Why do people pay a tax like TDS (Tax Deducted at Source)?

Tax Deducted at Source (TDS) is a popular tax component of an individual’s income. In general terms, TDS is a tax deducted right from a person’s income source. 

TDS is based on the concept that every individual who makes a specific payment to another individual is liable to deduct tax as per the TDS rates issued in the Income-tax Act, 1961 immediately at the source and is required to deposit the amount into the government’s account, which the Government will use to improve infrastructure, build healthcare centers for the public and develop rural areas.

If you are a salaried professional, you may have observed a certain amount of deduction from your monthly pay. That amount of tax is nothing but the TDS, which the employer collects to deposit with the government. So now you know why there is a tax deducted from your salary, loans, etc. As a taxpayer, it is crucial to observe and have a clear understanding and knowledge of how this works. 

Tax Deducted at Source (TDS), and Tax Collected at Source (TCS) are both taxes charged on the source of income. TDS is the company’s tax deducted from an individual’s salary to pay the government, whereas TCS is the tax collected by sellers while selling to buyers.

TDS interest rate varies from one source of income to another. As we know what TDS means, let’s see why TDS is deducted, how TDS interest rate is calculated, and the different taxes deducted on different sources of income.

Key takeaways: 

• In what different scenarios are we liable to pay TDS, and who is not?
• The different types of TDS paid on various sources of income.
• How is TDS calculated on various sources of income?
• How can an individual be eligible not to pay TDS?
• How can a TDS return be filed?

When is the TDS deducted, and who is liable for deducting the same? 

• According to Income Tax Act, 1961, any payments paid under this Act are liable to a Tax deduction during its payments.
• If an individual pays a rent of Rs 50,000/- or more, then a TDS interest rate of 5% would be deducted. He need not apply for a Tax Deduction Account Number (TAN) if he is liable for a TDS interest rate of 5%.
• If you are an employee in a company, then your company’s employer deducts a tax based on applicable tax slab rates. The bank which holds your working account will levy a TDS interest rate of 10%. However, if they do not have your PAN details, then the TDS interest rate will be 20% used for deduction. Hence, it is crucial to check for the PAN and ensure it is provided. 
• No TDS will be deducted if you submit all required investment proofs and it is below the taxable limit.
• Being a regular taxpayer, one must know that there is a way to avoid paying the TDS.
• If an individual has made certain investments, the same proof can be submitted in Form 15G/15H. 
• Once the employer verifies the same, and ascertains that the investment proof meets the criteria, then no TDS is deducted by the employer.
• In case you failed to submit the investment proof to your employer and the bank deducted the TDS, you can file a return and claim a refund provided your total taxable income is below the total taxable limit.

Let us take an example of TDS, assuming the nature of payment is professional fees on which the specified rate is 10%.  A company XYZ makes a payment of Rs 50,000/- towards professional fees to company  ABC, then XYZ  shall deduct a tax of Rs 5,000/- and make a net payment of Rs 45,000/- (50,000/- deducted by Rs 5,000/-) to  ABC. The amount of 5,000/- deducted by XYZ will be directly deposited by XYZ to the government’s credit.

Different types of TDS Interest rates

1. TDS interest rate on Salary: 

The TDS interest rate on salary depends on the employer’s salary income, and accordingly, an individual will fall into the category of various tax slabs. As per the various TDS interest slab rates, the range of TDS deduction can range anywhere between 10% to 30%.  

2. TDS on Interest on Loan:

As per section 194A, the TDS on Interest on Loan is deducted at a TDS interest rate of 10%.  However, no TDS would be deducted if your interest per annum is less than 5000. TDS is payable only if the interest per annum exceeds 5000/-.

TDS rate on Interest on Loan:

The TDS paid on interest on the loan was 10%, but due to lockdown, it was reduced by 25% (i.e., 10%*75%=7.5%). However, this rate was applicable only from 14^th May 2020 to 31^st March 2021.

3. TDS on Interest:

Section 194A of Income-tax contains information regarding TDS which is levied on interest such as Interest on Loan, Interest on FD, etc. Interests in securities are mentioned in section 193.

Interest paid to a resident person can deduct a TDS under section 194A, and if this payment is made to a non-resident, then the tax is deducted under section 195.

4. TDS on Savings bank Interest:

The below table represents the TDS on savings bank interest- 

The below table gives a fair idea about the TDS rates for various natures of payment. With the help of the below table, you can identify which TDS can apply to you or your business. 

Some of the other TDS rates are:

Word to Remember:

Liability: The responsibility of a person, business, or organisation to pay or give up something of value.

Interest: Money that is charged by a bank or other financial organisation for borrowing money. It is nothing but a financial cost to the lending authority. 

Conclusion:

Now we know where that small amount that is always being reduced from monthly salaries, loans, and your bank accounts is being used for and how it is calculated. 

Tax Deducted at Source is a tax paid at the source for different sources of income used by the Government for various features like architecture, welfare, and other things. So this is how a small amount from an individual makes a difference. When the same is viewed from a bird’s eye view, it results in a bigger impact on the overall economy. 

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