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TDS stands for Tax Deducted at Source. As the name suggests, this tax is deducted by the income payer (deductor) while making a payment to the deductee. Such taxes are taken from the total amount payable by the payer and deposited with the Income Tax Department. The person paying the income and deducting the TDS is called the deductor, while the person receiving the income and on whose behalf the tax has been deducted is called the deductee.
For example, while making interest payments, banks may deduct TDS @ 10% if the interest amount exceeds Rs. 40,000. (Source: Income Tax Department) Assuming the interest amount payable is Rs. 50,000, the bank may deduct Rs. 5,000 (10% of Rs. 50,000) and pay the remaining amount of Rs. 45,000 to the deposit holder.
In this case, the bank is the deductor, and the deposit holder is the deductee. The bank deposits Rs. 5,000 with Income Tax Department against the deposit holder’s PAN (Permanent Account Number). The taxpayer can claim credit for such TDS while filing their Income Tax Return (ITR) and set off it against the total tax liability.
Why is TDS Important?
TDS mechanism is established by the Government to collect tax at source. It helps prevent tax evasion to an extent, as the deductors file all the TDS deduction details in quarterly TDS returns. This enables the Government to know the income details of the taxpayers. Accordingly, it becomes obligatory for the taxpayer to disclose such income and pay tax on such income in their Income Tax Return.
Suppose the taxpayer has not disclosed such income in the ITR. In that case, the computerized return processing automatically detects the mismatch and highlights the same to the Income Tax officers for suitable action to recover the taxes.
Additionally, such TDS also becomes an interim revenue source for the Government wherein partial taxes are recovered during the year in which income has been earned.
TDS Rates for Most Common TDS Deductions
TDS from salaries are the most common TDS deductions, wherein the employer company is liable to deduct tax at the average tax rate applicable to the employee. The total tax payable on salaries is then deducted monthly from the compensation being paid by the employer.
However, in the case of other TDS deductions, the Government has specified fixed TDS rates when the payments exceed the specified threshold. The specified TDS rates for most common TDS deductions in the case of individual deductors are as below:
| Section | Nature of Payment | Threshold | TDS Rate (%) |
| 193 | Interest on securities | Rs. 10,000 | 10% |
| 194A | Interest from Banks | Rs. 50,000 for senior citizens and Rs. 40,000 for other individuals | 10% |
| 194H | Commission / Brokerage | Rs. 15,000 | 5% |
| 194IA | Sale proceeds on transfer of certain immovable property | Rs. 50 Lakh | 1% |
| 194IB | Rent | Rs. 50,000 per month | 5% |
| 194J (b) | Fee for professional service or royalty etc. | Rs. 30,000 | 10% |
| 194K | Payment of dividends by mutual funds | Rs. 5,000 | 10% |
| 194S | Payment on transfer of Virtual Digital Assets (VDAs) | - | 1% |
The tax rates above are for payments to resident Indians. In the case of non-resident taxpayers, the tax rates may be different. Further, it should not be construed that once any TDS has been deducted from any income, there is no further tax liability on the taxpayer for such income. For example, suppose the marginal tax rate to the taxpayer is 30% (plus applicable cess and surcharge), and TDS has been deducted at 10%. In that case, the taxpayer is further liable to pay an additional tax of 20% (plus cess and surcharge).
Mutual fund TDS deduction on dividend
Till the financial year 2019-20, dividend income from equity mutual funds was exempt. However, such exemption was repealed from April 1, 2020, and all the dividends received are now taxable at the regular tax rates applicable to the investor.
To plug revenue leakage due to the non-declaration of such income by the investors, TDS provisions have been implemented for the payment of dividends by mutual funds. As per Section 194K of the Income Tax Act, 1961, mutual funds must deduct TDS at 10% while paying the dividend to the investors if the dividend payable exceeds Rs. 5,000 in a year.
Thus, TDS plays a vital role in the transmission of income data of taxpayers to the Government, which can then be used to ensure that the income earned is duly tax accounted. For the taxpayers, it becomes crucial to check the taxes deducted from their account and duly consider the incomes and taxes deducted in their Income Tax Return (ITR).
Disclaimer:
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. Kindly contact your tax advisor for professional advice.
