Tax Deducted at Source (TDS)

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

Some governments have tax laws, which are required to deduct the tax before making tax payment. This rule in the law applies for specific payments which are more than specified limits. This ensures the taxes will be paid first to government on time rather than risk that the taxpayer might default at the time when his tax falls due in arrears. The deduction of tax from the source of income is also called as withholding of tax in some countries.

What is Tax Deducted at Source (TDS)?

Tax Deducted at Source (TDS) is the income tax reduced from the amount paid at the time of making specified payments such as rent, commissions, professional fees, salary, interest, and others by the people making such payments.

Usually, the person receiving income is liable to pay income tax. But the government, with the help of TDS provisions, makes sure that the income tax is deducted in advance from the payments being made by you.

The recipient of income receives the net amount after reducing TDS. The recipient takes credit of the amount already deducted and paid on his behalf.

Who is eligible to pay?

Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payments. But no TDS has to be deducted if the person making the payment is an individual or HUF whose books are not required to be audited.

However, in the case of rent payments made by individuals and HUF exceeding Rs 50,000 per month, a TDS @ 5% has to be deducted even if the individual or HUF is not liable for a tax audit.

Your employer deducts TDS at the income tax slab rates applicable. Banks deduct TDS @10% on deposits. In another case, they may deduct @ 20% if they do not have your PAN information. For most payments, the rate of TDS is already set in the Income Tax Act and TDS is deducted by the payer based on these specified rates.

A detailed breakdown of the procedure for filling the tax

  • TDS deducted in a month must be paid to the government by the 7th of the following month. However, the TDS deducted in the month of March can be deposited until 30th April. For TDS deducted on rent and purchase of property, the due date is 30 days from the end of the month in which TDS is deducted.

  • The tax deducted at source has to be deposited using Challan ITNS-281 on the government portal.

  • Filing TDS returns is mandatory for all the individuals who have deducted TDS. TDS return is to be submitted quarterly and various details needs to be furnished such as TAN, the amount of TDS eligible, type of payment, PAN of deductee, and more. Also, different forms are prescribed for filing returns based on the purpose of the deduction.