What is TDS and how is it calculated

TDS is something that almost everyone who pays taxes has heard of at some point or the other, but do you know everything there is to know about TDS, how it is calculated, why it is important, etc.? Here is where you get all the information you need about this mysterious abbreviation.

What is TDS?

The abbreviation ‘TDS’ stands for Tax Deducted at Source. Simply put, it is the collection of tax directly from the source of income. The person who has to make a payment to another party is the deductor and the party that receives the payment is the deductee. It is the deductor’s responsibility to get the tax deducted at source and remit it into the Central Government’s account. This is according to the provisions under the Income Tax Act of 1961. The entity that is responsible for managing this is the Central Board for Direct Taxes (CBDT).

Why is TDS important?

TDS is beneficial for both the government and taxpayers. For the government, TDS helps to keep its source of revenue steady and stable throughout the year. It also helps to prevent tax evasion since the taxes are directly deducted from the source. Tax is also collected from more people as most people will have either one or several of the sources of income on which TDS is applicable.

For taxpayers, TDS makes it easier to be compliant with tax regulations and filing because it is deducted automatically and at source. There is less chances of penalties, fines, etc., for late filing because of this.

What sources of income is TDS applicable on?

The sources of income that TDS is applicable on are the following:

  1. Salary
  2. Commissions
  3. Brokerage
  4. Contract payments
  5. Royalty payments
  6. Rental income
  7. Earnings from lottery
  8. Interest from financial investments
  9. Professional fees

Sources of income for which TDS is exempted

There are several sources of income for which TDS is not calculated. These are as follows:

  • Institutions that are no-TDS notified
  • Interest earned from savings accounts or recurring deposits that are opened in cooperative societies
  • Interest earned on Indira Vikas Patra, NSC, or KVP schemes
  • LIC, UTI, or other cooperative societies or insurance
  • Interest that is paid to the state or central government financial organisations
  • Interest that is earned on NRE accounts

How is TDS calculated?

The percentage of TDS is different for different sources of income. TDS is collected at source and before the calculations of any investments that are eligible for a tax deduction. For this reason, to claim refunds on investments, you have to declare and submit the proof of investment when a return is filed.

Calculation for TDS on salary

TDS on salary is calculated by reducing the exemption, as specified under the Income Tax Department regulations, from the total annual earnings. For any tax exemptions, proof and declaration are required from the employees. There are some categories that are exempt from tax. These are House Rent Allowance (HRA), allowance for travel or conveyance, and medical allowance.

TDS on salary is calculated by taking the sum of the basic income, prerequisites, and allowances as the gross monthly income. Then the calculations on the exemptions are made which are under the Income Tax Act Section 10. The amount for the exemptions is then reduced from the gross monthly income. TDS is always calculated on the yearly income, so the amount that is arrived at from reducing the exemptions from the gross monthly income is then multiplied by 12. This amount is your taxable income for the year. Also, remember to add or subtract other sources of income such as house rent or even house loan interest losses. You will also have to calculate your investments (which come under the Income Tax Act Chapter VI-A) and deduct this from the gross income. The maximum allowable tax exemptions on the salary should now be deducted. You should also take into account your income tax bracket when doing this. Senior citizens have different tax slabs and exemptions which should be taken into account. If you want to know more about the different types and rates of TDS, you can check out this article.

TDS refunds

A refund can be claimed if an individual has paid a surplus amount compared to the tax amount that is liable.

Now that you know more about your TDS, all that remains is filing your TDS returns. This is done on the government of India’s Income Tax Department website (www.incometaxindiaefiling.gov.in). It is important to do this on time to avoid any penalties or tax compliance issues. Also, after filing TDS returns, you should get TDS certificate as per Section 203. This states that tax has been deducted at source. This should also be requested from banks on payments of pension, etc.

Filing your TDS returns on time ensures not just peace of mind but better financial management.

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