What is TDS and how does it work?

TDS works on the concept that every person making specified types of payments to any person shall deduct tax at the rates prescribed in the Income-tax Act at the source and deposit the same into the government’s account. The person making the payment is responsible for deducting the tax and depositing the same with the government. This person is known as the ‘deductor.’ On the other hand, the person who receives the payment after the tax deduction is called the ‘deductee.’ Form 26AS is a statement that shows the amount of tax deducted and deposited in a person’s name/PAN in a particular financial year. An individual can, therefore, view/check the TDS from incomes paid to him by viewing this Form 26AS. Each deductor is also duty-bound to issue a TDS certificate certifying how much amount is deducted in the deductee’s name and deposited with the government.

In November 2021, the Indian government introduced two new documents, the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), to provide a record of financial transactions that the income tax department has of an individual. These documents show the total income received, the source of income, and the total tax deducted on the income received. These documents provide transparency and help individuals to understand the tax liability they owe to the government.

What is TDS

TDS, which stands for ‘Tax Deducted at Source’, is a tax collection tool introduced by the government of India to collect tax at the source of an individual’s income generation. The aim is to minimize tax evasion by taxing the income, either partially or wholly, at the time it is generated rather than at a later date. TDS is applicable to various incomes such as salaries, interest received, the commission received, dividends, etc. However, it is not applicable to all incomes and persons for all transactions. The Income-tax Act, of 1961, prescribes different TDS rates for different payments and different categories of recipients. For instance, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS, but for a Non-Resident Indian, it is subject to TDS.

Rates prescribed for different types of payments

There are different rates for TDS described in the different sections of the Act, depending on the nature of the payments.

Given below are some of the TDS rates on salaried and non-salaried payments for ongoing FY 2021-22:

*From April 1, 2022, Threshold will be Rs 50 lakh or Stamp duty value, whichever is higher
** TDS will be deducted on the monetary amount received from builder/developer

Effective from July 1, 2022, tax will be deducted on the transfer of crypto assets at the rate of 1% under section 194S of the Income-tax Act. The tax will be deducted if the transfer amount exceeds Rs 50,000 in case of specified person (Rs 10,000 in other case).

As per Budget 2022 proposal, in case the payer is an Individual or HUF, having turnover from Business less than or equal to Rs 1 Crore or having turnover from Profession less than or equal to Rs 50 Lakhs or having income under any head other than the head ‘Profits and gains of business or profession and the value of consideration transferred to a Resident with respect to virtual digital asset is less than Rs.50,000, there is no liability on such Individual/HUF to deduct tax. In any other case, the said limit is proposed to be Rs. 10,000 during the financial year.

How TDS works?

TDS or Tax Deducted at Source is a tax collection mechanism introduced by the government to collect tax at the source of income generation. When an entity makes a payment that is subject to TDS, a certain percentage of the amount paid is deducted as tax and the balance is paid to the recipient. The deductor also provides a certificate to the deductee stating the amount of TDS deducted, which can be claimed as tax paid by the deductee for that financial year.

It is the duty of the deductor to deposit the TDS with the government, and once deposited, the amount is reflected in Form 26AS of individual deductees on the TRACES website linked to the income tax department’s e-filing website. This enables the deductee to view and check the TDS from incomes paid to them by accessing their Form 26AS.

TDS only applicable above a threshold level

It is important to keep in mind that TDS is only deducted on specified transactions if the payment value exceeds the threshold level. The Income Tax department sets different threshold levels for different types of payments, such as salaries and interest received. For instance, if the total interest received on FD/FDs from a single bank is less than Rs 40,000 in a year, there will be no TDS deduction. However, for senior citizens, TDS on interest received on FD will be applicable if it exceeds Rs 50,000 in a single financial year. It is crucial to be aware of these threshold levels to ensure compliance with TDS regulations and avoid unnecessary tax deductions.

How to avoid TDS

When a person expects that their total income in a financial year will be below the exemption limit, they can submit Form 15G/15H to the payer and request them not to deduct TDS from their payments. This form is a self-declaration form that certifies that the person’s income is below the taxable limit.

It is important for the deductee to provide their PAN details to the payer while receiving payment that is subject to TDS. This is because if the PAN details are not provided or are incorrect, the TDS will be deducted at a higher rate of 20% or the applicable rate, whichever is higher, as per Section 206AA of the Income Tax Act. Therefore, it is essential for the deductee to ensure that their PAN details are correctly provided to avoid higher TDS deduction.