Fundamentals of TDS

As most of us are aware, TDS actually stands for tax deduction at source. While this is easily known to all, the concepts are not as easily understood, in fact dreaded at times too. As a subject, it is vast and you’ll need a good taxation course to become Mr./Ms. Know-it-all. Here, however, we have provided a brief outline so as to familiarize readers with the first principles.

TDS is not just an Indian tax concept. It is a global code applied everywhere in taxation. Internationally, it is usually referred to as withholding tax, i.e. tax withheld while making payments. 

The key reasons behind introduction/ existence/ levy of TDS are:

  • to provide an opportunity to the government to recover tax (or at least a part of it) upfront
  • to bring the transaction within tax ambit / network and ensuring that it gets reported eventually by the income recipient

Chapter XVII of the Indian income tax law (the Income Tax Act, 1961) deals with various provisions relating to TDS, such as:

  1. Authorizing deduction of tax at source from payments made (section 190)
  2. Specifying various types of payments to residents on which taxes have to be deducted, and rate of TDS, for example:
    • Tax on salaries to be fully deducted (section 192)
    • TDS on contractual payments @ 2% (section 194C)
    • TDS on professional payments @ 10% (section 194J), and so on.
  3. Providing the situation when taxes are required to be deducted from payments to non-residents (section 195 and others)

  4. Credit of TDS deducted by payer can be claimed by the payee against the tax liability determined on his total income (section 199)
  5. Duties of person deducting TDS, for example:
    • Requirement to obtain TAN (section 203A) and deposit TDS on time (section 200);
    • Payment of interest where TDS is not deducted on time, or after deducting is not deposited within the due date (section 201);
    • Obligation to file TDS returns (section 206) and issue TDS certificate to the payee (section 203);
    • Who is responsible for deducting tax – payer or principal officer of the company where the payer is a company (section 204); and so on.

    A lot of these sections in turn refer to Income Tax Rules where further details are provided, such as due dates, format of forms to be issued and return to be filed etc.

  6. Responsibility of payee to furnish his PAN, in absence of which payer may deduct tax at higher rate of 20% (section 206AA)

  7. Possibility of applying for a lower TDS certificate to the TDS officer where the applicable tax rate can cause hardship, for example, net income is lower, income recipient is in losses etc. (sections 195 and 197)
  8. Requirement to gross up income where TDS is to be borne by the payer (section 195A).

Hope you got a quick snapshot of TDS fundamentals from the above. For more detailed learning, you could subscribe to Super 20, a taxation coaching centre in Ahmedabad forming part of various commerce courses of varying levels – Jr. Executive, Executive, Advanced Executive.

TDS concepts may seem complex, but are very relevant for today’s business and taking up the best tax course for these would go a long way in staying tax-compliant, whether self or clients.