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TDS Deduction

TDS is short for Tax Deduction at Source. It is the amount of tax that an employer deducts from on behalf of the employee and deposits it with the Income Tax Department. Like for income tax, there are different tax brackets for people in different age groups for TDS deduction. The TDS is made when a specified nature of payment like commission, salary, professional fee, or rent is made. On these transactions, TDS deduction is made by the deductor, i.e. the person who is making such payment. The person who is receiving the payment is known as the deductee, and the liability of paying TDS deduction to the tax department lies with the deductee. 

To understand how a TDS deduction is made, let us take the example of salaried people. When salaries are disbursed by a company, the employer of the company has to make TDS deductions on behalf of its employees and pay the rest of the amount in their salary accounts. Say, a person's per month salary is Rs 90,000. The employer will apply the TDS deduction rate of 10% and accordingly deduct 10% of Rs 90,000 i.e. Rs 9,000 and deposit the tax amount with tax authorities while disbursing the rest. 

What is TDS Deduction?

According to the Income Tax Department Government of India, Tax Deduction at Source (TDS) is a tax that is levied on the very source of income. As per the concept of TDS, a person (known as the deductor) who has to make a specified nature of payment to any other person (known as the deductee) deducts tax at source, and this tax goes in the kitty of the Central Government. On the basis of Form number 26AS or the TDS certificate, which is issued by the deductor, the person from whose income the tax has been deducted (the deductee) is entitled to receive credit for the amount so deducted. 

Revised Income Tax Slab (New Regime – Individual)

INCOME TAX SLAB APPLICABLE TAX RATE
Up to Rs 2.5 Lakh Nil
From Rs 2,50,001 to Rs 5 Lakh 5% of the total income that is more than Rs 2.5 Lakh + 4% cess
From Rs 5,00,001 to Rs 7.5 Lakh 10% of the total income that is more than Rs 5 Lakh + 4% cess
From Rs 7,50,001 to Rs 10 Lakh 15% of the total income that is more than Rs 7.5 Lakh + 4% cess
From Rs 10,00,001 to Rs 12.5 Lakh 20% of the total income that is more than Rs 10 Lakh + 4% cess
From Rs 12,50,001 to Rs 15 Lakh 25% of the total income that is more than Rs 12.5 Lakh + 4% cess
Income above Rs 15 Lakh 30% of the total income that is more than Rs 15 Lakh + 4% cess

Different Types of Tax Deduction at Source (TDS)

TDS deduction is done on various types of income sources. These are:

  • Salary
  • Rent payment
  • Director's remuneration at a company
  • The interest levied other than on interest on securities
  • Commission or brokerage
  • Bank interest payment
  • On transfer of any immovable property
  • Contractor payments
  • Dividend payment
  • Commission payment
  • Income from winning in crossword puzzles, lottery, card games, etc. 
  • Insurance commission

What Exemptions are allowed for TDS?

Exemptions from tax payment are available under Section 80C and Section 80D. This grants an opportunity for exemption on tax on several investments made by an individual in a financial year. TDS deduction on salary can be calculated by deducting exemptions from the total earning in that fiscal year. The employer can get a declaration from her employees for tax exemption.

The categories that fall under the exemption are:

  • Medical allowance- An individual needs to produce medical bills for tax exemption
  • Conveyance or travel allowance- The employee can take exemptions on the basis of conveyance or travel allowance
  • Allowance on House Rent- If the employee receives an allowance for house rent, the exemption can be availed on the basis of HRA

How to Calculate TDS on Salary?

The gross salary is divided into basic pay or base pay and other amounts. The basic pay is fully taxable, while the other pay leaves a little room for exemptions. Let's take a look at these exemptions and see how TDS deductions can be calculated on salary.

  • Divide gross monthly salary into basic income, prerequisites, and allowances (if any)
  • Under Section 10 of the Income Tax Act, exemptions are mentioned, which can be applied to the salary for tax calculation. These are house rent allowance, travel allowance, medical allowance, etc. 
  • TDS deductions are made on yearly income. Multiply the total monthly exemptions with 12 to get at the desired figure
  • The remaining income is the total taxable income
  • In addition to income in the form of salary, other sources such as income from house rent, or losses of any kind are added and subtracted respectively from the total taxable income
  • Investments are also taken into account while calculating the taxable income of an individual. Deduct the total tax-exempted investments from the gross income

The figure so arrived is the total taxable income of an individual.

With the help of an example, this calculation can be better understood.

Say the monthly gross income of an individual is Rs 80,000. This is the gross income which means it contains the 

  • Basic pay of Rs 50,000
  • House rent allowance of Rs 20,000
  • A travel allowance of Rs 800
  • Medical allowance of Rs 1250
  • Child education allowance of Rs 200
  • Other allowances of Rs 12,750

This is the division of gross income into its various components. Say the individual has her own house, and the monthly exemption from allowance is Rs. 2250 (medical, travel, and child education allowances). So, effectively, the yearly taxable amount after calculation comes out to be Rs. 9,33,000 [ Rs (80000- 2250)*12]. 

Now, let's say that the individual suffered a loss of Rs. 1.5 lakhs on repayment of house loan interest during the particular financial year. Then this amount will be deducted from the total taxable income of the individual as it is exempted from taxation. This leaves the taxable income to be Rs. 7,83,000.

Say the individual also made an investment in some scheme to the tune of Rs 1.2 Lakh and Rs 30,000, and these investments are exempted under Section 80C and Section 80D, respectively. According to chapter Vi-A, Rs 1.5 Lakh stand exempted. This leaves the taxable income to be Rs. 6,33,000. 

After making all exempted deductions and arriving at the total taxable income figure, find out the tax slab under which the income falls. In this case, the income falls under the following tax slabs.

Income Tax Slab TDS DEDUCTION TAX PAYABLE
Up to Rs 2.5 Lakh Nil Nil
From Rs 2,50,001 to Rs 5 Lakh 5% of the total income that is more than Rs 2.5 Lakh + 4% cess Rs 25,000
From Rs 5,00,001 to Rs 7.5 Lakh 10% of the total income that is more than Rs 5 Lakh 4% cess Rs 26,600

 

Therefore, the final tax to be applicable to the individual's yearly income in this example will be the total of Rs 25,000 and Rs 26,600 that is Rs 51,600. This amounts to Rs 4,300 per month. 

TDS Rate Chart for FY 2020-2021 for a Person (Other Than a Company) who is Resident in India:

PARTICULARS TDS RATES (in %)
192: On payment of salary As per the Income Tax Slab
193: On interest paid on securities:
  1. Debentures or securities for any money that is provided by or on behalf of a corporation (a corporation set up by the Central or a State Government) or issued by any local authority.
  2. If a company provides such debentures that are listed on any of the stock exchanges which are registered with SEBI (Securities and Exchange Board of India) and adhere to the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and/or any other rules which are made thereunder. 
  3. Any security that has been issued by the Central Government [8% Savings (Taxable) Bonds, 2003 and 7.75% Saving (Taxable) Bonds, 2018]
  4. Interest generated on any other security.
10%
194A: income earned through interest on instruments other than on" interest on securities." 10%
194B: income earned as winnings in card games, crossword puzzles, lotteries, and/or any game other than these.  30%
194BB: Income earned through winnings from a horse race. 30%
194C: payment made to a contractor and/or a sub-contractor by a HUF – (Hindu Undivided Family) or an individual. 1%
194C: Payment to a contractor and/or sub-contractor by Others 2%
194D: Earnings as insurance commission 5%
194DA: payments made for a life insurance policy. 1%
194EE: payment deposited under National Savings Scheme (NSS) 10%
194F: payment made to repurchase  unit(s) of Unit Trust of India or Mutual Fund 20%
194G: income that arises from commissions and/or other earnings through lottery ticket sales. 5%
194H: brokerage or commission 5%
194-I: If rent is paid for a Machinery and Plant  2%
194-I: If rent is paid for any land  or building or furniture or fitting 10%
194 – IA: payments made for the transfer of immovable property (other than land used for agriculture) 1%
194 – I.B.: If any payment is made for rent which is not covered under tax audit and which is made by an individual or a Hindu Undivided Family (HUF) [with effect from June 1st, 2017] 5%
194 – I.C.: Monetary considerations paid under Joint Development Agreements 10%
194J: If an amount is paid through the following means: 
  1. Fees paid against professional services
  2. Payment for not sharing any patent, copyright, know-how, and so on
  3. Any fees that are paid against technical services
  4. Royalty
  5. Remuneration/fee/commission to a director
  6. Payment for not performing any activities not associated with business [the rate of the Tax Deducted at Source (TDS) will be taken as 2% in case the payee is engaged with business operations in a call centre w.e.f. June 1st, 2017]
10%
194LA: At the time of acquiring an immovable property, if any payment is made [No deduction of tax will not be done in case the payments on which income tax is not leviable falls under the Right to Fair Compensation Act, 2013, w.e.f. April 1st, 2017] 10%
194LBA(1): Business organisations can deduct tax at the time of distribution of any kind of amount/payment  10%
194LBB: If the unit-holder earns an income from an investment fund [except for the incomes exempted under Section 10(23FBB)] 10%
194LBC: If any income that is generated with respect to investments made in any kind of securitisation trust [as per the explanation under Section 115TCA] For individuals and/or Hindu Undivided Families (HUFs) - 25 For any other person - 30
Any other type of income 10%

How to file TDS Return?

To file TDS deduction returns, a few things need to be kept handy and prepared. These are:

  • A valid Tax Deduction and Collection Account Number (TAN). The TAN number should be registered for e-filing of TDS return
  • Using Return Preparation Utility or any other application, prepare your TDS statements before using the File Validation Utility for validation 
  • Keep a valid Digital Signature Certificate, which must be registered for e-filing for if one wants to upload returns using DSC 
  • Have the DEMAT account or bank account details of your principal contact ready. Also, the contact must have her/his PAN account linked with Aadhaar in case you need to upload the returns using the Electronic Verification Code 

How to Upload TDS Statement

To upload TDS deduction statements on the official website of the Income Tax Department, the following steps need to be followed:

  • Visit the official website of the Income Tax Department at the right corner of the page has a box stating "Registered User?" and "Login Here" options
  • If already registered, login into your account. If not, register with the department
  • Login to your account and find the "TDS" drop-down menu
  • Select the "Upload TDS" option from the menu
  • A form will appear. Fill in the form and click on "Validate" after filling in the details
  • Validate the returns using the Digital Signature Certificate or Electronic Verification Code

Challan for TDS Payment

The Challan form for online payment of Tax Deduction at Source (TDS) and Tax Collected at Source (TCS) is ITNS 281. The Challan 281 is for tax filing for both corporates and non-corporates. 

To download the challan, follow the links given below. 

https://www.incometaxindia.gov.in/forms/107010000000345599.pdf 

One can also check their statement and challan status. 

https://www.incometaxindia.gov.in/Pages/tax-services/statement-and-challan-status.aspx 

What happens when TDS returns are not filed in Time?

Late filing of TDS return attracts fine from the Income Tax Department. This goes for returns as well as statements:

  1. Not submitting TDS returns

    As per Section 272A(2), the Income Tax Department can levy a  penalty of Rs. 100 each day for which the returns are not submitted. This is subject to a maximum of the total amount of TDS deduction.

  2. Failing to file returns on time

    As per Section 234E, the Income Tax Department can levy a penalty of Rs. 200 each day for which the returns are not filed. This is subject to a maximum of the total amount of TDS deduction.

  3. For faulty filing of TDS statement

    As per Section 271H, the Income Tax Department can levy a penalty of Rs. 10,000 to Rs 1 Lakh if the deductor falters at the time of filing TDS returns within the due date. 

  4. Filing incorrect details

    As per Section 271H, the Income Tax Department can levy a penalty of Rs 10,000 to Rs 1,00,000 for submitting false information with respect to challan particulars, PAN card, TDS amount, etc. 

  5. Non-payment of TDS amount

    As per Section 201A of the Income-tax Act, an interest in addition to the penalty can be levied in such a case. If a part of the tax amount or the whole tax amount is not deducted at source, an interest charge of 1.5% is levied every month from after the due date of the tax filing till the date on which the tax amount is actually deducted. 

Refunds of TDS

There is an option of claiming a TDS refund. This option is available on the website of the Income Tax Department. To avail of a refund, income tax returns must have been filed, and a TDS refund must be presented. On filing the income tax return, the TDS refund is automatically processed by the Income Tax Department. It could take as long as six months for the refund amount to reflect in the bank account. The status of the refund can be checked by logging into the e-filing website.

What is a TDS Certificate?

There are two types of TDS certificates available – Form 16 and Form 16A.

As per Section 203 of the Income Tax Act, the deductee is provided with a certificate that shows the tax amount that is subtracted. These two certificates are:

  1. For the Salaried Class

    For salaried employees, the employer is required to provide the deductee with Form 16. This form should mention the amount of tax that has been deducted in the form of TDS deduction. Form 16 contains details such as the deduction of tax, the computation of tax, payment of the TDS. It is the responsibility of the employer to issue Form 16 to their employees before May 31st of the following financial year so that they can fill it and avail tax exemptions on their incomes.

  2. For Non-salaried Class

    Another TDS certificate which the deductor has to provide to the deductee in Form 16A. It is for non-salaried class and contains details such as the deduction of tax, the computation of tax, payment of the TDS.

In which case(s) is TDS not Applicable?

There are a few cases in which TDS is not applicable:

  • Hindu Undivided Family: In case a person who makes the payment is from a Hindu Undivided Family, TDS is not applicable in this case
  • For an individual whose books do not require any audit, TDS is not applicable

P.S.- Hindu Undivided Families or individuals who make rent payments which are higher than Rs 50,000 every month, TDS must be deducted at the rate of 5% irrespective of the fact that the individual's books have to be audited or not. Persons with the liability of subtracting the TDS deduction at 5% do not have any requirement to apply for TAN. 

FAQ's

Written By: Paisawiki - Updated: 03 December 2020