Tax Deducted at Source (TDS) is one of the most important concepts in income tax for taxpayers in India. It refers to the tax deducted on certain types of payments and incomes before the amount is paid to the recipient.
The Income Tax Act enforces the mandatory deduction of TDS on specific types of payments, such as salaries, interest, commission, rent, and professional fees. The payer, before making the payment, must actively deduct tax at the prescribed rates and deposit it with the Income Tax Department.
TDS ensures regular collection of taxes and prevents tax evasion. It also provides an easy way for taxpayers to pay taxes on incomes on which TDS is deducted. They get credit for the TDS against their overall tax liability.
In this comprehensive guide, we will cover everything you need to know about TDS in income tax, including:
- Who is Required to Deduct TDS?
- Types of Payments on Which TDS is Applicable
- TDS Rates and Threshold Limits
- TDS on Salary Income
- TDS on Interest Income
- TDS on Rent Payments
- TDS on Commission or Brokerage
- TDS on Professional Fees
- TDS on Contractor Payments
- TDS on Ecommerce Transactions
- How to Claim TDS Credit and File TDS Returns
- Consequences of Non-deduction and Short Deduction of TDS
- Frequently Asked Questions
So let’s get right into understanding this important tax concept in detail!
Who has the responsibility to deduct TDS?
Specific types of payments exceeding certain limits require individuals and businesses to deduct TDS. These include:
- Companies
- Partnership firms
- Proprietorships
- Co-operative societies
- Individuals/HUFs with business/professional income
- Trusts/Associations
- Central and state governments
The responsibility of TDS deduction lies with the payer or depositor of income. For example, if you are receiving rent above Rs 50,000 per month, your tenant will have to deduct 5% TDS on the rent paid to you.
Some key points about who must deduct TDS:
- Employers must deduct TDS on the salary paid to their employees.
- Banks must deduct TDS on interest paid on deposits
- Businesses deduct TDS on payments to contractors, professionals, commissions etc.
- Individuals/HUFs deduct TDS on rent or professional fees if it exceeds threshold
Non-residents who do not have a permanent establishment in India also have to deduct TDS on payments over specified limits to residents.
Failing to deduct TDS can attract penalties and interest under the Income Tax Act. Therefore, it is crucial for taxpayers making payments above threshold limits to understand TDS compliance.
Types of Payments on Which TDS is Applicable
As per the Income Tax Act, the following types of payments by residents to residents require compulsory TDS deduction if they exceed the threshold limits:
- Salaries
- Interest
- Rent
- Professional/technical fees
- Contract payments
- Commission
- Brokerage
- Payment of NSS deposits
- Winning from lotteries/puzzles
- Insurance commission
- Dividend
- Payment for property purchase
Ecommerce platforms must actively deduct TDS of 1% on Gross sales (goods or services or both) exceeding Rs 5 lakh provided through their platform. Incase PAN and Aadhar not provided it would be 5% on Gross Sales.
The TDS rates and limits vary for each payment type, which we have covered in detail later in this guide.
TDS Rates and Threshold Limits
The Income Tax Act has specified varying TDS rates and threshold limits for different types of payments. No TDS needs to be deducted if the payment amount is below the threshold in a financial year.
Here are the TDS rates and cut-off limits prescribed by the Income Tax Department:
| Payment Type | TDS Rate | Threshold Limit |
|---|---|---|
| Salaries | Applicable tax slab rate | No minimum threshold |
| Interest from banks, post office | 10% | Rs 40,000 |
| Interest on securities | 10% | Rs 5,000 |
| Rent for land, building, machinery | 5% | Rs 50,000 per month |
| Rent for furniture, fittings | 5% | Rs 200,000 per year |
| Professional fees | 10% | Rs 30,000 per transaction |
| Work contract payments | 1-2% | Rs 50 lakh per year |
| Commission, brokerage | 5% | Rs 15,000 per transaction |
| NSS interest | 10% | Rs 2,500 per year |
| Insurance commission | 5% | Rs 15,000 per year |
| Dividend | 10% | Rs 5,000 per year |
| Winnings from lotteries, puzzles | 30% | Rs 10,000 per event |
| Payment for property purchase | 1% | Rs 50 lakh per transaction |
| Ecommerce transactions | 1% on Gross Sales | Rs 5 lakh per year |
This table summarizes the key TDS rates and limits you must keep in mind for incomes that are subject to tax deduction at source.
TDS on Salary Income
Companies, businesses, and professional firms must actively deduct TDS on the salary paid to employees if it exceeds the basic exemption limit, making it a ubiquitous example of TDS in action.
- The TDS rate depends on the employee’s applicable tax slab and surcharges. It is deducted after considering tax exemptions and deductions.
- No minimum income threshold for TDS on salary. Even salaries below the exemption limit are subject to TDS if tax liability arises.
- The employer issues Form 16A showing TDS deducted and deposited with IT department.
- Employees can claim TDS credit while filing ITR to reduce overall tax liability.
- If employer does not deduct proper TDS, employee can face demand notice and penalties.
Let’s understand with an example:
Rohit’s gross monthly salary is Rs 80,000. After all deductions under Section 80C and 80D, his taxable income comes to Rs 7 lakh.
- His applicable tax slab is 20%.
- So his employer will deduct TDS @20% on his monthly salary after standard deduction.
- This TDS will be adjusted when Rohit files his ITR.
Ensuring proper TDS deduction on salary is important for employees to avoid high tax liability.
TDS on Interest Income
Financial institutions like banks and post offices have to deduct TDS on the interest paid on deposits, savings accounts, fixed deposits etc.
- In the case of fixed deposits and recurring deposits, if the interest earned surpasses Rs. 40,000 in a financial year, TDS at a rate of 10% will be deducted.
- Interest on savings bank account: TDS applies if interest exceeds Rs 40,000 per year (Rs 50,000 for senior citizens)
- TDS also applies on interest from bonds, debentures, securities if it exceeds Rs 5,000.
- To avoid TDS, you can submit Form 15G/15H if your total income is below taxable limit.
- To claim TDS credit during ITR filing, you must obtain Form 16A, a TDS certificate.
For example, if your total interest income for FY 2022-23 is Rs 45,000, the bank will deduct Rs 4,500 (@10%) as TDS. You can claim refund by reporting this in your ITR if your total income is below Rs 2.5 lakh.
TDS on Rent Payments
TDS applies on rent paid for real estate properties if it exceeds Rs 50,000 per month.
- Renters must deduct 5% TDS if the monthly rent payment exceeds Rs 50,000.
- For commercial or residential properties taken on rent, owners can ask for TDS if rent exceeds this limit.
- The threshold for rent paid for machinery, equipment, or furniture is lower at Rs 200,000 per year.
- Renters must issue Form 16B, a TDS certificate, and submit it during ITR filing.
Ensure proper documentation for rented properties to avoid disputes regarding TDS deduction.
TDS on Commission or Brokerage
Individuals, HUFs and firms making commission or brokerage payments above Rs 15,000 in a single transaction must deduct 5% TDS.
- Applicable for commission agents, insurance agents, brokers, etc.
- The payer must issue Form 16A showing TDS details.
- If a PAN is not provided, you must deduct 20% TDS.
For instance, If a broker receives a one-time commission of Rs 20,000 from a client, they must deduct 5% of the amount, equivalent to Rs 1,000, as TDS.
TDS on Professional Fees
TDS at 10% applies on any technical, professional or consultancy fee exceeding Rs 30,000 per transaction.
- Fees paid to lawyers, CA, CS, contractors, designers, doctors, etc. attract TDS.
- No TDS needed if the annual fees to a single professional are below Rs 30,000.
- Professionals should ensure clients issue Form 16B for claiming TDS credit.
For example, if a CA’s consultation fees for one assignment is Rs 50,000, the client will deduct Rs 5,000 (@10%) as TDS and pay Rs 45,000.
TDS on Contractor Payments
Under Section 194C, businesses or individuals making payments to contractors/sub-contractors have to deduct TDS if annual payments exceed Rs 50 lakh.
- Applicable for all types of work contracts including advertising, catering, maintenance etc.
- TDS @1% is deducted on individuals and HUF contractors.
- In case of firms, TDS @2% is deducted.
- The contractor should obtain Form 16A for claiming TDS credit.
Make sure contracts specify the TDS deduction terms to avoid financial disputes later.
TDS on Ecommerce Transactions
The Finance Act 2020 introduced mandatory TDS for business-to-consumer ecommerce transactions.
- Ecommerce operators like Amazon, Flipkart, etc have to deduct 1% TDS on goods sold and 5% TDS on services provided using their platform.
- This applies if gross payments to a seller/service provider exceeds Rs 5 lakh in a financial year.
- Ecommerce operators must furnish quarterly TDS statement in Form GSTR-8.
For instance, if a seller on Amazon sells goods worth Rs 10 lakh in 2022-23, Amazon will deduct 1% i.e. Rs 10,000 as TDS and pay Rs 9.9 lakh.
How to Claim TDS Credit and File TDS Returns
If tax has been deducted on your income, you can claim TDS credit in the following ways:
1. Obtain TDS Certificate
The deductor must issue a TDS certificate in Form 16A or Form 16B providing details of TDS deducted. This certificate is required while filing income tax returns.
2. File ITR
To claim TDS credit, you must report the income on which TDS was deducted and submit the TDS certificate along with your ITR. The TDS amount will be adjusted against your overall tax liability.
3. Claim Refund
If the TDS deducted is more than your actual tax liability for that income, you can claim refund of the excess TDS amount when filing returns.
4. File Revised Return
If TDS credit was missed or deducted in wrong assessment year, you can file a revised return to claim TDS benefit.
5. Rectify Defective TDS Credit
If there is a mismatch in TDS claimed in ITR vs deposited by deductor, you can submit a rectification request to the Income Tax Department.
TDS Returns
Meanwhile, the tax deductor must file quarterly TDS returns in Form 24Q, 26Q, 27Q, etc stating details of TDS deducted and deposited within the due dates. Proper filing of TDS returns ensures the deductee gets full TDS credit.
Consequences of Non-deduction and Short Deduction of TDS
Not deducting TDS or deducting lower TDS than required can attract the following consequences:
- Penalty equal to the TDS amount for non-deduction or short deduction of tax
- Interest @1% per month for delay in payment of TDS to the government
- Disallowance of expenses on which TDS was not deducted or short deducted
- Deductee losing out on tax credit if TDS not properly deposited
- Prosecution in extreme cases if the TDS default exceeds Rs 1 lakh
Therefore, taxpayers making payments above the threshold limits should be careful in deducting proper TDS and filing timely TDS returns. This will avoid penalties under Section 201 of the Income Tax Act.
Frequently Asked Questions
Q: What if my total income is below taxable limit? Do I still need to deduct TDS?
A: Yes, threshold limits are applicable only for the recipient or deductee. As a tax deductor, you must deduct TDS if the payment amount exceeds the specified threshold, irrespective of the deductee’s tax liability.
Q: How can I verify if TDS was properly deposited by the deductor with Income Tax?
A: You can check your Form 26AS through the e-filing portal to verify tax credits and see if the TDS deposited matches with your income. Raise a grievance if there is any discrepancy.
Q: Is TDS applicable on payments to non-residents?
A: You must deduct TDS if you make payments to non-residents without a permanent establishment in India that exceed the applicable thresholds. The rates may vary according to DTAA rules.
Q: Can I avoid TDS by furnishing declaration in Form 15G/15H?
A: Form 15G/15H can only exempt TDS on interest income if your total income is below the taxable limit. It does not apply to TDS on other incomes like professional fees, salary, etc.
Q: Where can I get assistance with TDS compliance and filing correct TDS returns?
A: Reputed platforms like Filingwala.com offer end-to-end assistance with TDS calculation, deduction, filing TDS returns, issuing TDS certificates, and resolving any TDS disputes or demands. Their tax experts follow the latest compliance requirements.
We hope this detailed guide on all aspects of TDS in income tax helps you understand your obligations as a tax deductor. Make sure you deduct the correct TDS on time, issue TDS certificates, and file accurate TDS returns every quarter. This will avoid problems during scrutiny and ensure smooth processing of income tax returns.
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