UNDERSTANDING TAX DEDUCTED AT SOURCE (TDS)

OVERVIEW OF TDS

TDS is one of the modes of collection of taxes, by which certain percentage of amounts are deducted by  a person at the time of making/crediting certain specific nature of payment to the other person and deducted amount is remitted to the Government account.

It is similar to "pay as you earn" scheme and also known as withholding tax in many other countries, one of the country is USA. It acts as a powerful Instrument to prevent tax evasion as well as expands the tax net.

WHO SHALL DEDUCT TAX AT SOURCE

Every person responsible for making payment of nature covered by TDS provision of Income Tax Act, 1961, shall be responsible to deduct tax.

HOW MUCH TAX IS DEDUCTED AT SOURCE

There is no uniform rate for TDS. It depends on the Source of Earnings. Here is a look at how much TDS is cut from the earnings.

• SALARY: This will include the maximum tax deduction allowed under section 80C, 80D & other tax saving instruments of the Income Tax Act, 1961. If despite of all these deductions, the salary is above the exemption limit, TDS will be cut from it every month.

• BANK ACCOUNT: TDS is cut only if the Interest earned from a Fixed Deposit or Saving Account is more than Rs. 10,000 annually. The Rate of TDS applicable is 10%.

• RENTAL INCOME: Any amount paid as Rent above Rs. 1,80,000 per year will attract TDS at 10% for Individual/HUF and 20% for others.

• PROPERTY: TDS at the rate of 1% is applicable on Properties sold for over Rs. 50 lakh in a town or city and over Rs. 20 lakh in a rural area.

• GOLD AND SILVER: Purchase of Bullion (Gold & Silver) in cash for an amount exceeding Rs. 2 Lakh, TDS at the Rate of 1% is applicable.

• NATIONAL SAVING SCHEME: TDS at the rate of 20% is applicable on Payment which is above Rs. 2500.

• DEBENTURES: Interest earned from an Investment in debentures will be exempt up to Rs. 5,000. The Rate of TDS applicable is 10%.

• LOTTERY, PUZZLE, COMPETITION OR HORSE RACE: Winnings up to Rs 10,000 in case of a Lottery and Rs. 5,000 for a Horse Race are exempt from TDS. The Rate of TDS applicable is 30%. 

HOW TO SAVE ON TDS

If the Income is below the taxable limit, but the Interest earned from the Deposit is above Rs. 10,000, an Assessee can request to bank not to deduct tax. For this purpose Form 15G and Form 15H are self-declaration Forms required to be furnished by the Assessee to his banker for Nil deduction/Lower deduction of TDS on Interest on Fixed Deposit at the beginning of the financial year.

CONSEQUENCES OF DEFAULTS

An Assessee cannot avoid paying taxes by not declaring Permanent Account Number (PAN). If he fails to do so or mention it incorrectly, the TDS rates will be applicable at the higher rate of 20% or in case of misuse of the Form 15G facility he shall be penalised.