What is TDS?

To all bread-earners out there...

Do you notice a chunk of money gone missing from your salary on your payslips? Are you wondering where it went? It could be your TDS, and we are here to tell you all about it. Read on to know all about it.

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:

1. Exemption Limit: No deduction of tax at source unless the estimated salary exceeds the exemption limit.

2. 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.

3. 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.

Rates of TDS Deduction

There are more than 20-25 sections that prescribe different types of payments on which TDS is applicable. Here is a list of some of the most commonly encountered types of payments on which tax is deducted at source.

Section	Nature of payment	Rate of TDS
192	Salary	15% (Education and higher education cess @ 2% & 1% respectively in cases where salary exceeds INR 1 crore)
194	Deemed Dividend u/s 2(22)(e)	10%
194A	Interest other than interest on securities	10%
194C	Payment or credit to a resident contractor/sub-contractor	1% (in cases of individuals and HUF) 2% (in case of a person other than individual or HUF)
194D	Insurance Commission	5% (in cases of individuals and HUF) 10% (in case of a person other than individual or HUF)
194G	Commission on the sale of lottery tickets	10%
194H	Commission or Brokerage	10%
194-I	Rent	2% (rent of plant & machinery) 10% (rent of land or building or furniture or fixtures)
194-IA	Payment/credit of consideration to a resident transferor for transfer of any immovable property (other than rural agricultural land)	1%
194J	Professional fees, technical fees, royalty or remuneration to a director	10%
194LA	Payment of compensation on acquisition of certain immovable property	10%

How to Calculate TDS?

As numerous transactions are covered under the purview of TDS sections, the calculations can get a little tricky. Though the basic salary is fully taxable according to respective tax brackets, there are some exemptions available as allowances and perks. Let's look at the way to calculate TDS:

1. Firstly, calculate the gross monthly income as the sum of basic income, allowances, and perquisites.

2. Then, calculate the available exemptions like medical, HRA, travel, etc. that fall under the purview of Section 10 of the Income Tax Act (abbreviated as ITA).

3. Next, reduce exemptions according to step 2 from the gross monthly income calculated in step 1.

4. TDS is calculated on yearly income, hence, multiply the corresponding figure by 12 to get your annual taxable income from salary.

5. If you have any other income sources - such as freelancing, income from house rent or housing loan interests - then you would have to add/subtract this amount from the figure in step (4).

6. Calculate your investments under Chapter VI-A of ITA; deduct this amount from the gross income calculated in step (5). You must know that each individual is entitled to an investment of up to INR 1.5 lakhs in specific investment instruments.

7. Next, deduct the maximum allowable income tax exemptions from your salary.

8. Now that you have calculated your total taxable income, check which tax slab it falls under and calculate how much tax you owe. If your taxable income is below INR 2.5 lakhs, then you aren’t required to pay income tax.

Do note that:

• The tax bracket has changed after the Union Budget in 2019; so you should check it before calculating your taxes.

• Senior citizens have different tax slabs and receive higher exemptions than those discussed above.

How to Check TDS Online?

TDS is deducted when employees receive salary. You can check it yourself without anyone’s help, and it’s free of cost! It takes only a few minutes to review the credit of TDS deducted. Here are the steps to check TDS credit on Form 26AS:

1. Go to the Income Tax portal.

2. Next, register (if you haven't already) and login to the portal.

3. Then, go to ‘My Account’ and click on "View" to view Form 26AS.

4. Next, select the financial year and download the PDF file and to proceed further.

5. Open the downloaded file. The password to this file is your date of birth as mentioned on your PAN card.

6. After opening the form, you will get information regarding your total income on which TDS is deducted and the TDS credited to your account.

7. If you have internet banking facility that is linked with your PAN, then use your bank’s net banking portal to check TDS.

How to Avoid TDS?

If your total income in a financial year is below the exemption limit, you can ask the deductor not to deduct TDS by submitting Form 15G/15H. Also, while receiving payment that is subject to TDS, the deductee is required to provide his/her PAN details to avoid tax deduction at the higher rates.

Final Thoughts

Managing tax compliance becomes a difficult task without help. That's why mymoneykarma's ITR tool will help you manage your taxes better and live stress-free when income tax comes knocking. It can also help you avoid penalties arising due to non-compliance. In case your TDS deduction has gone a but over the top, don't you worry - you can get it back easily by e-filing yout Income Tax Returns (ITR).

This article is purely educational and should not be considered as tax advice. mymoneykarma does not provide tax advice. For tax counsel, please reach out to a tax advisor.