Under the Income Tax Act 1961, Tax Deducted at Source (TDS) is a concept that aims to tax transactions as and when they occur, instead of collecting tax at a later stage. Tax deducted at source is not a taxation but a control mechanism that is put in place to ensure that each transaction is captured in the taxation environment and is subjected to taxation as per relevant provisions of the Income Tax Act, 1961. TDS provision was introduced in India in 1922. Initially only four sources of income were covered under TDS:
- Interest other than interest on securities
However, in the current scenario, the scope of TDS has increased many-folds and almost every transaction falls within the ambit of TDS. The government has prescribed specific TDS rates for different types of transactions, which is to be deducted on the amount of transaction.
Need for TDS
TDS is to keep a check on people who avoid reporting their taxable income and, hence, avoid the consequent tax that is to be paid on the same. This objective is fulfilled by putting the onus of deducting tax on the person making the payment. To ensure that even if the person earning such income does not report their income, still the income tax department has details of the person as well as of the transactions based on which the department can tax the person later on.
TDS Rates
There is no single rate of tax for all transactions; rather the TDS rate depends on the nature of transaction. Following are some rates along with the nature of transaction:
- Salary TDS: Under Section 192, every employer is liable to deduct TDS from the salary paid to employees each month. The amount for TDS shall be determined by the taxable income that an employee will earn in a financial year. Hence, the employees are required to disclose the income earned from all other sources like salary from past employer (if any, in case of change of job in the same financial year), rental income, interest, etc., as well as the deduction under Section 80, if any, to be claimed by the employee in the financial year, so that the correct amount of TDS can be deducted by their employer. Although providing the details of other income and deductions is not mandated by law, by not providing the same, the person has to calculate the advance tax payable by them on their annual income and deposit the same on quarterly basis.
- Dividends: Under Section 194, any company paying dividends to its resident shareholders must deduct TDS at a rate of 10% if the amount of such dividend exceeds INR 5,000.
- Lottery or crossword puzzle: Section 194B provides for tax deduction at a rate of 30% for income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding INR 10,000. For example, if a person wins INR 10 lakhs in KBC (Kaun Banega Crorepati), then KBC must deduct INR 3 lakhs before paying the same to the participant.
- Commission: Under Section 194H, TDS is to be deducted at the rate of 5% on commission if the amount of such commission paid or payable is more than INR 15,000. However, TDS is not to be deducted if such amount is paid by any individual or a Hindu Undivided Family (HUF) whose turnover from business in the previous financial year does not exceed INR 1 crore or turnover from profession in the previous financial year does not exceed INR 50 lakhs.
- Section 194N: If any person withdraws cash from their own bank account, then the bank will deduct TDS at a rate of 2% if the total amount withdrawn is more than INR 1 crore and for the purpose of TDS, the cash withdrawal will be seen for all accounts in the bank i.e., if there are three accounts in the same bank, the aggregate withdrawal from all three accounts will be considered. It changes if the person has not filed their ITR for the last 3 financial years. In such cases, the limit shall be INR 20 lakhs i.e., bank will deduct 2% above INR 20 lakhs while if the amount exceeds INR 1 crore, the bank will deduct 5%. However, technically, the amount withdrawn shall not be considered income of the person for ITR filing purposes.
- If the person whose TDS is to be deducted does not provide a valid Permanent Account Number (PAN) to the Deductor (person paying the amount), the rate of TDS shall be one amongst the following, whichever is higher:
- Rate of TDS in specific section
- Rate of tax on such income
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- Under Section 197, a deductee can apply to the department to get Certificate for deduction at lower rate. In such case, if the assessing officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, they shall grant the lower TDS certificate to such deductee.
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General Rules for TDS Deduction
The general rule is to deduct TDS before the payment or entry into books of accounts, whichever is earlier, with some exception as given below, where TDS is to be deducted only on payment basis:
- Section 194B [Winnings from lottery or crossword puzzle]
- Section 194BB [Winnings from horse race]
- Section 194DA [Payment in respect of life insurance policy]
- section 194LA [TDS on payment of compensation on acquisition of certain immovable property]
General Rules for TDS Payment
Under Section 200, the tax deducted by any person is to be remitted to the government on a monthly basis. The due date, i.e., last date of payment of TDS to government is the 7th of every subsequent month.
For example, all TDS collected/deducted in November 2022 should be deposited by 7th December 2022.
There is an exception for March, where the TDS shall be deposited by 30th April. |
Consequences of Late Deduction/Late Payment of TDS: [Section 201(1A)]
- Late deduction: Person is liable to pay an interest at 1% per month or part thereof calculated from the date from which tax was due to be deducted up to the date till which tax is deducted.
- Late payment: Person is liable to pay an interest at 1.5% per month or part thereof calculated from the date from which tax was due to be paid up to the date till which tax is paid.
Consequences of Non–Deduction/Non–Payment of TDS: [Section 201(1)]
- Person is deemed as ‘Assessee in default’ under Section 220 and is liable to interest as per provisions of Section 220 at 1% per month or part thereof, and
- Person is also liable to penalty as per provisions of Section 221, which can be maximum up to the amount of TDS not paid/deducted.
- Under Section 276B: Punishable with rigorous imprisonment for a term which shall not be less than three months, but which may extend to seven years along with fine as well.
Exception: Person who fails to deduct (not the one who fails to pay to the Government) shall not be liable to penalty (as mentioned above) and imprisonment (as mentioned above) if they obtain a certificate to this effect from a Chartered Accountant that the deductee (the person whose TDS was to be deducted):
- Has furnished their return of income under Section 139,
- Has taken into account such sum for computing income in such return of income
- Has paid the tax due on the income declared by him in such return of income.
However, the person (deductor) will still be liable to interest as mentioned above. |
TDS Returns
Under Section 200, the return for tax deducted and paid by any person is to be submitted to the government on a quarterly basis. The due date, i.e., last date of return filing of TDS to government is the 15th of the first month of every subsequent quarter.
For example, for all the TDS paid in the months of July, August and September, return should be filed by 15th October.
However, there is an exception for the quarter of March, the TDS return shall be filed up to 31st May. |
Consequences of Not Filing Returns
- Under Section 234E: Late fee of INR 200 per day up to a maximum of the payable amount of TDS.
- Under Section 271H: Penalty of not less than INR 10,000 but which may extend up to INR 1 lakh can be levied if there is a delay in filing return or incorrect information is furnished. However, if the deductor files the return before the expiry of a period of one year from the due date of filing of return and has paid late fee and interest (if any), then such penalty shall not be levied.
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