Threshold Limits for TDS Deduction under the Income Tax Act
Understanding the TDS threshold limit is essential for both individuals and businesses to ensure proper tax compliance and avoid unnecessary deductions. These limits determine when tax must be deducted at source for different types of payments such as salary, rent, or interest. Below is a detailed annual and monthly guide to help you understand the TDS exemption limit and when deductions apply.
What is a Threshold Limit in TDS?
A threshold limit is the minimum payment amount up to which no TDS (Tax Deducted at Source) is required. Once the payment exceeds this limit, TDS must be deducted at the applicable rate. These limits vary depending on the type of income and the relevant section of the Income Tax Act.
Annual and Monthly Threshold Limits Explained
TDS deduction can be based on annual or monthly thresholds, depending on the nature of the payment.
Annual Limits for Common Payments (Salary, Interest, Rent, etc.)
- Salary (Section 192): TDS applies if total income exceeds the basic exemption limit (₹2.5 lakh for individuals below 60).
- Interest on Deposits (Section 194A): Threshold is ₹40,000 per financial year (₹50,000 for senior citizens).
- Rent (Section 194I): Threshold is ₹2.4 lakh per year for land/building and ₹1.8 lakh for machinery or equipment.
Monthly Deduction Limits under TDS Provisions
For salaries and certain contractor payments, TDS is calculated monthly based on projected annual income, ensuring deductions are spread evenly across the year.
Section-wise Threshold Limits for TDS
Each section of the Income Tax Act prescribes specific limits:
Salary (Section 192)
Threshold: Income exceeding the basic exemption limit (₹2.5 lakh, ₹3 lakh for senior citizens). TDS is deducted monthly based on estimated annual income and chosen tax regime.
Interest on Deposits (Section 194A)
Threshold: ₹40,000 (₹50,000 for senior citizens). Applies to interest from banks, post offices, and other financial institutions.
Professional/Technical Services (Section 194J)
Threshold: ₹30,000 per financial year per payee. Applies to fees for professional or technical services .
Contractor Payments (Section 194C)
Threshold: ₹30,000 per single payment or ₹1,00,000 aggregate annually. Deduction rate is 1% for individuals/HUF and 2% for others.
Rent Payments (Section 194I)
Threshold: ₹2.4 lakh per year for property rent . Deduction rate is 10% for land/building and 2% for machinery/equipment.
TDS Threshold Exemptions & Relaxations
Certain payments, like those to government bodies or notified institutions, are exempt. Small businesses or individuals may also qualify for exemption if payments fall below specified limits or if forms like 15G/15H are submitted.
Consequences of Exceeding Threshold Limits
Once payments exceed the threshold, failure to deduct TDS can lead to:
- Interest and penalties under Section 201.
- Disallowance of related expenses while calculating taxable income.
- Additional compliance issues, including notices from the Income Tax Department.
Practical Examples of Threshold Calculations
- Bank Interest: If a regular taxpayer earns ₹45,000 interest in a year, TDS is applicable on the full amount as it crosses the ₹40,000 limit.
- Contractor Payment: A contractor receiving ₹35,000 in one invoice will face TDS at 1% or 2% as the single payment exceeds ₹30,000.
Conclusion
Knowing the TDS threshold limits is crucial to avoid penalties and ensure smooth tax compliance. Whether it’s salary, rent, or contractor payments, understanding both annual and monthly thresholds helps businesses and individuals plan payments and maintain accurate records.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
Frequently Asked Questions
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What is the TDS threshold limit on bank interest?
The limit is ₹40,000 per financial year for regular taxpayers and ₹50,000 for senior citizens.
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Is there a monthly limit for TDS deduction?
Yes. For salaries, TDS is deducted monthly based on annual projections.
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What happens if income crosses the TDS threshold limit?
TDS must be deducted at the applicable rate once payments exceed the threshold.
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Which payments are exempt from TDS deduction?
Payments to government bodies, certain notified institutions, and those covered under Forms 15G/15H may be exempt.
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How are TDS threshold limits updated every year?
The Finance Act, presented annually in the Union Budget, can revise these limits based on policy changes.