The Indian government charges different types of taxes to its citizens to generate revenue, which helps in running the country.
These taxes are deducted at different rates depending on various factors such as who is being taxed, reason for tax deductions, etc. Individuals and businesses are taxed differently depending on their income and nature of business.
TDS is one of the important taxes as it affects almost every person who earns an income for their service. In this blog, we are going to talk in detail about TDS, its meaning, and different types of TDS.
What is TDS?
TDS is a type of tax that is deducted by employers from employees’ income. Companies or even an individual employer deducts TDS at the time of making the payment to employees. This applies to both salaried as well as non-salaried individuals such as contract workers and freelancers.
The aim of TDS is to collect tax from an individual’s income directly at the time of receiving the payment for their service. This was introduced by the government to reduce or remove tax evasions from the system.
Meaning and full form of TDS
The full form of TDS is Tax Deducted at Source. It is a fixed amount of tax deducted by employers from employees’ payments for salary, commission, fees, etc.
However, TDS is not limited to employers. In fact, under the Income Tax Act, every person who is making a payment to someone for service has to reduce the TDS from the total payment and pay the rest. The person or company that deducts TDS must transfer the same to the Income Tax Department. Later, while filing the income tax return, people can claim a refund if they feel more TDS is deducted from their income than it should have.
Let’s understand TDS with two simple examples.
Scenario one: A company has agreed to lease office space at the monthly rent of Rs 80,000. While paying the rent every month, it needs to deduct 10% TDS from the payable rent and pay the remaining to the land owner as rent.
Scenario two: A company has employed people for their services at a monthly salary of Rs 40,000. Based on that year’s tax slab, it needs to deduct a TDS from the employee’s salary and pay them the rest.
Different Types of TDS
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When should TDS be deducted?
Any payment made under the Income Tax Act is eligible for TDS at the time of payment. The person who is paying the money is required by law to deduct the TDS from the total amount.
According to the Income Tax Act, a Hindu Undivided Family (HUF) is a separate entity and is taxed in a different manner. A HUF member whose books are not required to be audited doesn’t have to pay TDS.
Also Read: TDS Rates for FY 2021-2022: All You Need to Know
However, if an individual or someone who belongs to HUF pays a rent of more than Rs 50,000, he or she has to pay 5% TDS. This is true even if their books are not eligible for a tax audit. The good thing is that these individuals need not apply for TAN (Tax Deduction Account Number) while filing TDS returns.
Other than this, banks deduct a 10% TDS from individuals on the interest earned from their savings account. Banks will deduct 20% TDS if account holders don’t submit their PAN details.
How to reduce or avoid paying TDS?
A salaried person can reduce or avoid paying TDS every month if he or she makes enough tax-saving investments such as mutual funds, insurance, and PF among others. One can also save taxes by paying home loan EMIs or donating to a registered NGO.
The TDS on the monthly salary can be reduced or negated by simply submitting these investment proofs to HR. If the documents are not submitted in time and the TDS is deducted, one can claim a refund on the taxes while filing the income tax return.
To avoid paying TDS to banks on the interest earned, one can submit the Form 15G and 15H to their bank. This will only work if the total taxable income is below the tax threshold.
When should businesses file TDS returns?
Businesses that deduct TDS have to file TDS returns every quarter along with details such as their TAN, amount deducted as TDS, PAN of the deductees, etc.
Depending on the type of TDS deduction businesses have to fill out different forms to file TDS returns.
| Form type | Purpose of TDS | Date of return filing |
| Form 24Q | Salary payment | Q1 – 31st July Q2 – 31st October Q3 – 31st January Q4 – 31st May |
| Form 26QB | Sale of property | 30 days from the last day of the month when the TDS was deducted |
| Form 26QC | Rent payment | 30 days from the last day of the month when the TDS was deducted |
| Form 27Q | Payment made to non-residents (except salaries) | Q1 – 31st July Q2 – 31st October Q3 – 31st January Q4 – 31st May |
Due date to deposit TDS to the government
Businesses have to deposit the TDS collected from vendors and employees to the income tax authorities by the 7th of every month. For example, when a business deducts TDS in August, it has to pay the amount collected by September 7.
There are two exceptions to this rule:
- For TDS deducted in March, businesses can pay the TDS to the government by 30th April.
- Businesses will have to pay TDS on rent payment and purchase of property in 30 days from the end of the month when TDS was deducted. For example, if a business has paid rent after deducting TDS in August, the deadline to pay the government is September 30.
Frequently Asked Questions
Question: What is a TDS Certificate?
Answer: TDS Certificates are issued by the deductor to the person who is being paid. There are four types of TDS Certificates meant for different purposes of TDS deductions. They are:
- Form 16: Issued yearly for TDS on salary payments.
- Form 16A: Issued quarterly for TDS on payments that are not for a salary.
- Form 16B: Issued for TDS on sale of a property.
- Form 16C: Issued for TDS on rent payment.
Question: What is TAN and what is it used for?
Answer: Every business that deducts TDS must have a TAN (Tax Deduction Account Number). While filing the TDS return, businesses are required to provide their TAN.
Question: What is TDS Challan?
Answer: TDS Challan is used to deposit the tax deducted at source to the income tax authorities.
Question: Is there a penalty for companies that don’t file TDS returns on time?
Answer: Unde the section 271H, such companies have to pay a fine between Rs 10,000 and Rs 1 lakh. If a company doesn’t deduct TDS on time, an interest of 1% per month will be charged from the expected date of deduction to the date on which the TDS was deducted.
Question: What happens if the deductee does not provide their PAN details?
Answer: According to Section 206AB of the Income Tax Act, companies are eligible to deduct TDS at a higher rate to those who do not provide their PAN details. The higher rate of TDS is capped at 20%.
Conclusion
Tax Deducted at Source or TDS is important for the government as it is one of the major sources of income. Every company and individual is obligated by law to make these deductions.
