History of TDS
The full form of TDS stands for Tax Deducted at Source. Basically TDS means the payer (any company or a business firm) can deduct tax from the income of the payee (the one who is receiving the payment) and pay the balance amount to the payee.
In India, there are certain rules and obligations under the income tax act of India, 1961. According to this act, a respective amount of income tax has to be deducted at the source before the payee receives the remaining amount. This is a part of Indian revenue service and is handled by the CBDT (Central Board of Direct Taxes) which is a part of the revenue department. This procedure is very important during tax audits.
The person who is liable to pay tax to the government is known as Assessee. An assessee is supposed to file income tax returns to the CBDT quarterly. This helps to understand the TDS amount which is deducted and paid to the government in that particular quarter.
There are also some groups of individuals on whom the TDS is not applicable. In brief, we can say that there are different TDS slabs provided by the income tax act, 1961 for different categories of groups and individuals of different pay scales.
In countries like New Zealand, South Africa, etc., such individuals who have a payroll with tax are also known as PAYE i.e. Pay-As-You-Earn Tax and a few other countries like the United States, pay-as-you-go term is used.
India’s income tax act came into existence during 1961. There are different types of TDS rates for various types of incomes and payments under different sections of the income tax act 1961. Though it is important that one must understand, there is a certain margin level upon which TDS is applicable. The TDS on certain transactions is deducted only when the amount of payment or salary is above the specified margin level. If the amount does not cross the specified level, no TDS is deducted in any form.
Benefits of TDS
This helps the salaried people to pay tax every month in easy instalments as they earn thus reducing the burden of paying a lump sum amount at the end of the year.
This income tax if collected properly throughout the year helps the government to get enough funds to run the government well.
It also helps the government receive the tax at the time of payments itself to avoid any fraud by any individual or company.
Apart from individuals or companies, the TDS is also applicable to immovable property. This comes under the section 194lA of the income tax act,1961. This states that 1% TDS is deducted on the sale of the immovable property however the rate may increase up to 20% if the person who is transferring the property does not provide a valid PAN number.
Under section 194lB of the income tax act,1961, tax is also deducted at source if the rent is exceeding 50,000 per month by an individual to a landlord.
The Standard Rate of TDS:
This varies between 10% to 30% based on the salary of the individual.
Eg: salary up to 3,00000- nil
3,00000 to 5,00000- 10%
5,00000 to 10,00000- 20%
10,00000 and above 30%
The TDS rates for a resident Indian and a non-resident Indian (NRI) will be different.
The minimum salary for the deduction of TDS under section 192 of the income tax act,1961 for a resident Indian under 60yrs of age would be 2.5 lakh per annum.
And for a resident Indian above 60 yrs would be 3 lakhs per annum.
For someone above 80yrs of age, the tax deduction would be on the amount 5 lakhs per annum.
FAQs on TDS Full Form
1. What is TDS and how is it calculated?
The TDS will be deducted by dividing the estimated tax liability of the employee for the financial year by the number of months of his employment under the particular employer. However, if you do not have PAN, TDS shall be deducted at the rate of 20% (excluding education cess and higher education cess).
2. Who is eligible for TDS?
Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such a specified payment. 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.
3. What are the rules associated with TDS?
TDS, that is, Tax Deducted at Source are associated with certain rules which when followed by the individual can help him/ her in avoiding any kind of fees, penalty, or interest. The major rules associated with TDS are:
The first and the most important rule is that the TDS should be deducted at the time when the payment is either kept on due or when the actual payment is done, whichever occurs earlier.
If any delay in the deduction of TDS is made, it will result in an interest of 1% per month till the time tax is deducted.
Every person, whether an employer or any other person, should submit the tax deducted to the government’s account latest by the 7th day of the following month.
The late or non-payment of TDS will result in interest of 1.5% per month applied until the tax is not deposited.
4. How much tax is deducted from the salary of an individual in the form of TDS?
The most important payment done by people is basically in the form of salary and as per the current laws governing income tax, there is no fixed rate of TDS that is deducted from the incoming salary of an individual. The tax is generally calculated in the form of the average rate of the income tax. The average rate is calculated by dividing the total tax liability by the total income generated by an employee. The average rate is calculated before the tax is deducted from the salary of an individual. If in case, by mistake or any other issue, tax greater than the actual tax based on the actual income of a person is deducted, then in such a case, the individual can get a refund of the deducted tax by filing an income tax return (ITR).
5. What are the exemptions related to TDS deduction on salaries?
TDS, that is, Tax Deducted at Source, has certain exemptions related to its deduction in salaries. The tax is not deducted from the source until and unless the basic exemption limit is exceeded by the estimated salary. Apart from tax exemption, allowance such as house rent allowance (HRA), leave travel concession (LTC) and travelling are also exempted under the prescribed limits. During the calculation of Annual income and TDS, deductions under the sections 80C, 80CCC, 80CCD, 80CCG, 80D, 80DDB, 80DD, 80E, and 80EE are also considered for the deduction.
6. Does the TDS amount change during any financial year?
Under section 80C to 80U, the TDS is generally deducted from the expected net taxable income of the employees based on the information shared by the employees. The calculation of the average rate of income tax is based upon the employee’s forecasted salary and the declarations made by the employee for the upcoming period, it may therefore change under certain conditions:
If there is any bonus or increment received by an employee during the year causing an increase in the income of the employee.
Addition of any other tax-saving investment proofs that were not submitted earlier.
If by any chance, the amount of actual tax-saving investment is less than the declaration that was made by the employee at the beginning of the year
The TDS may also change if the employee switches to a new job. In that case, the TDS will be calculated considering the new salary that the employee receives.
In any of the situations stated above, the additional TDS on the basis of the increment in the salary of the employee by any source will also be deducted in later months of the financial year in order to compensate for the lower deduction earlier. Similarly, if by mistake or due to any other reason, the employer has deducted a higher rate of TDS, then he will deduct lower TDS on the basis of his income in the following months so that he can average out the total TDS.
7. How can I apply for a refund of my TDS?
According to the Indian tax system, the citizens of India can apply for only one type of return at the time of filing their annual income tax return. It is very important for an individual to provide their bank account details such as account number and IFSC code at the time of filing their TDS return because if they don't do so, they will not be able to generate a valid file for themselves. If in case you have deducted more tax than it should have actually been, then in that case you are eligible for an income tax refund, for which you need to file ITR, that is the annual income tax return.