Tax Deducted at Source (TDS) - Definition & Meaning

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 1^st 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.