Full Form of TDS – Tax Deducted at Source
The full form of TDS is Tax Deducted at Source. TDS provisions are given in the Income Tax Act, 1961. Using TDS, income tax is collected at the source of income generation. The one who makes payment to another person deducts TDS out of the amount and remits the amount to the government on behalf of the receiver. In this fashion, the tax authorities get a specified percentage of tax in advance. The receiver, at a later date, will file his return of income and offer the income for tax and take credit for the TDS deducted earlier.
TDS Deduction Process
The payer (‘Deductor’) deducts a specified percentage of tax on specified income on behalf of the receiver (‘Deductee’) of the income. The amount hence deducted in e challan ITNS 281 is deposited with the government. The deductor also must file quarterly TDS returns. The receiver can claim credit of the TDS deducted while filing the Income-tax return by way of deduction from the tax payable amount. The person who should deduct TDS is specified under the sections covering TDS. it should be deducted at the time of payment or credit whichever is earlier.
Example
If A pays Rs. 10,000 to B as Consultancy charges, then A needs to deduct 10%, i.e., Rs. 1,000 and remit to the government and pay B Rs. 9,000. The amount received by B will be Rs. 9,000 as bank receipt and Rs. 1,000 as TDS credit with the government. B can adjust the TDS credit at the time of filing the return of income with the tax payable by B. At the end of the year, if B has tax payable of say, Rs. 5,000, then B can adjust Rs. 1,000 of TDS credit and remit balance Rs. 4,000 with the government.
Types
The TDS deduction has been specified for different types of payments in TDS sections 192 to 196D. Common and most frequent heads where it is deducted are payment in nature of Salary, Interest, Dividend, Commission or brokerage, Contractors, Rent, Transfer of Immovable property, Payment to a non-resident, Professional Consultancy. The rate of TDS deduction is enclosed as annexure. It is deducted as per the rates, and deduction is subject to threshold limits of payment given under these sections. In case of payment to non-residents, rates as per DTAA also needs to be considered.
Why is TDS Deducted?
The government uses Tax Deducted at Source as a tool to check tax evasion. It is deducted at the time of income generation by the third party rather than by the earner of income. In this way, the government collects tax in advance rather than at a later date while filing income tax returns or paying advance tax. This also brings to the knowledge of the tax authority’s various income earned by the receiver of income, which they can verify using the income tax return filed.
TDS Certificate
Tax Deducted at Source certificate is issued by the deductor to the deductee. It is mandatory to issue the certificate to the deductee. Form 16 is the annual TDS certificate, which is relating to salary, and Form 16 A is a quarterly TDS certificate, which is for other than salary. They provide all details of TDS for transactions between the deductor and the deductee. TDS certificate should be generated only from the Traces portal. Process for TDS certificate is – Deductor logs into the traces portal and goes to the download tab. The form must be selected and details filled, after which the TDS certificate can be downloaded. TDS certificate must be issued within 15 days from the date of filing of quarterly TDS returns.
Payment Due Dates
The due date for payment of TDS is as under:
- For Government Deductors – 7th of the next month if paid through challan, Same day if paid through book entry.
- For Non-Government Deductors – For April to Feb – 7th of next month, For March – 30th April.
The due date for filing TDS return is as below:
TDS on purchase of property – time limit is the 30th day of the following month in which property is purchased.
Procedure for E-Filing of TDS Return
Prerequisites:
- Valid TAN no and E-filing portal login.
- Prepare statements using Return Preparation Utility (RPU) validated with File Validation Utility (FVU) downloaded from Tin-NSDL.
- Valid DSC should be registered in e-filing. Alternatively, the Principal contact’s PAN can be linked with Aadhar or bank account validated to file using EVC.
Procedure to Upload:
- Log in to the Income-tax e-filing portal.
- Go to TDS – Upload TDS.
- Select appropriate details for FVU Version, Financial Year, Form Name, Quarter, Upload Type.
- Click validate to validate statement details.
- Upload the TDS ZIP file, which is a statement prepared using the utility downloaded from the Tin-NSDL website or third-party software.
- Affix the digital signature and click on the upload button.
Advantages
- It helps in the prevention of tax evasion.
- It generates steady cash flow to the government.
- Helps the deductee in reconciling income generated with TDS deduction by the deductor.
- Lessens burden of tax collection responsibility of government as the burden of tax deposit is shifted to the deductor.
Disadvantages
- Increase in Compliance burden for deductor.
- The blockage of cash flow as TDS is deducted at the time of income generation while credit is available only at the time of filing of an income tax return.
- In case of the wrong deposit of TDS by the deductor, the deductee could not claim TDS credit for no fault of his.
Points to Remember
Interest, penalties, and prosecutions are associated with TDS provisions. Hence the deductor should be careful in timely compliance with provisions of TDS. Further, the rates of tax and sections should be correctly accounted for by filing quarterly returns; the PAN number of parties should be correctly entered. Due dates of various filings and tax deposits need to be tracked.
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