May 21, 2013 06:56 PM IST | Source:

Tax deduction at sources and its workings

There are several details related to the entire TDS process that has to be seen carefully and hence here is a look at several terms as well as conditions related to this mode.

Arnav Pandya
Financial Advisor

The term Tax Deducted at Source (TDS) often leaves individual tax payers a bit confused about what this actually means and how it operates. There has been a wide expansion of the places where an individual will now encounter TDS. The general feeling is that since this is a mode of payment of taxes it completes the entire responsibility of the individual but this might not actually be the case. There are several details related to the entire TDS process that has to be seen carefully and hence here is a look at several terms as well as conditions related to this mode.

TDS is a way in which tax is collected and paid to the government. There are various transactions whereby a person receives income under different heads. The provision for TDS ensures that at the time of receipt of payment the receiver gets an amount that is reduced by a certain percentage with the only the net receipt coming to them. The amount that is deducted by the person or the entity paying the amount has to be deposited with the government and this will be considered as the tax payment made by the receiver. This ensures that there is a compulsory payment of tax for a certain amount every time there is an amount received.

One of the points that have to be understood in the TDS process is that the rates that are applicable for the TDS. The rate is nothing but the figure or percentage which has to be deducted at the time of the payment and deposited with the government. There is no single rate that is used for the purpose of TDS so this might seem confusing but it involves different rates for different uses. For example the rate for deduction on interest received on fixed deposits is 10 per cent (plus cess) while the rate for a salaried person has to be according to the slab that they fall into so this would go up as high as 30 per cent (plus cess) in a year.

A concept that often rises in case of a TDS transaction is that there is a certain threshold that has to be crossed when the entire system comes into play. This is nothing but a base till which the receipts do not involve any tax deduction but after this figure the TDS will come into effect. Again this figure could be different for various payments and hence the nature of the payment becomes an important factor.  In case of a salaried employee there would not be any TDS if the total income earned does not exceed the basic exemption limit. On the other hand in case there is a payment made for professional fees then this would require a TDS if the figure exceeds Rs 30,000 in a year.

The key part of the entire TDS process is the responsibility of the various parties involved. It is the responsibility of the person making the payment to look for the applicability of the TDS and then to actually deduct the amount at the time of the payment and then deposit this with the government. The responsibility of the receiver is to ensure that they consider the gross income that they have earned and then take the figure for the TDS separately in their tax workings. At the time of filing their income tax return the individual has to look at the overall picture to see that the total tax has to be paid. If there is a shortfall which can happen because the TDS rate is lower than the actual rate that has to be paid then the balance amount has to be paid. Just having a TDS does not mean that the tax payment process is over because the amount of the tax paid is also an important factor to consider.

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