deducted at the average rate of income tax applicable to the employee's annual income. The average tax rate is calculated by dividing the total income tax liability (based on applicable tax slab rates) by the employee's projected income for the financial year.
Q6. What happens to TDS deducted by the employer/customer?
TDS deductions are linked to the PAN and reflected in Form 26AS, allowing taxpayers to claim credit against their tax liability. The taxpayer must file income tax returns considering these credits, along with advance taxes or self-assessment taxes if applicable.
Q7. What is Form 16?
Form 16 is a TDS certificate issued by employers to employees, validating that income tax has been deducted from the employee’s salary and deposited with the government.
Q8. How can I avoid TDS deductions on interest income?
Submit Form 15G or 15H to your bank if your total income is below the taxable limit to avoid TDS on interest. Additionally, you may consider spreading fixed deposits across multiple banks, as TDS is deducted if interest income exceeds INR 40,000 (or INR 50,000 for senior citizens) per financial year from a single bank.
Q9. When is TDS not required to be deducted?
TDS is not required if an individual or HUF's income is below the taxable limit, or if Forms 15G/15H have been submitted to the deductor, certifying that their income is below the threshold for tax deduction.
Q10. How is TDS calculated on rent payments?
TDS at 10% is deducted on annual rent payments for the use of land and building exceeding INR 2.4 lakh, and at 5% for rent payments over INR 50,000 per month by individuals/HUFs.
Q11. What is the due date for filing TDS returns?
TDS returns must be filed quarterly, with specific forms for different types of payments.
Q12. How can I claim a refund for excess TDS deducted?
To claim a refund for excess TDS, you must file an income tax return showing the total TDS deducted and the tax payable. If there is an excess deduction, you can claim a refund. Form 26B, available on the TRACES portal, can be used for claiming a refund of excess TDS deductions along with the required documentation.
Q13. What is the importance of Form 26AS?
Form 26AS consolidates all TDS deductions linked to your PAN, aiding in accurate tax filing and reconciliation.
Q14. What should I do if there is a mismatch in TDS credits?
Reconcile your TDS records with Form 26AS and resolve discrepancies with the deductor or tax department.
Q15. Can I use PAN instead of TAN for TDS remittance?
In certain cases, such as property purchases and rent payments under specific sections, PAN can be used instead of TAN for TDS remittance.
Q16. How many types of TDS are there under the Income Tax Act?
There are several types of TDS specified under Indian tax law. These include TDS on salary, payments to contractors, commission payments, sale of property, insurance commissions, and more.
Comments