What is TDS & why is it Important to you?

Anything that reduces the net value of your hard earned revenue feels a bit disappointing. And when that’s TDS that shows up in all its different forms, it’s time you knew what it was and how to understand the way it works.

Simply put, TDS is a tax deduction from your income, whichever form you earn yours. While it is a ‘deduction’, there are still quite a few benefits of having them. Let’s see what it is and why you should be aware of it.

TDS — what is it exactly?

Tax Deducted at Source — pretty straightforward definition, isn’t it? It is the taxable amount that gets deducted at the source of your income. The kind of deduction that’s taken from the interest by your bank while crediting the maturity value of your fixed deposit.

While it was introduced as a way to automate tax collection from every income earning citizen and prevent tax evasion by bad players, it has some advantages for the honest taxpayer.

Apart from the income you earn, there are also areas where TDS is applied on the payments you make. Here’s a short list of payments that’s eligible for TDS:

• Professional fee
• Rent payments
• Interest on securities and deposits
• Lottery and other winnings of this nature
• Consultation fee
• Salary transfer
• Dividend on mutual funds and company shares
• Commission
• Royalty

How does TDS work?

All taxable incomes come under the reach of TDS deductions. The only difference it has from other forms of tax collection is that it is deducted right at the source. Most of these deductions have a fixed rate based on the type of income except for salaries. Thus you could say that TDS is decided based on the type of income rather than the total amount paid.

As for salaries, since employers can decide on the amount paid, subsequent raises or appraisals, and other benefits for their employees, the TDS in this case is fixed based on applicable slab rates.

Changes to your TDS on salary can happen mid-year if you submit your investment proof or if you get any bonus or appraisal — basically any improvement in your overall income.

Here’s a table of TDS rates for payments that you may generally come across

TitleType of PaymentTDS Rate1SalariesApplicable Slab Rates + Cess2Rent Payments over Rs.50,000 p.m.5%3Lottery & Other Type of Winnings30%4Professional Services Payment*10%5NSC Maturity Value*10%6Interest from Bonds & Debentures*10%7Interest on deposits*10%8Sale of Mutual Fund Units back to Mutual
Fund20%

What happens after my TDS deductions?

Whenever TDS is deducted from your income, the company or the person who deducted them must deposit the amount with the central government. This will be reflected on your Form 26AS and will automatically be adjusted in your taxable income.

This doesn’t mean that your tax returns are all automatic. You would still require to file your income tax returns after TDS. Luckily, it’s also mandatory that you get a TDS certificate from your payer which you could use while filing your Income Tax Returns. Also, every TDS deduction will give you assured tax credits and reduce total liability.

Let’s see the effects of TDS on, say, a lottery that you received. Let’s assume you won a lottery for Rs.2,40,000. If the TDS deduction for lotteries is 30%, then you’d effectively get a sum of Rs.1,68,000 credited to your account. If this is the only income you generate for the current financial year, your liability while filing your Income Tax Returns will be zero as Rs.2,50,000 is the minimum tax-exempt income. Also, the excess amount that you paid will be returned to you as well. So there is immense merit in filing your ITR on time.

TDS Certificate

After an amount is taken away from your income by the payer as TDS, the, payer is responsible to provide a TDS certificate as proof of the transaction.

There are different forms ranging from Forms 16, 16A, 16B, and 16C and it’s Form 16 that’s issued to employees annually.

Form 16A pertains to the TDS certificate issued by banks when they deduct TDS on interest from your fixed deposits. Similarly, Form 16B is given after TDS deductions on sale of property and 16C on rent payments.

What should I do after deducting TDS?

If you are someone who is required to deduct TDS on payments you make to others, there is a couple of things you need to make sure to steer clear from trouble. First, you must file your quarterly TDS returns on time.

Based on the purpose of TDS deductions, you must file TDS returns on Forms 24Q, 26Q, 26QB, or 26QC. You can deposit the amount with the Central Board of Direct Taxes CBDT. It’s important to have the PAN/TAN of the payer and the PAN/TAN of the deductee while filing TDS returns.

It’s the payer’s responsibility to file TDS returns to make sure your deductee’s Form26AS is automatically credited.

What are the benefits of TDS?

Your TDS payments could just be a temporary deduction id your overall tax liability is less than the TDS amount, as we saw in our above example. If that’s not the case for you and your income falls in the highest tax bracket, you’d still have to worry less at the end of the year as the amount to paid then will not be a giant sum altogether.

Conclusion

Parpella has been supporting businesses across a wide spectrum of industries with their business registration, taxation and several other accounting needs. With special care to customers in Kerala and Dubai, the two places where they are most spread across, Parpella has offices in your nearby towns that could ease up your doubts on accounting and other business related issues.