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

A small guide to Tax Deducted at source

In this post, We’ll discuss TDS, or Tax Deducted at Source. We’ll go through everything to know about TDS, including what it is, when it’s used, and how it works.

 In which we will look into the following topics in detail:

What is TDS?

TDS, or Tax Deducted at Source, is income tax deducted from payments made by a person at the time of such payments, such as rent, commission, professional fees, salary, interest, etc. Usually, the person receiving income is liable to pay income tax

The government ensures, however, that income tax is deducted in advance from payments you make using the Tax Deducted at Source provisions. A recipient of income receives the net amount (after subtracting TDS).

Tax deducted at source is added to the recipient’s income, and the amount of TDS will be added to his final tax obligation. Amounts already deducted and paid on his behalf are credited to the recipient.

New updates

New Section 194S: At the time of payment of the transfer of virtual digital assets, a person is subject to a 1% Tax Deduction at Source (TDS).

Sale of immovable property under Section 194-IA: The amount on which TDS should be deducted is recommended to be changed. The individual purchasing the property shall deduct 1% of the amount paid/credited, or the stamp duty value of the property, whichever is greater.

New Section 194R: Any person who provides perks or benefits to any resident, whether convertible into money or not, for carrying on any business or profession by such resident should deduct TDS at a rate of 10%.

Different types of TDS

TDS is deducted from a variety of payments, such as:

  • Amount under LIC
  • Salaries
  • Interest payments by banks
  • Payment of commission
  • Deemed Dividend
  • Payment of rent
  • Brokerage or Commission
  • Remuneration paid to the director of a company, etc
  • Compensation for acquiring immovable property
  • Payments made to consultants
  • Payments to lawyers or freelancers
  • Transfer of immovable property
  • Winning from games like a crossword puzzle, card, lottery, etc.

Advantages of TDS

The main advantages of TDS are:

  • 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 help in the smooth running of the government.
  • Deductees are much more convenient because the tax amount payable is automatically deducted.
  • Tax Collection Agencies have a much lighter load to collect tax

What is TDS on salary and how to claim a refund?

TDS on salary refers to the amount of tax withheld from an employee’s pay. Due to this, your employer deducted your money and deposited it with the government on your behalf.

Follow the steps below to get a TDS refund on your salary:

  • You must file an income tax return if your employer deducts TDS in addition to the tax that you actually owe
  • Provide the bank account number, the bank’s name, and the IFSC code.
  • After you file an income tax return claiming a TDS refund, it takes the income tax officer a few months to sanction your return.

TDS Due Dates of FY 2020-21 for Return filing

The following are the TDS Payment filing deadlines for FY 2020-21.

Quarter            Period Due Date for filing 
Quarter 1April 2020 to 30 June 202031 March 2021
Quarter 2July 2020 to September 202031 March 2021
Quarter 3October 2020 to December 202031 January 2021
Quarter 4January 2021 to March 202130 June 2021

How and When to file TDS return?

Every person who has deducted TDS must file a TDS return. The TDS return needs to be submitted quarterly, and various details have to be furnished like the TAN, the amount of TDS deducted, the payment type, the PAN of the deductee, etc. 

Also, 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 24QTDS (on Salary)Q1 – 31st JulyQ2 – 31st OctoberQ3 – 31st JanuaryQ4 – 31st May
Form 26QTDS (on all payments except salaries)Q1 – 31st JulyQ2 – 31st OctoberQ3 – 31st JanuaryQ4 – 31st May
Form 27QTDS (on all payments made to non-residents excluding salary)Q1 – 31st JulyQ2 – 31st OctoberQ3 – 31st JanuaryQ4 – 31st May
Form 26QBTDS (on sale of the property)30 days from the end of the month in which TDS is deducted
Form 26QCTDS (on rent)30 days from the end of the month in which TDS is deducted

What is a TDS certificate?

There are two types of TDS Certificates: Form 16 and Form 16A. A certificate showing the amount that has been subtracted as tax must be provided to the deductee according to Section 203 of the Income Tax Act, 1961. The deductor is liable to provide this form to the deductee.

  • For salaried class: Salaried employees must be provided with Form 16 indicating the amount of TDS deducted by their employers. This form contains a variety of details, such as how to compute tax, deduct tax, and pay TDS. Employees must receive this form by May 31 of the next fiscal year.

  • For non-salaried class: Form 16A is provided by the deductor to the deductee, which contains all the information related to the computation of tax, TDS deductions, and payments.

Who do TDS deductions and what is the timeline?

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 is made by an individual or HUF who is exempted from the tax audit.

In the 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.

Challan for TDS payment

The Challan ITNS 281 is used to pay TDS (Tax Deducted at Source) and TCS (Tax Deducted at Source) online (Tax Collected at Source). Tax Deducted at Source / Tax Collected at Source (TDS/TCS) from corporations and non-corporations is covered by Challan No. 281. 

The TDS exception is an Indian government approach in which a tax deduction is made at the source of an income, calculated at a specified rate, and then paid to the Income Tax Department.

Penalty for Late Filing TDS Return

Here is the penalties levied by the Income Tax Department for the failure to submit or defaults in submitting your TDS return/statements:

  • Failure to submit your returns: A penalty of Rs.100 will be levied for each day that returns remain unsubmitted, up to a maximum of the TDS amount, under Section 272A (2) of the Income Tax Act.
  • Failure to file your returns on time: There is a penalty of Rs.200 for each day the return remains unfiled, up to the maximum amount of TDS under Section 234E of the Income Tax Act.
  • For defaults in the filing of TDS statement: If the deductor fails to file the TDS return within the due date as per Section 271H of the Income Tax Act, a penalty of Rs.10,000 to Rs.1 lakh will be charged.
  • For incorrect details: If the deductor submits false information regarding PAN, challan particulars, TDS amount, etc., a penalty of Rs 10000 to Rs 1 lakh will be assessed under Section 271H of the Income Tax Act.
  • Non-payment of TDS: If TDS is not paid by the due date, interest will be charged in addition to the penalty under Section 201A of the Income Tax Act. If a portion or all of the tax is not deducted at source, interest of 1.5 percent per month will be imposed from the day the tax was deductible until the date the tax is actually deducted.

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