All You Want to Know About TDS (Tax Deducted at Source)
Tax Deducted at Source (TDS), is a system established by the Indian Income Tax Act for collecting tax at the point of income. Through this scheme, tax is paid on time, and tax evasion is reduced to zero by deducting a given proportion of tax at the time of payment of salary, rent, interest, professional charges, etc. Following is all that you want to know about TDS (Tax Deducted at Source). File your TDS/TCS returns now at TaxDunia.
Overview
TDS refers to Tax Deducted at Source. It is a direct taxation system wherein the deductor (payer) deducts a specific percentage of tax from the amount being paid to the deductee (payee). The deductee is then paid to the government. For example:
- If your employer is deducting 10% TDS on a salary of ₹50,000 every month, ₹5,000 will be paid as tax, and you will be paid ₹45,000.
- The amount deducted can be seen either in Form 26AS or in the deductor’s TDS certificate. It is advantageous to both the taxpayers and the government.
- Taxpayers do not have to pay in a lump sum at the end of each year.
- The government obtains consistent revenue flow.
Major Benefits of TDS
Avoid Tax Evasion: Since taxes are collected at the source, it is more difficult for people or organizations to avoid paying taxes.
- Ease of Compliance: Rather than paying taxes in a lump sum at the end of the year, taxpayers pay incrementally.
- Regular Revenue for Government: Periodic deductions guarantee regular inflow into government coffers
Types of Payments Subject to TDS
TDS is levied on various kinds of payments, such as:
- Salaries (Section 192)
- Rent (Section 194I)
- Professional or technical fees (Section 194J)
- Interest on securities (Section 193)
- Dividends (Section 194)
- Commission and brokerage (Section 194H)
- Payments to contractors (Section 194C)
- Winnings from lotteries or games (Section 194B)
Each has its own rates and threshold limits.
Threshold Limits for TDS
TDS is only required when payments cross certain threshold limits specified by law. For instance:
- Rent: Threshold raised from ₹2.4 lakh annually to ₹6 lakh w.e.f. April 1, 2025.
- Contractor Payments: No TDS if aggregate payments in a financial year are less than ₹1 lakh or if one transaction is less than ₹30,000.
If payments are less than these thresholds, no TDS is deducted.
How is TDS Calculated?
The formula for TDS calculation varies with the type of payment and rate applicable. Consider the following example:
- Determine the nature of income and the section applicable.
- Determine if the payment is more than the threshold limit.
- Apply the rate specified.
For example:
If rent paid is ₹7 lakh per year and the rate is 10%, then TDS = ₹7,00,000 × 10% = ₹70,000.
For salaries, TDS is computed in terms of income slabs after exemptions such as HRA or deductions under Section 80C.
Latest Changes for FY 2025-26
Raised Thresholds:
- Rent: From ₹2.4 lakh/year to ₹6 lakh/year.
- Senior citizen interest income: From ₹50,000 to ₹1 lakh/year.
New Rates:
- Insurance commission: Cut down to 2% from April 2025.
- Professional fees above ₹50 lakh: New rate of 2%.
Steps to File TDS Returns
Filing TDS returns keeps one in compliance with tax laws and enables deductees to obtain credit for deducted amounts:
- Collect Necessary Information: Gather deductee PAN details and payment history.
- Use TRACES Portal: Log on to the official TRACES portal for return filing.
- File Quarterly Returns: Submit returns within timelines for every quarter on Form 24Q (for salaries) or Form 26Q (for non-salaries).
- Issue TDS Certificates: Issue Form 16 or Form 16A to deductees as evidence of deduction.
Advantages of TDS
- Convenience: Saves financial load by paying tax over some time.
- Transparency: Allows proper documentation and monitoring through Form 26AS.
- Refunds: In case of excess deduction of tax, taxpayers can receive refunds while submitting income tax returns.
Common Issues and Solutions
Incorrect Deductions:
- Ensure correct PAN information to prevent increased deductions.
- Use current rates and limits.
Missed Deadlines:
- Late submission incurs a penalty under Section 234E (₹200/day).
- Use reminders for quarterly submissions.
Over-Deduction:
Claim refunds at the time of annual return submission if more tax is deducted.
Get Started with TaxDunia
TDS plays a pivotal role in India’s taxation system by ensuring timely collection and reducing evasion risks. By understanding its provisions, rates, and filing requirements, taxpayers can comply effectively while minimizing financial stress during year-end filings. Whether you’re an individual taxpayer or a business entity responsible for deductions, staying updated with changes like threshold revisions or new rates is crucial for smooth compliance. Reach out to TaxDunia to file your TDS returns now with ease. We will handle all the paperwork while you stay focus on your business, hassle free solutions for reducing compliance burdens.
