TDS on Exempt Income or Lower Tax Liability
Tax Deducted at Source (TDS) is designed to ensure timely collection of income tax. But not all income is taxable, and in many cases, taxpayers with exempt income or a lower overall liability may not need TDS deduction at all. Understanding when TDS applies, how to claim exemptions, and the steps to avoid excess deduction is crucial for both deductors and individuals.
BOOK A FREE DEMO
What Does Exempt Income Mean for TDS?
Exempt income refers to categories of income that are not taxable under the Income Tax Act.
Definition: Exempt income includes earnings that are specifically excluded from total taxable income.
Examples: Agricultural income, interest from Public Provident Fund (PPF), certain dividend income (up to limits), and specific allowances.
Why TDS is sometimes still deducted: Even if income is exempt, banks, employers, or institutions may deduct TDS by default unless a declaration is submitted.
Applicability of TDS on Exempt Income
In practice, TDS may still be applied if the deductor is unaware of the exemption.
Cases where TDS is deducted: Banks on FD interest, employers on salary, or institutions on certain payments.
Instances: Interest from tax-free bonds, withdrawals from NPS (if partially exempt), or dividends within exemption limits.
Role of PAN and declarations: Providing a valid PAN and declaration forms (like 15G/15H) prevents unnecessary deduction.
Claiming Lower or Nil TDS Deduction
Section 197 of the Income Tax Act allows taxpayers to apply for lower or nil TDS deduction.
Application process: File Form 13 to request a certificate from the Assessing Officer.
Approval: Once approved, the deductor can apply reduced TDS rates.
Benefit: Helps avoid excess deduction and waiting for refunds.
When Can You Submit Form 15G / 15H?
Individuals can avoid TDS by declaring that their income falls below the taxable limit.
Eligibility: Form 15G is for individuals below 60 years with income below the exemption limit; Form 15H is for senior citizens.
Declaration process: Submit these forms to banks or financial institutions at the start of the financial year.
Examples: Bank FD interest under the threshold, senior citizens with limited pension income.
Calculation of Taxable Income & TDS Adjustment
Employers and banks adjust TDS based on exemptions and deductions claimed by the taxpayer.
Process: Taxable income is calculated after subtracting exemptions under Section 10 and deductions under Chapter VI-A.
Example: If salary is ₹6,00,000 with deductions of ₹1,50,000 under Section 80C, TDS is applied only on ₹4,50,000.
Adjustment: Ensures TDS reflects actual liability, preventing over-deduction.
Refund of Excess TDS Deducted
If excess TDS is deducted, taxpayers can claim a refund.
Process: File Income Tax Return (ITR) declaring total income and exemptions.
Timelines: Refunds are usually processed within 2–6 months after ITR verification.
Common mistakes: Not declaring exempt income, or failing to file ITR despite excess deduction.
Compliance Obligations for Deductors
Deductors must ensure accuracy in TDS compliance .
Employer/bank’s responsibility: Verify declarations before deducting tax.
Return filing: File correct forms such as 24Q (salary) or 26Q (non-salary).
Penalties: Wrongful or excessive deduction may attract penalties.
Consequences of Non-Compliance
Non-compliance impacts both taxpayers and deductors.
Legal implications: Deductors may face fines and interest .
Taxpayer’s right: Individuals can claim refunds or appeal wrongful deductions.
Extra burden: Wrong deductions increase compliance costs and lead to delayed refunds.
Conclusion
TDS on exempt income or lower tax liability can create unnecessary hassles if not handled correctly. By using provisions like Form 15G, Form 15H, and Section 197 certificates, taxpayers can avoid excess deductions. At the same time, deductors must verify declarations and comply with rules to avoid penalties.
Jagdish Prasad is a Chartered Accountant with over 5 years of experience. He helps people and businesses with GST, income tax, and HSN codes. Jagdish makes sure his clients follow all tax rules and save money the right way. He also enjoys writing simple articles to help others understand taxes and stay updated with the latest rules.
Frequently Asked Questions
-
Can TDS be deducted even if my income is below the taxable limit?
Yes, banks or employers may deduct TDS if you don’t submit Form 15G/15H or a certificate under Section 197
-
How can I avoid TDS on exempt income?
Submit the correct declaration forms (15G/15H) or apply for a nil/lower deduction certificate to your deductor.
-
What is the difference between Form 15G and 15H?
Form 15G is for individuals below 60 years, while Form 15H is specifically for senior citizens.
-
How do I apply for a lower TDS certificate under Section 197?
File Form 13 with the Income Tax Department, and upon approval, provide the certificate to the deductor.
-
Can I get a refund if excess TDS has been deducted?
Yes, you can claim a refund by filing your Income Tax Return (ITR) and reporting the excess tax deducted.
