All about Tax Deducted at Source (TDS)

An individual can earn income from various sources. Income tax is a direct tax that they need to pay, depending on which tax bracket their total income falls in. According to the Indian tax system, Tax Deducted at Source (TDS) is an essential term in taxation that has a significant bearing on the taxpayers. It is a means of collecting income tax by the government and offers convenience to the deductee as it is deducted automatically.  

What is TDS?

The TDS full form is Tax Deducted at Source (TDS). The system was introduced by the Income Tax Department of India. In this, people who are responsible for making payments like salary, commission, professional fees, interest, or rent are liable to deduct a specified percent of tax before making the full payment. In simple words, the system allows tax deduction right at the source.

To understand the TDS better, consider the following example.

Assume that the nature of payment is professional fees on which the rate specified for TDS is 10 percent (To know more - click here). An ABC organization pays INR 50,000 as professional fees to Ms. XYZ. In this case, the ABC organization is liable to deduct INR 5000 and make a net payment of INR 45,000 to Ms. XYZ. The INR 5000 deducted by the company will be deposited directly to the credit of the government.

What are the rules for Tax Deducted at Source?

There are rules concerning not just income tax return filing but also concerning TDS. If an individual or organization meets these rules adequately, they will be able to avoid penalties, fees, or interest. The main rules related to TDS are:

  1. One of the first essential rules is that Tax Deducted at Source needs to be deducted at the time when the payment either gets due or when the actual amount is made, whichever is earlier
  2. Delay in deduction of TDS will attract interest @ 1% per month until the tax is deducted [2]
  3. Every person, whether an employer or otherwise, needs to credit the tax deducted to the government’s account by the 7th day of the following month
  4. In case of late or non-payment of TDS, an interest @ 1.5% per month will be levied until the tax has not been deposited

How to apply for a TDS refund?

A major misconception that many individuals have is that an excess TDS refund is different from that of an income tax refund. However, according to the Indian Tax System, there is only one type of return that you claim at the time of filing your annual income tax return.

For filing your TDS refund, it is compulsory to quote bank account details such as account number and IFSC code. Failing to do so will not generate a valid file for you. In case if someone deducts more tax than he should have deducted, then there will be an income tax refund, which can be claimed upon the filing of the annual income tax return (ITR).

For example, you own a transport agency, and yours is a proprietorship firm. You presented an invoice for Rs. 20,000/- and the person paying freight paid you a net amount of Rs. 19,600/- (after deducting tax of Rs. 1,000/- @ 2% under section 194C). In this case, the tax will be deducted at 2% instead of 1% and hence deducted excess TDS by Rs. 200/-. This excess TDS of Rs. 200 will arise as a refund in the income tax return, according to the Income Tax Act, 1961.

Ensure Proper TDS Deduction

Tax Deducted at Source is an essential legal obligation for everyone earning an income. It ensures that there is no tax evasion as it is levied at the source itself. Every employer, as well as individuals, should give proper attention to meeting with this deduction. It is because non-filing or late filing of Tax Deducted at Source will attract penalties and fines.

Along with being aware of how to file ITR, Individuals at their end should share proper documentation with the employer as well as check online for any updates in TDS provisions. It will ensure that your employer makes the right Tax Deducted at Source declaration from your salary income.

Wealthcafe Advice

There is only a single refund i.e. Income Tax Refund which is an excess of tax already paid by way of TDS, TCS, advance tax or self-assessment tax less tax on your total income. You can get a refund of additional tax only after filing your income tax return for that particular year.

In other words, there is no other method to get a refund other than by filing an Income Tax Return.

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