What is Tax Deducted at Source?

For quick and efficient collection of taxes, the Income-tax Law has incorporated a system of deduction of tax at the point of generation of income. This system is called as “Tax Deducted at Source”, commonly known as TDS. Under this system tax is deducted at the origin of the income. Tax is deducted by the payer and is remitted to the Government by the payer on behalf of the payee. 

The provisions of deduction of tax at source are applicable to several payments such as salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc. In respect of payments to which the TDS provisions apply, the payer has to deduct tax at source on the payments made by him and he has to deposit the tax deducted by him to the credit of the Government.

Following are the basic duties of the person who is liable to deduct tax at source. 

• He shall obtain Tax Deduction Account Number and quote the same in all the documents pertaining to TDS.

• He shall deduct the tax at source at the applicable rate.

• He shall pay the tax deducted by him at source to the credit of the Government (by the due date specified in this regard*).

• He shall file the periodic TDS statements, i.e., TDS return (by the due date specified in this regard*).

• He shall issue the TDS certificate to the payee in respect of tax deducted by him (by the due date specified in this regard*).

TDS & PAN

Its important to understand how TDS is linked to your PAN. TDS deductions are linked to PAN numbers for both the deductor and deductee. If TDS has been deducted from any of your income you must go through the Tax Credit Form 26AS. This form is a consolidated tax statement which is available to all PAN holders. Since all TDS is linked to your PAN, this form lists out the details of TDS deducted on your income by each deductor for all kinds of payments made to you – whether those are salaries or interest income – all TDS linked to your PAN is reported here. This form also has income tax directly paid by you – as advance tax or self assessment tax.  Therefore, it becomes important for you to mention your PAN correctly, wherever TDS may be applicable on your income.

Advantages of TDS:

TDS is based on the principle of ‘pay as and when you earn’. TDS is a win-win scenario for both the taxpayers and the government. Tax is deducted when making payments through cash, credit or cheque, which is then deposited with the central agencies.

• Responsibility sharing for deductor and tax collection agencies.
• Prevents tax evasion.
• Widens the tax collection base.
• Steady source of revenue for the government.
• Easier for a deductee as tax gets automatically collected and deposited to the credit of the central government.

When TDS is not Deducted?

TDs is not collected on payments made to the Reserve Bank of India, the Government of India etc. TDS will not be collected when interest is credited or paid to:

• Central or State Financial Corporations.
• Banking companies.
• Interest paid under Direct Taxes or refund from the IT department.
• UTI, LIC and other insurance or co-operative societies.
• Interests earned from recurring deposit or savings account in cooperative societies or banks.
• Interest in Indira Vikas Party, KVP, or NSC.
• Interest earned in NRE account.
• All institutions notified under no-TDS.

Apart from these, there are other avenues also where TDS may not be applicable, such as interest on compensation from MVCT (Motor Vehicles Claims Tribunal). Therefore, taxpayers are advised to check if their interest income is liable for TDS with a particular institution or not.

Click here for TDS rate chart FY 2023-24