Tax Deducted at Source (TDS) is a mechanism introduced by the Income Tax Department of India to make sure that taxes are collected on time. It is deducted at the source of income generated by the payer and is then deposited with the government. The TDS mechanism is meant to minimise tax avoidance via the collection of taxes at the time of income disbursement instead of waiting for the financial year to end.**
How Does TDS Work?**
TDS works by requiring certain payments, such as salaries, interest, rent, or commissions, to be deducted at a prescribed rate before they are paid to the recipient. For instance, when banks pay interest on fixed deposits (FDs), they deduct tax at source if the interest earned exceeds a specified threshold. The deducted amount is then deposited with the government, and the recipient receives a TDS certificate as proof of tax deduction.
What are the Different Types of TDS?**
TDS applies to various types of income, including but not limited to:
1. Salary Payments
2. Interest on Fixed Deposits
3. Rent Payments
4. Commission or Brokerage
5. Professional Fees
6. Sale of Immovable Property
Among these, TDS on FD (Fixed Deposit) is one of the most common forms of tax deduction.
TDS Rates on Common Payments in India**
The TDS rates vary based on the type of income and the recipient's category (individual, senior citizen, or corporate). Below are some common rates:
Income Type
| TDS Rate
|
Interest on FD
| 10% (if PAN is provided)
|
Salary
| As per income tax slab rates
|
Rent on Property
| 10% for commercial purpose and 2% for residential purpose. 2% for resident individual and HUF payer (With effect from 1.10.2024)
|
Professional Fees
| 10%
|
For interest on FD the default rate is 10% if the PAN is provided. If PAN is not provided, the rate percentage increases to a value of 20%.
Who is Liable to Deduct TDS and When?**
The liability to deduct TDS lies with the payer, such as an employer, bank, or business entity. For TDS on FD, banks and financial institutions deduct the tax when the total interest earned exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.
TDS Exemptions: Payments Not Subject to TDS**
Certain payments are exempt from TDS deduction under specific conditions:
- Interest below the threshold: Interest earned on FDs below ₹40,000 (₹50,000 for senior citizens) is exempt from TDS.
- Submission of Form 15G/15H: If you submit Form 15G or 15H declaring that your total income is below the taxable limit, no TDS will be deducted on satisfying certain conditions.
- Tax-free investments: Income from tax-saving instruments such as life insurance policy maturity benefits or interest from tax-free bonds is exempt.
TDS Return: Filing Process & Key Steps**
Deductors of TDS are required to file TDS returns quarterly. The key steps for filing are:
1. Gathering the TDS details, including PAN of the deductees and the amounts deducted.
2. Using the official TDS return filing utility provided by the Income Tax Department.
3. Verifying the details and generating the TDS return file.
4. Submitting the file online through the TRACES portal.
Understanding the TDS Certificate**
Once TDS return is process successfully, the payer provides a TDS certificate (Form 16/16A) to the recipient as proof of tax deduction. This certificate includes details, such as the TDS amount, PAN of the deductor, period, and the income against which TDS was deducted. It is essential for claiming credit while filing your income tax returns.
Example of TDS Calculation**
Here’s an example to understand how TDS on fixed deposits is calculated.
1. Interest Earned on FD: ₹50,000
2. Threshold for TDS: ₹40,000 (₹50,000 for senior citizens)
3. TDS Rate (194A): 10%
- For individuals under 60 years of age:
Interest exceeding the threshold = ₹50,000 - ₹40,000 = ₹10,000
TDS Deducted = ₹50,000 x 10% = ₹5,000
No TDS is deducted as the interest does not exceed the ₹50,000 threshold.
Key Updates on TDS in the Latest Budget**
The government periodically revises TDS provisions to simplify compliance and address economic priorities.
Key updates include:
- An increase in the TDS exemption threshold for senior citizens (from ₹40,000 to ₹50,000 for FD interest).
- Digital tax administration to ensure transparency and efficiency.
- Simplified TDS return filing process for small taxpayers.
How to Claim a TDS Refund?**
In case of excess deduction of TDS, claim a refund while filing your income tax return:
1. Calculate your total tax liability using an income tax calculator.
2. Enter the TDS details as per your Form 16/16A in your ITR.
3. Submit the ITR and wait for the refund to be processed.
Common Penalties & Consequences of Late TDS Filing**
A failure to comply with TDS provisions can lead to penalties.
- Late Filing Fee: ₹200 per day until the return is filed (subject to a maximum of the TDS amount).
- Interest on Delayed Payment: 1-1.5% per month depending on the delay i.e. whether the delay is on account of deduction or deposit as the case may be.
- Disallowance of Expenses: Deductors may face disallowance of 30% of the expense if the tax is not deducted or deposited on time.
Tax-Saving Investments for Your TDS Refund**
You can invest your TDS refund in tax-saving instruments to further reduce your taxable income. Popular options include:
- Life Insurance: Premiums paid for a life insurance are deductible under Section 80C.
- Fixed Deposits: Opt for tax-saving FDs with a 5-year lock-in period.
- Equity-Linked Savings Scheme (ELSS): Offers market-linked growth and tax benefits.
What Happens After TDS Deduction?**
After TDS is deducted, the payer deposits the amount with the government and files a TDS return. The deducted amount is reflected in Form 26AS and can be claimed as a credit while filing income tax returns.
Can TDS Rates Change Within a Financial Year?**
Yes, TDS rates can change mid-year due to amendments in the Income Tax Act or announcements in the Union Budget. It’s important to stay updated on these changes to ensure accurate compliance.
TDS Payment Due Dates & Important Deadlines**
The due dates for TDS payment vary:
Type of TDS
| Due Date
|
TDS deducted in a month
| 7th of the following month
|
TDS for March
| 30th April of the same year
|
TDS is an essential component of India’s tax framework, ensuring tax collection at the source of income generation. For individuals earning interest on fixed deposits, understanding TDS on fixed deposit, its rates, exemptions, and refund processes can help manage tax liability effectively. By staying informed and using tools such as an income tax calculator, you can optimise your financial planning and compliance.
FAQs**
What is the full form of TDS?
TDS stands for Tax Deducted at Source.
What is the TDS rate on salary?
TDS on salary is deducted as per the individual’s applicable income tax slab rate.
How does TDS affect salaried employees?
TDS ensures that taxes are deducted monthly, reducing the year-end tax burden and ensuring compliance.
Is PAN required for TDS deduction?
Yes, providing your PAN ensures a lower TDS rate (e.g., 10% for 194A TDS rate). Without PAN, the rate increases to 20%.
What is the role of the TDS challan?
The TDS challan serves as proof of tax deposit, linking the deducted amount to the taxpayer’s PAN.
What is the TDS on property transactions?
TDS on the sale of immovable property is 1% of the transaction value if it exceeds ₹50 lakh.
What is the new TDS threshold for senior citizens?
For senior citizens, TDS on FD interest is applicable only if the interest exceeds ₹50,000 annually.
Can I avoid TDS deduction? How?
Yes, by submitting Form 15G/15H, provided your total income is below the taxable limit.
File your ITR, report the TDS details, and claim the refund of the excess amount deducted.
Who is eligible for TDS return?
Any individual or entity whose TDS deduction exceeds their actual tax liability is eligible for a refund.
** Tax exemptions are as per applicable tax laws from time to time.