Taxes are the fuel that keeps the engine of our nation running, but figuring out how and when to pay them can be complicated. India's Tax Deducted at Source (TDS) system simplifies the process by collecting a portion of taxes upfront, directly at the income source. This not only streamlines things for the government but also helps taxpayers spread out their obligations.
What is TDS?
TDS, or Tax Deducted at Source, is a method introduced by the Indian government to collect taxes at the very point where income is generated. The concept is simple: instead of the entire tax liability resting on an individual or business when they file their annual returns, a portion of the tax is deducted upfront by the payer and directly deposited with the government. This streamlines tax collection and minimises tax evasion.
Additional read: tax evasion
When should TDS be deducted, and who is liable to deduct it?
If you are making specific payments mentioned in the Income Tax Act, you must deduct TDS when making those payments. Individuals or HUFs whose books do not require an audit are exempt from deducting TDS.
Individuals and HUFs must deduct 5% TDS on rent payments exceeding Rs. 50,000 per month, even if your income falls below the taxable audit threshold. You don't need to obtain a TAN for this purpose.
Most TDS rates are predefined in the income tax act, and the payer deducts TDS accordingly. If you provide investment proofs to your employer and your taxable income is below the limit, no tax or TDS is deducted. Submitting Form 15G or Form 15H to the bank exempts TDS on interest income if your total income is below the taxable limit. If TDS is deducted but your total income is below the limit, you can claim a refund.
Let's say you earn Rs. 20,000 in a year from bank interest, and the taxable income limit is Rs. 2,50,000. If you submit Form 15G or Form 15H to your bank, they won't deduct tax (TDS) on your interest income because you earn less than the taxable limit. But if the bank already deducted tax from your interest and you earn less than Rs. 2,50,000 you can ask for a tax refund.
Types of TDS (Tax Deducted at Source)
Tax Deducted at Source (TDS) is a system that ensures taxes are collected upfront on various types of income. For example, when you earn interest on a fixed deposit (FD), the bank will deduct a portion as TDS before crediting the remaining amount to you. TDS applies to many other income sources, including:
- Salary
- Interest from banks
- Brokerage or commission
- Commission payments
- Compensation for acquiring real estate
- Deemed dividends
- Payments to contractors
- Insurance commission
- Rent payments
- Interest on securities
- Interest other than interest on securities
- Winnings from games, such as lottery prizes
Additional read: TDS on FD Interest
Example of TDS (Tax Deducted at Source)
Tax Deduction at Source (TDS) can seem confusing. Let us break it down with a simple example:
Imagine a startup company, Company ABC, renting office space for Rs. 80,000 a month. The applicable TDS rate for rent payments is 10%. Here is how TDS works in this scenario:
- Deduction and payment: Company ABC calculate 10% of Rs. 80,000, which is Rs. 8,000. They deduct this amount and pay the remaining Rs. 72,000 to the landlord.
- TDS to the government: It is Company ABC who is responsible to deposit the deducted Rs. 8,000 TDS directly to the government.
When and How to File TDS Returns in India
A. Who needs to file?
Anyone responsible for deducting Tax Deducted at Source (TDS) from payments must file TDS returns.
B. Filing Frequency
TDS returns are submitted quarterly, with specific due dates for each quarter:
- Quarter 1 (April-June): July 31st
- Quarter 2 (July-September): October 31st
- Quarter 3 (October-December): January 31st
- Quarter 4 (January-March): May 31st
C. What information is required?
TDS returns require details like:
- TAN (Tax Deduction and Collection Account Number)
- Amount of TDS deducted
- Type of payment
- PAN (Permanent Account Number) of the person TDS was deducted from (deductee)
D. Choosing the right form
The type of TDS return form you need depends on the reason for deducting TDS:
- Form 26Q: Used for all payments except salaries.
- Form 24Q: Used specifically for TDS deducted from salaries.
- Form 27Q: Used for TDS on payments made to non-residents (except salaries).
- Form 26QB: Used for TDS on sale of property (within 30 days of deduction).
- Form 26QC: Used for TDS on rent payments (within 30 days of deduction).
Different TDS certificates are issued against different TDS forms
TDS certificate |
TDS form |
Form 16 |
Form 24Q |
Form 16A |
Form 26Q |
Form 16B |
Form 26QB |
Form 16C |
Form 26QC |
Additional read: Tax Avoidance
