Tax Deduction at Source, more commonly known as TDS is a tax deduction that many individuals and businesses face at various stages of the business. Knowing the importance of Tax Deduction at Source, TDS is of utmost importance and should be known as it makes a difference in conducting the business. While there are different taxation systems and tax heads, knowing Tax Deducted at Source or TDS holds a very important place. This affects everyone right from employees to students to even freelancers. Hence, knowing TDS rules and how it affects your books of accounts is knowledgeable and we’re going to cover that in today’s article.
Tax Deducted at Source, or TDS is a form of tax that is paid at the initiation of a business transaction to the government if the transaction exceeds a certain threshold limit. The Income Tax Department of India introduced tax Deducted at Source or TDS to ensure all the books of accounts are kept in order, tax manipulations occur the least and the individuals can keep a track of their tax expenses.
What is the Full Form of TDS and Why is it Needed?
Tax Deduction at Source is the full form of TDS. It is an important tax tool that requires individuals to pay tax at the initiation of the business transaction if the transaction is above a certain threshold level. The person making the payment is in charge of deducting the TDS before the final payment is made to the receiver. The individual that deducts the TDS is known as the deductor and the individual who receives the amount post the tax deduction is known as the deducted. TDS is not only exposed to individuals but everyone right from students, employees, freelancers, businesses, enterprises entities and even while receiving dividends from companies.
However, there are certain situations only when Tax Deducted at Source or TDS is required to be paid. For example, TDS is not required to be deducted at the time of paying individual rent to your landlord. But in some situations, TDS is required to be deducted at the time of paying salary, professional fees etc.
Situations where Tax Deducted at Source, TDS is required to be paid are:
- Salaries for employees and other individuals
- Professional and consultation fees that need to be paid
- Freelance charges when the amount is above a certain threshold level
- Commission payments
- Interest payments that need to be cleared
- Rent payments that are made on a commercial level
*Individuals do not need to pay TDS on rent
TDS Meaning: What is it?
TDS full form is over important to know as in layman terms everyone calls its TDS and hence to know the context of the conversation in line with TDS will help make matters easy. Tax Deducted at Source or TDS is some form of advanced tax that is already paid to the government. Usually, individuals, businesses or corporations need to file for their taxes at the end of the financial year. That is, for the preceding year, the tax is paid later on. But in the case of Tax Deducted at Source, the taxable amount is already paid at the initiation of the business transaction and hence it is called the source. This is why it is a sort of advance tax that is already paid to the government. The government introduced Tax Deducted at Source, TDS for several reasons but a few main ones being:
- Reduction in the manipulation of the books of accounting and taxation payment
- Minimise tax evasion by the taxable party
- Aim to collect tax at the start to reduce paperwork and delay in tax payments
- Reduce errors in incorrect tax returns filed at the end of the financial year
What are the Tax Deducted at Source Tax Rates?
While there is an exhaustive list that is covered by the government to mention all the transactions that come under the TDS purview, we will cover a few so you get a small idea of which transactions are exposed to Tax Deducted at Source:
|Business Transaction||Tax Deducted at Source: Tax Rate|
|Payment of Salary||10%|
|Payment of freelance fees||10%|
|Interest on securities, either government or commercial, debentures or any other securities||10%|
|Payment of dividends received from shares or stocks||10%|
|Income through betting such as horse racing, lottery, card games, crosswords||30%|
|Insurance commission received||5%|
|Payment of royalty towards the means of entertainment such as music, films etc||10%|
|Premature withdrawal from Employee Provident Fund||10%|
|Payments on commissions or brokerage||5%|
|Any other income||10%|
Example of TDS
Suppose Mr Karan Mehta gets in touch with Abaz Ali and Sons for a short term consultation contract, the fees that will be paid will be net of Tax Deducted at Source charges. In case the monthly decided amount is INR 50,000, the TDS tax rate charged for professional fees is 10%. In this case, Mr Karan Mehta will then receive
= INR 50,000 – 10%
= INR 45,000
The INR 5000 which is the TDS charge has been deducted according to the rules. The TDS amount, which is INR 5000 is then directly credited to the government in the name of Mr Karan Mehta as a means of his advance tax payment.
Once Mr Karan Mehta files for his final tax at the end of the financial year, he needs to evaluate whether he comes in the 10% tax bracket or not. Post that, he also needs to know if the tax that he needs to pay additional tax post the TDS payment or whether he is in line to receive a tax refund.
As mentioned above, many situations arise when the tax paid is more than the tax due amount. This can happen due to advanced tax paid or through the means of TDS.
What is TDS return?
An individual or a business needs to submit a quarterly report mentioning all the transactions that involve TDS. When such situations arise, the individual or the deductor has to file for a TDS return.
TDS return is a quarterly document submitted to the income tax department of the government. The TDS return is a quarterly statement that mentions all the entries of the TDS amount collected by the individual and the TDS amount paid by the individual.
While one may prepare a TDS return statement manually or through the help of their accountant, many online cloud computing softwares that do the job in a few minutes, almost error-free.
This is everything you need to know about TDS, TDS full form and TDS meaning. Ensuring and gaining knowledge about TDS can be very helpful for individuals and even businesses.
Frequently Asked Questions about TDS
- What is the full form of TDS?
Ans : Tax Deduction at Source is the full form of TDS.
- When is the due date for TDS payments?
Ans: Every individual or business corporation that deducts TDS is required to credit the TDS amount to the government’s income tax department. The due date for this is the 7th of the following month. For example, in case a business needs to pay TDS dues for the month of July, they need to be done on or before the 7th of August.
- Can TDS returns be filed with the help of software?
Ans: Yes. While any option is given to the business or individual to file for the returns manually, a cloud computing software can do the job just fine and faster too, without errors.
- How often do TDS returns need to be filed?
Ans: TDS returns need to be filed every quarter. TDS return is a statement that mentions the amount of TDS paid and the amount of TDS received by the individual or the business.
- Is there a TDS refund?
Ans: Yes. However, a TDS refund should not be confused with Income Tax Return as they both are different and the process to gain a TDS refund is different.