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TDS : Tax Deduction at Source- A Basic Guide

While running a business, there are both collection and disbursements of incomes involved. While tax is payable on the collections at the end of the year , reduced by advance tax paid during the year. Tax is to be withheld on disbursements if they meet certain criterion. In India Such withholding of taxes is known as “TDS”

Such withholding is known as TDS or Tax deduction at source is a method of tax collection whereby a percentage of certain payments is withheld by the person responsible for such payments and deposited with the government as taxes on behalf of the receiver of such payments.

“It is estimated that as much as 40% of the overall tax collection of the government comes from TDS”

The idea is that tax collection is times along with revenue earned by the respective tax payers. TDS is also knows as “Withholding taxes” in foreign tax jurisdictions. It is estimated that as much as 40% of the overall tax collection of the government comes from TDS. Other than being a source of easy and early collection of taxes, TDS also makes evasion of taxes difficult by creating a trail of the transactions on which such TDS is applied.

TDS regulations are onerous on the deductor, whose responsibility it is to deduct TDS and deposit it in time with the government. He also has to bear the burden of filing lengthy and time consuming TDS returns. In return he faces monetary risks such as payment of tax, if the department deems that TDS deducted was less than required, in addition to interest, penalties and prosecution. Further, If no TDS is deducted on payments where TDS should have been deducted the respective expenses are subject to be disallowed at the time of computation of Income for the purposes of Income Taxes.

TDS is applicable on the following domestic payments as per the rates specified in the table below :

Download a handy TDS calculator to automatically calculate your TDS liability from here

We shall discuss TDS on foreign payments in a separate update.

Rights and duties of the deductor.

Rights

  • To deduct the appropriate amount of tax and pay the net amount to the creditor
  • To decide the applicable section and rate of TDS based on his/her interpretation

Duties

  • To pay the tax deducted within the prescribed time
  • To file timely TDS returns
  • To issue TDS certificates in time
  • To revise returns in case of any errors or omissions

Amount on which tax to be deducted

Tax is deductible on the entire bill amount, including taxes that may be so included in the invoice as presented by the payee.

Time of Deduction

For Salary payments TDS has to be deducted at the time of such payment to the employee. For all other payments TDS is deductible at the time of credit to the account of the reciepient in the books of the deductor or at the time of payment, whichever is earlier.

In plain words,  if you are liable to make any payments as mentioned in the previously mentioned list which happen to be above the threshold limit, the specified percentage of the total payment required to be made, inclusive of service tax etc., will have to be withheld by you at the time of :

  • Providing for such payment in your books of accounts or
  • Payment of such amount to the recipient,

Whichever is earlier.

For payment of Salary to employees, Tax will be deductible at the time of payment to the employees whose incomes are above the exemption limit after providing for deductions to be obtained by them.

Deposit of TDS.

Once deducted TDS has to be deposited with the government as per the following schedule :

  • Within one week of the end of the month in which such deduction is made
  • For the month of March the due date for deposit of TDS is 30th April

Filing of TDS returns

Returns of TDS must be filed by all deductors on a quarterly basis in the prescribed forms. The respective due dates for filing of returns are :

  • 15th July
  • 15th October
  • 15th January
  • 15th May

Salary deductions are filed in form 24Q whereas in the case of all other payments to residents form 26Q has to be filed. In the case of payments to non residents form 27Q is filed.

This article addresses the tip of the iceberg that are the tax withholding regulations in India. There exist a variety of controversies and possible scenarios within each payment head which may cause doubt in the mind of the Indian business owner. We welcome any queries that may arise, you can get in touch with us here

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