How Does TDS Affect You?

TDS: Quick Recap

Tax is collected upfront on certain income categories in India through a system called Tax Deducted at Source (TDS). Authorised payers, like employers or companies, deduct this tax from your income before disbursing the remaining amount. The deducted TDS is then deposited with the government as per Income Tax Act regulations.

How Does TDS Affect You?

Filing TDS reduces the chances of tax evasion, ensuring that the government receives its share of taxes in a timely manner. But how does TDS filing impact your tax liability? Here are some of the ways:

1. Minimises Tax Burden

One of the primary benefits of TDS is that it spreads out your tax liability over a period of time. Instead of paying a large amount at the end of the financial year, the tax is deducted regularly from your income. This helps in minimising your tax burden at the end of the year. 

2. Prevents Tax Evasion

TDS is deducted at the source, i.e., at the point of income generation. This makes it harder for individuals to evade taxes, ensuring that everyone pays their fair share. This contributes to a more equitable tax system and increases overall tax compliance.

3. Ensures Timely Collection of Taxes

With TDS, taxes are collected at the time of income generation, ensuring a steady and regular inflow of tax revenue for the government. This helps in maintaining liquidity and enables the government to fund its arious public services, defence and infrastructure projects.

Who Is Liable to Deduct TDS On Salary?

In India, employers withhold tax upfront on salaries through a system called Tax Deducted at Source (TDS). This tax is deducted only when your salary is paid and applies specifically to taxable income. There’s a threshold – salaries below ₹2,50,000 are exempt from TDS. As per Income Tax rules, an employer-employee relationship is necessary for TDS deductions.

As per Section 192, there must be an employer-employee relationship so as to make the TDS deduction on salary. The following employers are must pay TDS on salary:

1. Individuals
2. Companies (Private or Public)
3. HUF (Hindu Undivided Family)
4. Trusts
5. Partnership firms
6. Co-operative societies

The type of employer (company, HUF, or trust) doesn’t affect TDS on salaries. The number of employees a company has also doesn’t influence TDS deductions. You can easily find your TDS amount by checking your payslip.

Which Incomes Are TDS Deducted From?

Even when you are making payments as an individual taxpayer, you need to deduct TDS on certain payments. The following type of payments that attract TDS:

1. Salary Transfer
2. Professional Fee
3. Consultation Fee
4. Rent Payments
5. Commission
6. Interest on Securities & Deposits
7. Dividend on company shares and mutual funds
8. Lottery and similar winnings
9. Payment of Royalty
10. Salary Transfer
11. Professional Fee
12. Consultation Fee
13. Rent Payments
14. Commission & brokerage payments
15. Interest on Securities & Deposits
16. Dividend on company shares and mutual funds
17. Lottery, lucky draw and similar winnings
18. Payment of Royalty
19. Director’s Remuneration
20. Transfer of Property
21. Other interest payments
22. And specific others specified under the Income Tax Act, 1961.

Tax-filing begins at the beginning of the financial year, roughly in early January and continues till April.

When Should TDS Be Deducted and by Whom?

Anyone making specific payments outlined in the Income Tax Act must deduct TDS (Tax Deducted at Source) at the time of payment. However, there’s an exception: individuals or Hindu Undivided Families (HUFs) exempt from tax audits don’t have to deduct TDS for most payments.

There’s one key exception. Individuals and HUFs making rent payments exceeding ₹50,000 per month are required to deduct TDS at 5% even if they’re not subject to a tax audit. Notably, they don’t need to apply for a TAN (Tax Deduction and Collection Account Number) for this purpose. 

TDS deduction rates:

• Employers: deduct TDS based on your income tax slab rate.
• Banks: deduct TDS at 10% on interest income. This may increase to 20% if they don’t have your PAN information.

If your estimated total income falls below the taxable limit, you can potentially avoid TDS deductions:

• Salaried individuals: Submit investment proofs to your employer to demonstrate your tax-exempt status.
• Interest income: Submit Form 15G or Form 15H to the bank if your income is below the taxable limit.

How to Claim Revised TDS Return?

Upon filing the TDS return, if you find an error, such as missing PAN or mistyped challan details, the Form 16/Form 16A/Form 26AS will not be showing the correct tax amount credited to the government. In order to ensure that the exact tax amount is credited and also reflected in all the Forms, you will need to file a revised TDS return.

Here are the different types of revisions that you are allowed to make to submit an error-free TDS return:

The employer will pay the charge again for the revised return. Revised Returns can be filed multiple times for incorporating any changes.

Also Read More About How to File TDS Return?

What Happens If TDS Is Not Deposited?

1. By Government

If the TDS on salary is not deposited on time to the IT department of the Government, then the employee’s TDS will not be reflected against his/her PAN on Form 26AS. In that case, the employee cannot get the tax credit of the TDS on their salary while filing their income tax return. If they take the tax credit for this amount, they will then be notified of the mismatch in their TDS claimed and paid, from the IT department.

In this situation, the taxpayer (i.e. employee in the case of TDS on salary) will be caught in an unfavourable position between the employer and the government’s income tax department.

2. By Deductor (Employer)

In case the employer fails to deduct or deposit TDS on your salary, then they will have to pay the penalty. The table here explains the interest the employer will have to pay under 2 different cases:

How Can I Save TDS?

The employee can minimise their TDS on salary by investing in certain tax-saving instruments. The deduction benefits on the TDS on their salary can be availed under the provisions of various sections. Here are a few important ones below: 

1) Under 80C

Under Section 80C of the Income Tax Act, 1961, the employee may claim maximum deduction benefits at the time of TDS on a salary of up to ₹1.5 lakh. There are various tax-saving instruments covered under this Section, such as:

1. PPF (Public Provident Fund)
2. Sukanya Samriddhi Account
3. ULIP (Unit linked investment plan)
4. ELSS (Equity linked savings scheme)
5. This Section also covers house loan repayment (principal amount) subject to the limit of ₹1.5 lakh.

2) Under 80 EE

Under Section 80 EE, employees can minimise the TDS on their salary if they are first-time homebuyers and have taken a loan. They can thus claim tax benefits on home loan interest amounts. This deduction will be over and above the upper limit of ₹2 lakh under Section 24 of the Income Tax Act, 1961.

Conclusion

TDS (Tax Deducted at Source) is a method used in India to collect tax directly from the source of income, ensuring timely tax collection and reducing tax evasion. This system affects all income-earning individuals by distributing tax liabilities and enforcing compliance. However, individuals can reduce their TDS burden by investing in tax-saving instruments like ELSS (Equity Linked Savings Scheme). 

To save on taxes and potentially enhance your returns, consider investing in ELSS funds. Start today to make the most of your earnings and savings! Open your Demat account with Angel One today and start investing!

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