Tax Deducted at Source - What is TDS?

TDS stands for ‘Tax Deducted at Source’. You’re surely aware of income tax, aren’t you? Well, if your total income in a financial year falls under the income tax bracket, then you are bound to pay an amount every year as your income tax. Income tax is applicable not only on your salary but also on all other types of income you may have from various sources. These ‘sources’ often deduct a certain percentage of the payment as tax. That amount is your tax deducted at source or TDS. The deducted amount is deposited with the government and qualifies as your share of income tax for that particular income. Once deposited, the amount reflects the Form 26AS of the deductee. TDS applies to earnings from several financial instruments and business transactions.

The types of payments that TDS deduction is applicable for are:

• Salaries
• Commission payments
• Interest payments by banks
• Rent payments
• Professional fees
• Consultation Fees
  

How Does it Work?

The Indian tax structure is broadly divided into a two-dimensional approach, wherein the first method allows for the taxes to be paid voluntarily after careful evaluation of income during the financial year. And, in the second method, TDS deduction is the spot deduction of tax at the very source of income itself. This method aims to simplify the taxation procedure and ensures that every individual/company is adhering to the same.

An organization or person that makes the payment after deducting TDS is called a ‘deductor’, and the organization or person receiving that payment is called the ‘deductee’. It is the deductor's responsibility to deduct the payment and submit it with the government. There is no standard rate for TDS deduction, and it can range from 1% to 30% depending on the source of the concerned income. If the deductee isn’t liable to pay the deducted amount as tax, the amount can be claimed in the form of a tax refund after they file their ITR.
A Brief Example

To understand the concept of TDS, let's observe an example: Jasper Ltd. makes a payment of 50,000 INR towards professional fees to Mr. AC. Jasper Ltd. deducts a tax of 5,000 INR and makes a net payment of 45,000 INR to Mr. AC. Then Jasper Ltd. directly deposits the deducted amount with the government. If Mr. AC’s total income in the concerned financial year doesn’t require him to pay that 5000 INR as income tax, then Mr. AC can file an ITR and get back the amount.

TDS on Salary

How Much TDS Should be Deducted from Salary?

Organizations that are responsible for paying salary are liable to deduct tax on estimated salary at a prescribed rate of 15%. But that is also subject to the following:

• Exemption Limit: No deduction of tax at source unless the estimated salary exceeds the exemption limit.
  
  
• Free allowances: Allowances like HRA, LTC, conveyance, etc. as per prescribed limits and other perquisites that do not qualify as taxable salary should be deducted from the total salary during tax computation.
  
  
• Other deductions: Other deductions under section 80C, 80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E, 80EE, etc. should be taken into consideration before the calculation of tax on salary.

When is TDS Deducted?

The concept of TDS is solely based on the principle of deducting the tax at the time of payment. Employers deduct it while disbursing salaries. Banks deduct it while crediting interests.

What is the minimum salary for TDS on salaries to be deducted by the employer?

If the income from salary exceeds a sum of basic exemption limit even after comprehensive calculation of allowances, taxable perquisites, and deductions under chapter VI-A, then 15% tax has to be deducted by the employer.