What Is Tax Deducted At Source (TDS)? How Does It Work?

The Central Government introduced TDS (Tax Deducted at Source) to collect taxes from an individual’s very source of income. Under this concept, the deductor (who is liable to make payments to a deductee) is responsible for collecting tax and depositing the same to the government’s account.

The following sections will explain the concept of TDS, current rates and due dates. Read along to know more.

Understanding How TDS Works

TDS refers to tax deducted from any money paid by the person making such payments. In other words, whenever someone pays a recipient above a specific limit, he/she has to deduct TDS in advance. The recipient receives payment after TDS deduction and can later adjust the amount from his/her final tax liability.

TDS is applicable whenever an income is accrued or paid, depending on whichever is earlier. It applies to various sources of income such as salaries, interest from fixed deposits, commissions, dividends, rent, professional fees, etc. It is not applicable for all people, transactions or incomes. That said, the TDS rates are prescribed by the Income Tax Act, 1961.

For example, let’s say ABC Private Limited has paid Rs. 70,000 for office rent to a property owner. The company has to deduct TDS at 10% as per tax laws. Therefore, ABC Pvt Ltd will deduct Rs. 7,000 and pay Rs. 63,000 to the property owner who can add a gross income of Rs. 70,000 when filing taxes and credit Rs. 7,000 against tax liability.

Who is Liable to Deduct TDS and When?

For any payment, persons making specific payments (deductor/payer) must deduct TDS from the payment.
This rule is applicable for any tax-paying entity, including individuals, non-residents, companies, firms, HUF (Hindu Undivided Family), local authorities, BOI (Body of Individuals) and AOP (Association of Persons).
Your employer deducts TDS at income tax slab rates applicable for your annual income. Banks deduct TDS at a 10% rate and 20% if you do not furnish your PAN.
No TDS is to be deducted if the payer belongs to the individual/HUF category, and does not need to get the books audited.
Payers have to deduct a 5% TDS on rent payments of over Rs. 50,000 per month. This is applicable even if the taxpayer does not have to get a tax audit done.
If your total taxable income is below the taxable limit, no TDS deductions are applicable to your income. You can submit proof of tax-saving investments to your employer and Form 15G or Form 15H to your bank to prevent TDS deductions.

What Are the Latest TDS Rates for FY22-23?

There are a number of sections under the IT Act that stipulate TDS rates for different payments with different threshold limits (above which TDS is applicable). As per the Union Budget 2022, the following are the latest TDS rates for FY22-23 (or Assessment Year 2023-2024).

Section of the IT Act	Payment Type	TDS Rate	Threshold Limit
192	Salary	Normal slab rate	Total taxable income
193	Interest from securities	10%	Rs. 2,500
194	Income from dividends	10%	Rs. 5,000
194D	Insurance commission	5% for individuals; 10% for companies	Rs. 15,000
194EE	Payment from National Savings Scheme	10%	Rs. 2,500
194F	Payment for the repurchase of mutual fund units	20%	NA
194H	Any commission or brokerage	5%	Rs. 15,000
194-IA	Payment for transfer of immovable property	1%	Rs. 50 lakh
194-IB	Rent payment by individual/HUF not subject to tax audits	5%	Rs. 50,000
194N	Cash withdrawals over Rs. 1 crore	2%; 5% if aggregate withdrawal is over Rs. 1 crore in the previous year	Rs. 1 crore
194Q	On purchase of goods	0.1%	Rs. 50 lakh
206AA	TDS without PAN available	20% or higher as per provisions of the law	Specified by respective section

What is the Due Date for Depositing TDS to the Government?

The deductor (payer) has to deduct tax at the time of payment, credit to deductee (payee) account or actual payment, whichever is earlier. After this deduction, the payer has to deposit the money to the Government’s account within a certain time. The amount is deposited along with the TDS Challan No. 281.

All deposits must be made by the 7^th of the month subsequent to any TDS deduction. For example, the deductor must deposit TDS he/she collected in July by August 7. An exception is TDS for the month of March, which one can deposit by April 30.

Also Read: Section 194D Of The Income Tax Act

Final Word

The concept behind TDS is that any person making specific payments has to deduct taxes at prescribed rates and deposit the sum into the government’s account. For the government, TDS is a tool to prevent tax evasion as it taxes the income directly from the source.

Frequently Asked Questions

1. What is the function of Form 26AS?

Form 26AS is a consolidated tax statement that shows any TDS deductions from your income. It shows every tax deduction and deposit against a person’s PAN for a financial year. It also shows all income tax payments that you have directly paid, including self-assessment or advance tax.

2. What is a TDS certificate?

Every deductor has to mandatorily issue a TDS certificate that shows the tax deductions in a deductee’s name. Form 16, Form 16A, Form 16B and Form 16C are all TDS certificates that people deducting TDS must issue for specific TDS deductions.

3. Is it possible to get TDS refunds?

Yes, if your tax liability for a financial year is lower than deducted tax, you can claim a tax refund. To claim a refund, you have to file income tax returns for the relevant assessment year.

4. What penalties are applicable for defaults in filing TDS returns?

Under Section 234E of the IT Act, tax deductors are liable to pay Rs. 200 per day as late filing fees till they file TDS returns. For non-filing of TDS returns, the AO (Assessing Officer) may impose a minimum penalty of Rs. 10,000.

5. Can I get an exemption for TDS deductions?

Yes, if your total income in a financial year is below the exemption limit, you can ask the deductor not to deduct TDS. Resident citizens below 60 years should file Form 15G, and senior citizens should file Form 15H to avoid TDS liability on interest income.

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