Starting financial year 2023-24, anyone earning less than Rs 7 lakh a year need not pay any tax or file tax returns, barring certain conditions.
However, the government still mandates upfront tax payments for those earning Rs 2.5 lakh a year or more. These are done in the form of tax deducted at source (TDS) or tax collected at source (TCS).
These upfront tax deduction ensure the government doesn’t have to chase citizens for tax collection at the last minute.
To be sure, TDS is paid on income earned. TCS is tax paid on certain expenses.
Here is a guide on upfront tax collections and how you can avoid or adjust them, if you earn less than Rs 7 lakh.
Which payments are liable to tax payment upfront?
TDS is an amount deducted when certain payments like salary, commission, rent, interest, professional fees, share dividends, crypto currency gains, and lottery or horse-race winnings, etc., are made.
For instance, if you pay a rent of Rs 50,000 per month, you would have to first deduct a tax of 5 percent, or Rs 2,500 per month, and make sure you deposit it every quarter with the government.
Similarly, foreign tours and payments abroad would be brought under a steep 20 percent TCS from July 1, 2023.
To get an idea of how it benefits in tax collection, note that Rs 60.46 crore was collected last financial year as tax for virtual assets transactions (cryptocurrency trades).
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Why did my tenant collect higher TDS than notified?
While the rate for each payment category is decided (see table), the rate could be doubled if the TDS exceeds Rs 50,000 and there is no return filed against your permanent account number (PAN) for the past year, or even if your AADHAR and PAN aren’t linked by June 30, 2023.
Also read | Finmin's Rs 7-lakh relief to taxing foreign spends on credit cards can't resolve TCS crisis
But once TDS is paid, can you safely avoid disclosing that income?
Not quite. You need to calculate your total tax and pay the balance based on your tax slab.
“One general myth about TDS is that the TDS is the final tax liability and no further tax is required to be paid. This is mostly because the TDS rates are different, as compared to the applicable tax rate on the total income,” said Dr. Suresh Surana, Founder, RSM India.
For instance, 10 percent of dividends exceeding Rs 5,000 are cut for resident Indians. But if your total income is high and you fall in the 30 percent tax bracket, an additional 20 percent tax should be paid on the dividend income.
Also read | TCS rules on foreign tours, magazine subscriptions, iTunes, international equities… all doubts clarified
Can you claim any extra tax back?
Yes, if you earn less than the basic tax exemption limit of Rs 7 lakh, you can claim a TDS/ TCS refund. But the same can be claimed only by filing tax returns. After filing and verifying your income-tax returns, the excess tax is credited to your bank account within six months.
My employer has cut taxes and given me a TDS certificate. So, I don’t need to worry about more taxes now?
The tax axe doesn’t end with the employer, who may just take into account salary income and deduct taxes based on your tax regime and investment declaration for Section 80 (C), 80 D etc. But one may have many other income sources and they need to be accounted for and the relevant tax needs to be borne.
“Taxpayers, however, are required to take into consideration other income, such as rental income, interest income, etc., for the purpose of determining the final tax liability,” says Suresh Surana of RSM India.
Also read | How will tax on foreign tour spends on credit cards affect your holiday. The complete guide.
I couldn’t submit investment proof. So, a lower tax was deducted during the first seven months. Will I be forced to pay more TDS in February and March?
To avoid a large tax outgo in one particular month, employers request tax regime and investment declaration at the start of the year. Accordingly, the overall tax is divided across monthly salary, taking into consideration the advance tax needs as well.
But if you don’t stick to your tax-saving investments, the tax outgo increases due to lack of deduction. This could lead to higher taxes towards the end of the financial year.
Amit Gupta, MD, SAG Infotech, says: “If the employee fails to provide documentation of investments and expenses, the employer will recalculate the TDS for the year and deduct more TDS in such circumstances.”
How to avoid TDS and TCS deductions if income is below Rs 7 lakh?
You would have to take steps at the start of every financial year to avoid TDS/ TCS.
“If you are in the low-income category, you can use the Form 15G/H to avoid deduction of TDS and TCS,” said Paras Savla, partner at KBP and Associates. Another declaration form can be given to the Income-Tax Department to avail a certification for low income to ensure TDS and TCS aren’t applied to your transactions, adds Savla.
Considering Rs 7 lakh is now the basic tax exemption limit, do you think people with income below Rs 7 lakh can claim the TDS and TCS by filing a tax return?
Yes, taxpayers in the new tax regime would not be effectively liable to pay any tax in case their total income is up to Rs 7 lakh. Such taxpayers may claim the refund of TDS/ TCS (if any) as appearing in their Form 26AS.
I have opted for the new tax regime and earn less than Rs 7 lakh, but my tour operator deducted 5 percent TCS on my package. What can I do?
Overseas tour packages are subject to 5 percent (20 percent after July 1) TCS. So, if your total income is up to Rs 7 lakh, you may claim a refund of such TCS as your effective tax liability would be nil.
Can the tax adjustment be done only at the time of filing returns?
Apart from filing your own return at the end of the year, corrections can be requested when the person or organisation deducting your taxes files the quarterly TDS returns. “Tax adjustments are also possible by way of revision in the TDS returns,” says Surana.
So, if a TDS on dividend has been deducted by a registrar in May 2023, even though your total dividend was less than Rs 5,000, you can ask the registrar to adjust your TDS in his return for the next quarter of September 2023.
The amount of TCS mentioned in my Annual Information Summary is wrong. What can I do?
TDS/TCS details are mentioned in Tax Certificates, Annual Information Summary (AIS), Tax Information Summary or Form 26AS. Verify and check for any errors. Mismatch between the numbers you mention and those mentioned in your returns could lead to delays in processing of returns, refunds and a notice from the Income-Tax Department.
“In case of any deviation, the taxpayers should inform the deductor/ collector and get the TDS/TCS returns revised,” says Surana.
As the updating takes time, one should initiate verification much before filing the tax returns.
I deducted TDS before paying the landlord, but I forgot to file TDS returns. Do I have to face any penalty?
Yes, if one fails to file the TDS/TCS return on or before the due date, a late fee of Rs 200 is levied daily. But if you prove that after depositing TDS/ TCS in the government’s account that you filed the TDS/ TCS return with a year from the due date, the penalty may be waived off.