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Tax Deducted at Source (TDS) - Definition & Meaning

Have you ever considered why a part of your salary is deducted even before it reaches you? This deduction is called TDS or Tax Deducted at Source. It is an important aspect of the taxation system that ensures efficient tax collection. For a taxpayer, understanding TDS is necessary for efficient tax planning.Read More

This blog will help you explore what is TDS, its meaning, applicability and benefits. Get ready to unlock the mystery of TDS!Read Less

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Written ByShruti gujarathi
AboutShruti gujarathi
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Shruti gujarathi has 5 years of experience in the BFSI sector, and as Manager- Digital Marketing at Bajaj Allianz Life Insurance, manages digital and content marketing. She has had hands-on experience in content strategy, performance marketing and Strategic Alliances over a career spanning 10 years.
Reviewed ByRituraj Singh
AboutRituraj Singh
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Rituraj Singh,With over 6.5 years of experience in the insurance industry, Rituraj Singh, Manager- Product & Brand Marketing at Bajaj Allianz Life Insurance overlooks new product launches, compliance, and brand projects, leveraging artificial intelligence and technology to enhance outcomes.
Written on: 12th Jan 2025
Modified on: 13th Jan 2025
Reading Time: 15 Mins
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What is Tax Deducted at Source1?
 

Tax Deducted at Source is a tax collection mechanism introduced by the government of India to collect taxes directly from the source of income. In this system, the payer or employer deducts a percentage of the income at the time of payment to the receiver or employee, and this amount is then remitted to the government. The income recipient receives the net amount after deducting TDS from the gross income.

Generally, it is the responsibility of the income recipient to pay income tax; however, the TDS system allows for the collection of tax in advance from the payment itself. It is a type of advance tax. The deducted TDS amount is adjusted against the recipient’s final tax liability. The income recipient can claim credit for the tax already deducted from the source. So, the actual TDS meaning is part of your Income Tax that is payable, is deducted from the source, and the rest can be adjusted when filing your returns.
 

How Does TDS Work2?
 

You are now aware of what is TDS definition is. However, to fully understand TDS, you need to know how it works. Here are some key points that break down how it functions.

  1. The individual paying or deductor deducts a percentage of the payment as tax according to the income tax slab rates applicable to the Income Tax Act and pays the balance amount to the recipient or deductee.
  2. The tax collected is deposited with the government. The deductor is responsible for depositing the TDS collected.
  3. The deductor is also duty-bound to issue a certificate to the deductee or the recipient. This certificate is called the TDS certificate and specifies the amount of tax deducted and the rate at which it is deducted.
  4. The tax deducted is deposited in the deductee’s name or PAN in a financial year and is reflected in the form 26AS or the Annual Information Statement (AIS) of the recipient.
  5. The deductee can claim a credit of the TDS amount while filing a tax return.
     

TDS on Life Insurance3
 

Section 194D and 194DA of the Income Tax Act specify the TDS deductions applicable to life insurance commissions and payouts under a life insurance policy. According to budget 20245, the TDS rate under both sections has been proposed to be reduced to 2% from 5%. This change in tax rate is effective from 1st October 2024 for payouts under a life insurance policy under Section 194DA. Under Section 194 D with respect to  life insurance commissions, the new rate will be applicable from 1st April 2025.
 

A. Section 194D:
 

This section covers TDS applicable to insurance commissions paid to insurance agents or intermediaries for selling or procuring activities related to the continuance, revival, or renewal of insurance policies.

  1. Tax is deductible if the payment exceeds ₹ 15,000.
  2. Under this section, any individual who makes a payment to a resident in the form of a reward or remuneration as part of the insurance business is eligible to deduct tax.
  3. TDS is deducted at the time of commission being credited to the payee’s account, or it could be done when the payment is disbursed in cash, cheque, draft, or other modes.
     

B. Section 194DA:
 

This section covers TDS applicable to life insurance policy payouts, including bonuses received on maturity that are not exempt under section 10(10D).

  1. Tax is deductible if the maturity payout exceeds ₹ 1 lakh.
  2. TDS applies to the income part of the payment, which is the amount exceeding the total premium paid.
     

What are the Income Sources that Qualify for TDS4?
 

TDS is deducted for different types of income sources for individuals and businesses.
 

1. Salary TDS
 

Employers deduct TDS from employees' salaries based on income tax slab rates to ensure timely fulfilment of their tax liability.
 

2. Interest TDS
 

Banks and other financial institutions like post offices deduct TDS from an individual’s interest income above a specified limit. It includes income from fixed deposits, recurring deposits and other schemes.
 

3. Rent TDS
 

Individuals or HUF paying rent above a certain limit are required to deduct 5% TDS. The current limit is ₹ 50,000 per month.
 

4. Commission TDS
 

Any person (not being an individual or HUF) 12 paying a commission to agents or brokers are also required to deduct TDS beyond a specified threshold of ₹15,000 per year6.
 

5. Consultation Fees TDS
 

All taxpayers, except individuals and HUF, paying for consultations from a professional like an architect or technical services above a certain limit also need to deduct TDS under section 194J7. However, individuals and HUFs with a turnover more than Rs. 1 crore in any business or Rs 50 lakhs in any profession will have to comply with this act13.

Please note that TDS does not apply to all types of income or every transaction made by an individual. Different TDS rates are set for various types of payments and recipients as outlined in the Income Tax Act. For instance, TDS is not applicable when a resident Indian citizen redeems proceeds from a mutual fund if the PAN is furnished for capital gains under section 194K14. Only in case of distributed income dividend options., there is a 10% TDS for resident individuals, HUFs, domestic companies, etc. However, in the case of a non-resident Indian redeeming the same proceeds, TDS is applicable8 on capital gains as well as 20% TDS on distributed income dividend options.
 

What are the Benefits of TDS?11
 

TDS system has many benefits. It was implemented by the government to,

  1. Minimize tax evasion and ensure tax compliance
  2. Automatically deduct taxes, and widens the base of tax collection.
  3. Reduce the burden on tax collection agencies by shifting the responsibility for tax deductions to the payer and works as a steady source of revenue for the government.
     

Conclusion
 

Understanding the fundamentals and significance of Tax Deducted at Source (TDS) is essential for both individuals and businesses. This knowledge helps to follow tax regulations and to avoid penalties. Moreover, a clear understanding of TDS can help you plan tax-saving investments strategically, allowing you to reduce your overall tax liability.
 

FAQs
 

1. What do you mean by TDS?
 

A system of tax deduction at the point of income generation is called Tax Deducted at Source (TDS).
 

2. Will my fixed deposits attract TDS9?
 

There will be no TDS deducted if you avoid fill out forms 15G(for everyone) or 15H(for pensioners), provided  your total income is below the taxable limit and the forms are submitted before the due date . The income from interest needs to be accounted at the time of filing your Income Tax Return.
 

3. How do you check the TDS amount?
 

To check your TDS amount, download form 26AS from the Income Tax e-filing portal15.
 

4. What is TDS rate applicable on salaries?
 

The TDS rate applicable on salaries depends on your income and the income tax slab rate with a basic exemption of ₹ 3 lakhs. So, no TDS is deducted if the salary is less than ₹3,00,000 per year. Beyond this threshold amount, the TDS depends on your estimated tax liability basis of your declarations10.
 

References:

 

[1]https://cleartax.in/s/what-is-tax-deducted-at-source-tds

[2]https://economictimes.indiatimes.com/wealth/tax/what-is-tds-and-how-does-it-work/articleshow/58905206.cms?from=mdr

[3]https://cleartax.in/s/section-194d-194da-income-tax

[4]https://cleartax.in/s/tds

[5]https://www.indiabudget.gov.in/doc/budget_speech.pdf

[6]https://cleartax.in/s/section-194h-tds-on-commission-brokerage

[7]https://cleartax.in/s/tax-on-consultancy-services

[8]https://www.amfiindia.com/investor-corner/knowledge-center/tax-corner.html

[9]https://cleartax.in/s/income-tax-on-fixed-deposit-interest

[10]https://cleartax.in/s/section-192

[11]https://dducollegedu.ac.in/Datafiles/FacultyProfile/renu_aggarwal_ddu_du_ac_in/CompleteTDSNotes.pdf

[12]https://www.indiafilings.com/learn/section-194h-tds-on-commission-and-brokerage/#:~:text=Section%20194H%20of%20the%20Income%20Tax%20Act%20mandates%20TDS%20deduction,15%2C000%20in%20a%20financial%20year

[13]https://cleartax.in/s/section-194j

[14]https://tax2win.in/guide/tds-section-194k-tds-on-mutual-fund

[15]https://www.paymeindia.in/blog/check-tds-status-pan-card/#:~:text=Visit%20the%20Income%20tax%20e,to%20view%20your%20TDS%20statement

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The views stated in this article are not to be construed as investment advice and readers are suggested to seek independent financial advice before making any investment decisions. Bajaj Allianz Life Insurance Company Ltd., Regd. office Address: Bajaj Allianz House, Airport Road, Yerawada, Pune - 411006, Reg. No.: 116, CIN: U66010PN2001PLC015959, Call us on toll free No.: 1800 209 7272, Mail us: customercare@bajajallianz.co.in

Tax benefits as per prevailing Income tax laws shall apply. Please check with your tax consultant for eligibility

BJAZ-WEB-ECNF-12735/25

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*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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I hereby authorize Bajaj Allianz Life Insurance Co. Ltd. to call me on the contact number made available by me on the website with a specific request to call back. I further declare that, irrespective of my contact number being registered on National Customer Preference Register (NCPR) or on National Do Not Call Registry (NDNC), any call made, SMS or WhatsApp sent in response to my request shall not be construed as an Unsolicited Commercial Communication even though the content of the call may be for the purposes of explaining various insurance products and services or solicitation and procurement of insurance business

 

Please refer to BALIC Privacy Policy

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%%Above illustration is for Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V03) considering Male aged 25 years | Non-Smoker | Policy Term (PT)– 30 years | Premium Payment Term (PPT) – 30 years | Sum Assured opted is Rs. 1,00,00,000 | Online Channel | Standard Life | 1st Year Premium is Rs. 6,238. 2nd Year onwards premium is Rs. 6,659. Total Premium Paid is Rs. 1,99,349 | Medical Rates | Yearly Premium Payment Mode | Death benefit opted is lumpsum payout and monthly installments (Lumpsum Payout Percentage : 45, Income Payout Percentage : 55) | Premium shown above is exclusive of Goods & Service Tax/any other applicable tax levied, subject to changes in tax laws, and any extra premium and is for illustrative purpose only. This is inclusive of all the discounts mentioned above.

##Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

@Term Insurance plan bought online directly from Bajaj Allianz Life Insurance has no commissions involved.

^^The Return of Premium amount is total of all the premiums received, exclusive of extra premium, rider premium and GST & /any other applicable tax levied, subject to changes in tax laws
Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116

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Bajaj Allianz Life eTouch- A Non Linked, Non-Participating, Individual Life Insurance Term Plan (UIN: 116N172V04)

*Tax benefits as per prevailing Section 10(10D) and Section 80C of the Income Tax Act shall apply. You are requested to consult your tax consultant and obtain independent advice for eligibility before claiming any benefit under the policy.Above Tax benefit is calculated considering deduction of Rs. 150,000 and applicable tax rate of 31.20%.

~Individual Death Claim Settlement Ratio for FY 2023-2024

1Premium Holiday has to be selected at inception to avail this benefit and also depends on other policy terms & conditions


Bajaj Allianz Life Insurance Co. Ltd. | IRDAI Reg. No. 116


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^Subject to Section 10 (10D) conditions i.e. aggregate annual premium for ULIP policies issued on or after 1st February 2021 does not exceed Rs. 2.5 Lakhs.

1Minimum premium mentioned is applicable for Bajaj Allianz Life Goal Assure IV - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L204V01) and is subject to policy terms and conditions.

#Source: https://economictimes.indiatimes.com/investments-marts/eight-crucial-numbers-to-ensure-financial-success/10-times-the-annual-income-is-your-life-insurance/slideshow/16699748.cms . Subject to availability in Bajaj Allianz Life ULIP Plans. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com ) carefully before concluding a sale.

*Benchmark: Nifty 500 Multicap Momentum Quality 50 Index past 5 CAGR Returns, as on 31st December 2024. Past returns of a fund are not necessarily indicative of the future performance of the fund. | Please consult the financial advisor before investing.

The Unit Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of the fifth year.

ULIPs are different from the traditional insurance products and are subject to the risk factors. The premium paid in ULIPs are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. Bajaj Allianz Life Insurance Company Limited is only the name of the Life Insurance Company and Bajaj Allianz Life Future Wealth Gain IV - A Unit- linked Non- Participating Individual Life Savings Insurance Plan (UIN:116L202V01), Bajaj Allianz Life Goal Assure IV - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L204V01), Bajaj Allianz Life LongLife Goal III is A Unit-linked Non-Participating Whole Life Insurance Plan (UIN:116L203V01), Bajaj Allianz Life Invest Protect Goal III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L205V01), Bajaj Allianz Life Magnum Fortune Plus III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L207V01), Bajaj Allianz Life Goal Based Saving III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN:116L206V01) and Bajaj Allianz Life Smart Wealth Goal V - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L201V01) are only the name of the unit linked insurance contracts and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. For more details on risk factors, terms and conditions please read sales brochure & policy document (available on www.bajajallianzlife.com ) carefully before concluding a sale.

Nifty 500 Multicap Momentum Quality 50 Index Fund is available Bajaj Allianz Life Future Wealth Gain IV - A Unit- linked Non- Participating Individual Life Savings Insurance Plan (UIN:116L202V01), Bajaj Allianz Life Goal Assure IV - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L204V01), Bajaj Allianz Life LongLife Goal III is A Unit-linked Non-Participating Whole Life Insurance Plan (UIN:116L203V01), Bajaj Allianz Life Invest Protect Goal III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L205V01), Bajaj Allianz Life Magnum Fortune Plus III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L207V01), Bajaj Allianz Life Goal Based Saving III - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN:116L206V01) and Bajaj Allianz Life Smart Wealth Goal V - A Unit-linked Non-Participating Individual Life Savings Insurance Plan (UIN: 116L201V01)

In addition to the already existing funds, Nifty 500 Multicap Momentum Quality 50 Index Fund is now available with the above mentioned products. Customer has an option to choose from other available funds apart from Nifty 500 Multicap Momentum Quality 50 Index Fund.

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I hereby authorize Bajaj Allianz Life Insurance Co. Ltd. to call me on the contact number made available by me on the website with a specific request to call back. I further declare that, irrespective of my contact number being registered on National Customer Preference Register (NCPR) or on National Do Not Call Registry (NDNC), any Call made, including via Voice over Internet Protocol & WhatsApp, SMS or WhatsApp messages, in response to my request shall not be construed as an Unsolicited Commercial Communication even though the content of the call may be for the purposes of explaining various insurance products and services or solicitation and procurement of insurance business

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