Understanding TDS

By | March 4, 2016

Understanding TDS

Design credits: Rakesh Mohan

Tax Deducted at Source or TDS is an indirect method of collecting Income Tax from employed professionals in India. Apart from salary, TDS deductions are also applicable on commission, brokerage, royalty payments, contract payments, interest earned on several financial investments, professional fees among others . TDS falls under the purview of the Income Tax Act of India, 1961 and is regulated by the Central Board for Direct Taxes (CBDT). It forms a part of the Department of Revenue managed by Indian Revenue Service (IRS).TDS deductions are not applicable in case an employee’s income falls below the minimum taxable income slab (Rs. 2, 50,000).

Here’s why TDS is important

Rather than paying a huge amount of tax at one go, TDS allows you to pay your tax on your income as you earn it. If you think that these deductions are an unnecessary burden on salaried people, think again. All things considered, this set-up works for  both the government and taxpayers for several reasons.

  • It reduces chances of tax evasion as the tax is collected at source.
  • It is a steady source of revenue for the government.
  • It widens the tax collection base, as most people have to pay TDS in some form or another.
  • It eases tax calculations for the individuals.

TDS deduction slabs

TDS deductions are typically calculated as a certain percentage of overall payment received, and may typically range from 1% to 30% of the total payable amount. Here are a couple of examples where TDS is applicable:

Source of Income TDS percentage payable
Salary of an individual As per the Income Tax slab rate
RD or FD deposits If the interest income exceeds Rs. 10,000, then 10% is payable. In case PAN details are not submitted, 20% is payable.
Property sale If the value of the property exceeds Rs. 50 lakhs, then TDS is payable at 1% of the sale value. In case PAN details are not given 20% of the sale value
Interest on securities and deemed dividends 10% of the total interest earned
Payment with respect to deposits under National Savings Schemes 20% of the total interest earned
Insurance commission 10% of the total interest earned
Payment made for repurchase of Unit Trust of India (UTI) or Mutual Fund units 20% of the total interest earned
Commission or brokerage 10% of the total amount
Payment of interest on infrastructure debt funds 5% of the total interest earned
Technical or professional service fees 10% of the total fee
Income from winning lotteries or horse races 30% of the total amount
Compensation for the acquisition of immovable property 10% of the total amount

These are just a few common deductions. You can view the complete list for the assessment year 2016-17 on the official Income Tax website

Do I ever Not have TDS?

Yes, there are certain incomes on which tax is not deducted at source. Here are some of them:

  • Interest paid to central or state financial organisations.
  • Interest earned on NRE accounts.
  • Interest is paid/credited to any banking company, co-operative bank or public financial institutions.
  • Interest earned on KVP, NSC or Indira Vikas Patra schemes.
  • UTI, LIC and other insurance or co-operative societies.
  • Interest paid under direct taxes or refund from IT returns.
  • Interest earned from Recurring Deposits or Savings Account opened in co-operative societies.
  • All institutions which are notified under no-TDS.

A complete list of institutions that are not subject to TDS, are available on the official Income Tax website.

Point to note

Just because tax is deducted at source, it does not mean that you don’t have to File your Income Tax Return or submit your claims. TDS has nothing to do with Income Tax filing or claiming returns. You need to do this separately and it is mandatory.

Also, in case your TDS deductions are much higher than what you should ideally pay, you can always submit the correct forms and claim back any excess deductions that were made.

We hope, you now have a better picture of the different facets of TDS.

Further reading: How to Claim Your TDS Refund

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