Tax Deducted at Source (TDS) - A simple guide with example

Hello Everyone, In this post, we will talk about TDS or Tax Deducted at Source. We will go through various details starting from what TDS is, when it is applicable and how it works.

The topics we will cover in this post are:

What is TDS?

TDS is an abbreviation for ‘Tax Deducted at Source’. TDS is a means of collecting tax on income from any entity. So, under TDS the tax is deducted at the source i.e., from where the income is generated.

The purpose of TDS is so that people will pay tax as soon as they earn or get an income. Income Tax was generally paid once, at the end of a financial year. With TDS, the whole process is changed. The same amount will now be paid in smaller amounts regularly.

Objectives of Tax Deducted at Source

  • It aids in the payment of the tax to the government every month by the taxpayer. They don’t have to pay a huge tax amount at once. Thus can pay in small instalments.
  • It minimizes tax evasion by the collection of tax at the time of payment of income (partially or wholly) at the time it is generated.
  • The government requires funds throughout the year so, both advance tax and TDS helps in the smooth running of the government.

Entities involved in Tax Deducted at Source

  • Deductor – The company or person that makes the payment after deducting TDS is called a Deductor.
  • Deductee – The company or person receiving the payment is called the Deductee.

It is the responsibility of the deductor to deduct the TDS before making the payment and deposit the amount to the government.

TDS is deducted irrespective of the mode of payment – cash/cheque or credit to the payee’s account whichever happens earlier. The TDS deducted is linked to the TAN of the Deductor and the PAN of the Deductee.

The Deductee receives the net amount after deduction of tax at source. The Deductee will add the gross amount to their income during their annual returns.

The amount which is deducted at source is then adjusted against their final tax liability. Basically, it is taking credit of the amount already deducted and paid on their behalf.

What is TDS deducted on?

TDS is deducted from various payments like:

  • Salaries
  • Interest payment by banks
  • Payment of commission
  • Payment of rent
  • Payments made to consultants
  • Payments to lawyers or freelancers

Individuals are not expected to deduct TDS while paying rent or while paying fees to doctors or lawyers. TDS is not applicable to all incomes and all persons for all transactions.

The due date for depositing the TDS to the government?

The TDS is deposited to the government by 7th of the following month. So, for TDS deducted on rent and for purchase of property, the due date is 30 days from the end of the month in which TDS is deducted.

Once deposited, this amount reflects in the Form 26AS of individual deductee’s on the TRACES website linked to the Income Tax Department’s e-filing websiteThe deductee also gets a certificate from the deductor stating the amount of TDS.

For Example:
TDS deducted in August is paid to the government by 7th September. However, the TDS deducted in March can be deposited till 30th April.

What is TDS return?

A deductor deposit the deducted tax to the government and then the details are filed quarterly by TDS return. So, there are different types of TDS return forms for different TDS deductions.

How and When to file TDS return?

Filing TDS returns are required to all who have deducted TDS. It is quarterly submission containing details like TAN, amount of TDS deducted, type of payment, PAN of deductee, etc.

There are different forms for filing returns based on the purpose of the deduction of TDS. Now let us take a look at the below table:

Form No Transactions reported in the return Due date
Form 24Q TDS (on Salary)
  • Q1 – 31st July
  • Q2 – 31st October
  • Q3 – 31st January
  • Q4 – 31st May
Form 26Q TDS (on all payments except salaries)
  • Q1 – 31st July
  • Q2 – 31st October
  • Q3 – 31st January
  • Q4 – 31st May
Form 27Q TDS (on all payments made to non-residents excluding salary)
  • Q1 – 31st July
  • Q2 – 31st October
  • Q3 – 31st January
  • Q4 – 31st May
Form 26QB TDS (on sale of the property) 30 days from the end of the month in which TDS is deducted
Form 26QC TDS (on rent) 30 days from the end of the month in which TDS is deducted

What is a TDS certificate?

Form 16, Form 16A, Form 16 B and Form 16 C are the TDS certificates issued by a person deducting TDS to the assessee from whose income TDS was deducted while making payment.

For Example, The employer issue Form 16 to salaried employees and Form 16A for non-salaried employees within a specified time.

When should TDS be deducted and by whom?

Any person making certain payments as per the Income Tax Act should deduct TDS at the time of making that payment. But TDS is not deducted if the payment made by an individual or HUF who are exempted from the tax audit.

In case of rent payments made by individuals and HUF more than Rs 50,000 per month, the deduction of TDS @ 5% happens even if the individual or HUF is not liable for a tax audit. They also need not apply for TAN.

Your employer deducts TDS from you as per the income tax slab rates.

For Example, Banks deduct TDS at the rate of 10% but they will deduct 20% if you have not provided PAN.

That’s it for this post on TDS. If you have any questions, leave them in the comments section below.

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