Tax deduction at Source or TDS is a method to collect income tax in our country. According to the Income Tax Act of 1961, a person or company is required that is making a payment has to deduct the tax at the source if such payment surpasses certain threshold limits. It is deducted according to the rate that is prescribed by the tax department. The company or person that makes the payment after deducting TDS is called a deductor and the company or person receiving the payment is called the deductee.
It is a type of an advance tax that is deposited with the government and the deductor is responsible for this before the payment is made. TDS is deducted irrespective of the mode of payment which can be cash, cheque or credit.
It is managed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue. It has is considered significant while conducting tax audits.
TDS is deducted on the following types of payments:
- Interest payments by banks
- Commission payments
- Rent payments
- Consultation Fees
- Professional fees
However, individuals are not required to deduct TDS when they make rent payments or pay fees to professionals like lawyers and doctors.
Advantages of TDS:
- It prevents tax evasion.
- As this is deducted at the time of payment, it helps prevention of the commission of fraud.
- It enables salaried people to pay tax monthly which thereby reduces their burden of paying a lump sum amount at the end of each financial year.
- It is a continuous source of funds for the government, which helps its smooth functioning.
The company or person making a payment deducts a certain percentage of it as it and the balance is paid to the deductee. The latter also gets a certificate from the former stating the amount of TDS and he can claim this amount as the tax that has been paid by him for the financial year.
TAN stands for Tax Deduction Account Number. It is 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting the tax. Under Section 203A of the Income Tax Act, 1961, it is mandatory to quote Tax Deduction Account Number (TAN) allotted by the Income Tax Department (ITD) on all TDS returns. The procedure for application of TAN is very simple and can be done online by filling up Form 49B.
The deductor is duty bound to deposit the TDS with the government which is then reflected in the Form 26AS of individual deductees on the TRACES website linked to the income tax department’s e-filing website. The details of such deducted amount have to be filed in the form of a TDS return which is filed quarterly. The TDS deductions are linked to the PAN numbers of the deductor and the deductee. The tax credited Form 26AS is a consolidated tax payment which is available to all PAN holders. Since all TDS is linked to your PAN, this form lists out the details of TDS deducted on your income by each deductor for all kinds of payments made to you – whether those are salaries or interest income – all TDS linked to your PAN is reported here. This form also has income tax directly paid by you – as advance tax or self-assessment tax. Thus, this makes it essential to provide the correct PAN details to avoid deduction at higher rates.
Now, the Central Government is making it compulsory to link the PAN with the Aadhar for every individual by the end of this financial year. A person can avoid such a tax if he that his total income in a financial year will be below the exemption limit and may ask the deductor not to deduct the TDS by submitting Form 15G/15H.
Also, the impact for non-compliance of payment such tax, the Income Tax Act provides for certain activities that will be taken such as Disallowance under S. 40(a) (ia); Raising of demand under S. 201(1); Charging of Interest under S. (1A) and Levying penalty under S. 271C.