What is TDS – When Should You Deduct Tax At Source

TDS stands for Tax Deduction at Source. As per the provisions of IT act, tax on income shall be payable by deduction at source (TDS) even though such income earned during the financial year is assessable subsequently in the relevant assessment year. Because of this provision, the person who is making payment of your salary, rent, interest etc will deduct income tax (TDS) at a rate specified for that financial year in which such person is making payment of salary, rent, interest. 

In other countries this concept is known as withholding tax or “pay as you earn“ scheme.

IT act specified 22 items of income or payment from which the payer has to deduct income tax at source (TDS). In all these 22 cases tax is to be deducted at source (TDS) by the payer at the time of accrual/payment of income to the payee.

What are the incomes specified for TDS

IT act specified following incomes from which the payer has to deduct TDS;

1. Salary (u/s 192)
2. Interest on Securities (u/s 193)
3. Dividends (u/s 194)
4. Interest other than interest on securities (u/s 194A)
5. Winning from lottery or crossword puzzle (u/s 194B)
6. Winning from horse-race (u/s 194BB)
7. Payment to contractors or sub contractors (u/s 194C)
8. Insurance commission (u/s 194D)
9. Payment to non resident sportsmen or an entertainer or sports association (u/s 94E)
10. Payment in respect of deposits under NSC (u/s 194EE)
11. Payments in respect of repurchase of units by mutual fund or unit trust of India (u/s 194F)
12. Commission etc on sale of lottery tickets (u/s 194G)
13. Commission or brokerage (u/s 194H)
14. Rent (u/s 194I)
15. Fees for professional or technical services or remuneration to a director other than salary (u/s 194J)
16. Payment of compensation on acquisition of certain immovable property (u/s 194LA)
17. Income by way of interest from infrastructure debt fund (u/s 194LB)
18. Other sum payable to non resident (u/s 195)
19. Long term capital gains on units to an offshore funds (u/s 196B)
20. Income from foreign currency bonds or shares of Indian company (u/s 196C)
21. Income from foreign institutional investors from securities (u/s 196D)
22. Income by way of interest from Indian company (u/s 194LC)

Who has to deduct TDS

The person responsible for paying income or amount which is subject to TDS as listed above has to deduct tax at source. However in the case of Interest on securities (Section 194A), contractors (`194C), commission on brokerage (`194H), Rent (194I) and Fees for professional or technical services (194J) an individual or HUF have to deduct tax at source only if the turnover or professional receipts exceed the sum of Rs 1 Crore or 25 lakhs respectively ( the limit was 60 lakhs or 15 lakhs earlier).

What is the procedure of TDS

The person responsible for TDS has to follow the following procedures;

• Obtain a TAN by applying in from 49B
• Deduct tax from the income or payment specified above
• Deposit the deducted amount from such income or payment within the time limit as specified to the credit of central government
• File your quarterly TDS return with the IT department in accordance to the IT provisions.
• Issue certificate of TDS on or before the specified date (i.e. form 16/16A).

When TDS is deductible

As specified under the IT act, it has to be deducted from income either on payment basis or at the time of credit or payment which ever is earlier.

Followings are cases where Tax has to be deducted while making payment to the payee (payment basis);

1. Salary
2. Dividends
3. Winning from lottery or crossword puzzle
4. Winning from horse-race
5. Payment in respect of deposits under NSC
6. Payments in respect of repurchase of units by mutual fund or unit trust of India
7. Payment of compensation on acquisition of certain immovable property

Except these 7 cases, in all other cases we need to deduct it at the time of credit or payment which ever is earlier. For example in the case of rent you will be deducting it at source either at the time of making payment or at the time of crediting your books of account which ever is earlier.

Rate of Deduction

In the case of salary (section 192) and payment to non resident including foreign companies (section 195) we have to deduct tax at the rate that is applicable to the assessee.

In all other cases we need to deduct tax as per the rate of tax that is specified in the relevant section related to such payments.

TDS will be deducted at a higher rate or @20% of PAN is not provided by the payee to the payer.

How about surcharge and education Cess

If you are making a payment to foreign company, surcharge @ 2% has to be deducted in addition to income tax where the income or the aggregate of such income paid or likely to be paid and subject to tax deduction exceed 1 Crore rupees.

Education cess of 3% will be charged on income tax and surcharge if the payee is a non resident or a foreign company. In the case of salary payment to residents you also need to charge education cess @ 3% on income tax and surcharge (if applicable).

Except these three cases you should not charge education cess or surcharge to the applicable rate of TDS.

Relevant points of TDS

• In a case where provision under IT act has not made for deducting income tax at the time of payment, income tax shall be payable by the assessee directly to the government of India as per the provisions of IT act.

• If tax has not been deducted from income which is specified to be deducted under the IT act then it’s the responsibility of the assessee to calculate his liability and pay it to the government of India in accordance to the provisions of IT act.

• At then end of the year, assessee need to check his form 26AS online for the total tax deduction at source (TDS) and has to pay self assessment tax under section 140A at the time of filling his ITR if TDS deducted is less than his/her income tax liability.

• If the employer opted to bear the income tax on non monetary perquisite paid to employee then such payment of non monetary perquisite has to be made in accordance to the provisions related to TDS on Salary.