What Is Tax Deducted At Source? Meaning, Returns, Filling, & How It Works
TDS is an important part of India’s tax system. It helps the government collect tax right at the time of income generation, whether you are a salaried employee, freelancer, or business owner, understanding TDS is important to stay tax-compliant and avoid penalties. In this blog, we’ll discuss what TDS is, why it is deducted, how it works, and the difference between TDS and income tax. We’ll also discuss TDS threshold limits, who deducts it, and how and when to deposit and file TDS returns.
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What is TDS and its Meaning
TDS full form is Tax Deducted at Source. It is a system introduced by the Income Tax Department where tax is collected at the source of income . This means the person making a payment (such as salary, rent, commission, or interest) deducts tax before giving it to the receiver. For example, if a company pays ₹50,000 as salary to an employee and the applicable TDS is 10%, the company will deduct ₹5,000 as TDS and pay the remaining ₹45,000 to the employee. The ₹5,000 is deposited with the government under the employee’s PAN.
Why is TDS deducted?
TDS ensures steady revenue collection for the government throughout the year. It prevents tax evasion and facilitates transparency in financial transactions. By deducting tax at the source, the government minimises the burden of collecting tax at once during the return filing.
How TDS Works
For example, you earn interest of ₹40,000 from a fixed deposit in a year. If the bank is required to deduct 10% TDS, it will deduct ₹4,000 and deposit it with the government. You will receive ₹36,000 in your account. Later, while filing your income tax return, you can adjust this ₹4,000 TDS against your final tax liability. This system is applicable to various types of payments, like:
- Salaries
- Interest from banks
- Rent payments
- Contractor or professional fees
- Commission and brokerage
Threshold Limits under TDS
TDS threshold limit means the minimum amount above which TDS will be applicable. If the payment is below this limit, no TDS is deducted. Here are a few common threshold limits:
- Deductor:Responsible for deducting TDS before making any payment.
- Deductee:Pays the actual tax but receives payment after TDS is cut.
Who Deducts and Who Pays TDS?
The person or company making the payment is called the deductor. The person receiving the payment is the deductee.
| Nature of Payment | Threshold Limit | TDS Rate |
|---|---|---|
| Salary | Based on the tax slab | As per the slab |
| Bank FD Interest | ₹40,000 (₹50,000 for senior citizens) | 10% |
| Rent (Land/Building) | ₹2,40,000 per year | 10% |
| Professional Fees | ₹30,000 per year | 10% |
| Contractor Payment | ₹30,000 per contract / ₹1,00,000 per year | 1%-2% |
Always check the latest TDS rules under the Income Tax Act before making or receiving large payments.
Due Dates for Depositing the TDS to the Government
The deductor must deposit TDS to the government within the specified time frame:
- Monthly Payment:TDS deducted in a month must be deposited by the 7th of the next month.
- For March:TDS deducted in March can be deposited by 30th April
Failing to deposit TDS on time can result in interest and penalties.
How to Deposit TDS
TDS is deposited using Challan ITNS 281 either online through the NSDL portal or by visiting authorised banks. The deductor has to quote the TAN (Tax Deduction and Collection Account Number) while depositing TDS.
Steps to deposit TDS:
- Go to the NSDL tax payment website.
- Select Challan 281.
- Fill in PAN, TAN, assessment year, and amount..
- Make payment via net banking or debit card.
- Save the receipt for records.
How and When to File TDS Returns?
Apart from depositing TDS, the deductor should file TDS returns every quarter. This return includes details like:
- PAN of deductees
- Amount paid
- TDS deducted and deposited
TDS (Tax Deducted at Source) Return Due Dates:
| Quarter | Period Covered | Due Date |
|---|---|---|
| Q1 | April – June | 31st July |
| Q2 | July – September | 31st October |
| Q3 | October – December | 31st January |
| Q4 | January – March | 31st May |
What is the Difference Between TDS & Income Tax?
Though both are forms of taxation, here’s how TDS differs from income tax:
- TDS is deducted at source before payment. Income Tax is calculated annually and paid while filing returns.
- TDS applies to specific payments. Income tax applies to total annual income.
- TDS is deducted by the payer. Income tax is paid directly by the individual.
Conclusion
TDS or Tax Deducted at Source is a simple concept with a big role in India’s tax system. It helps the government collect taxes in advance and ensures that individuals don’t skip paying their dues. Understanding how TDS is deducted, the TDS threshold limits, who is responsible for paying it, and the process for depositing and filing returns can help individuals and businesses maintain tax compliance with ease.
I am a chartered accountant with over 14 years of experience. I understand income tax, GST, and balancing financial records. I analyze financial statements and tax codes effectively. However, I also have a passion for writing, which is different from working with numbers. Recently, I started writing articles and blog posts. My goal is to make finance easier for everyday people to understand.
Frequently Asked Questions (FAQs)
- What is TDS, and why is it deductedTDS is Tax Deducted at Source. The payer deducts it before making payments, such as salary or interest, to ensure the government collects advance tax.
- Who is responsible for deducting TDS, and who pays it?The person making the payment (deductor) is responsible for deducting TDS. The receiver (deductee) pays the tax, but gets the amount after TDS deduction.
- What are the threshold limits under TDS?Threshold limits vary by payment type. For example, interest on FD has a ₹40,000 limit (₹50,000 for seniors), and rent has a ₹2.4 lakh annual limit. No TDS is deducted below these limits.
- How is TDS different from income tax?TDS is deducted at the time of payment and is part of income tax. Income tax is calculated on your total income annually, while TDS is adjusted during return filing.
