What is Tax Deducted at Source (TDS)?
Tax Deducted at Source is actually income tax. Sounds ugly right? Yes, we know. After all, tax is always ugly. Anyway, in this article, we are going to answer a simple question – what is tax deducted at source? You will often come across this term and in case you have no idea what it means, this article will help.
So, what is tax deducted at source?
TDS or tax deducted at source is the income tax you pay Central Government. The only difference with the Income Tax filing as we know is that TDS is paid later like normal income tax. It is rather paid up front. So, does that mean you are paying in advance. Not really, no! What really happens here is that tax is deducted as you earn money and not after you earn it. On the other side, the tax is being collected when you are earning it and not after you pay income tax separately.
Here is a quick illustration:
Normal Income Tax:
You earn >>> You get the money in your bank >>> You pay the tax later.
Tax Deducted at Source:
You earn >>> Tax is deducted from where the income originates >>> The balance after deduction goes to your bank.
Now is it clear? Hopefully it is.
Funny thing about TDS is that it cannot be deducted from all forms of income. There are only specific types of incomes where tax deduction at source takes place.
So, TDS is deducted from which types of incomes?
Here is a quick list:
- From your FDs or Fixed Deposits.
- From your salary.
- From the interest you earn on your savings bank accounts.
- From transactions that you make for real estate sales or purchase (in short, all real estate transactions).
How TDS works?
Now that you have the basic understanding of TDS, this part should be fairly easy to understand. See, when you earn, that income has to come from some source. Right? The source from where the income originates, is the source from where the tax will be deducted. It is that simple!
For instance, let us take the example of fixed deposits. You deposit some money in a Fixed Deposit account. You will earn interest. How pays you this interest? The bank or the organization with whom you have your fixed deposit account. So, the income source is the bank and your income is the interest you earn on your FD.
Now TDS is deducted at the very source of income origin. This means that the TDS will be deducted from the bank. Will the bank pay the tax to the government? Of course NOT. It is your income and hence, you will pay. What really happens is that the bank will deduct the tax from your income and pay the deducted amount to the government. The remaining balance is your net income and it will be credited to your account. It is that simple!
The terms used in TDS
There are some technical terms used in TDS. Actually, there aren’t many and it should be fairly easy for you to remember:
- Deductor: The organization who is tasked with the responsibility of deducting tax at source.
- Deductee: The person from whose income the TDS is being deducted.
- TAN: TAN stands for Tax Deduction and Collection Account Number. It is alphanumeric and a 10-digit number. For paying TDS you need to have TAN.
- PRN: PRN stands for Provisional Receipt Number. Once you pay TDS, you will get a receipt. It contains a number of 15 digits. That is the PRN.
That’s pretty much all you need to know about the terms used in TDS. There are others too but you can simply live without knowing them.
A look into income sources from which TDS is deducted
Salary: If you are an employee of some company, you earn salary. It is very likely that you already know about TDS because it will be deducted from your salary by your employer. It sucks but it happens. Based on the tax savings declarations you make (for example 80C or 80D investments, LTA, HRA etc.), the employer will deduct TDS and then pay you salary. The TDS thus deducted will go to Income Tax Department and then to government treasury. Now the problem is that sometimes TDS deductions are inaccurate. There is nothing you can do about it at that moment. Later however, while filing yearly income tax at end of the fiscal year, you will get an opportunity to make corrections.
Fixed Deposits: This is a type of investment that you make with banks or some other financial organization offering fixed deposits. Now, by rule, if, at the end of the fiscal year, you earn more than INR 10,000 in interest earning, TDS will be deducted by bank or the financial organization where you have invested in FD. Exactly how much TDS will be deducted? There are three cases to consider:
- You updated your PAN with your bank or financial organization: 10% TDS is deducted.
- You did not update PAN with your bank or financial organization: 20% TDS is deducted.
- You are an NRI: flat 30% will be deducted in form of TDS.
Savings Bank Interest: Same as in case of FD, if interest earnings exceed INR 10,000 in a fiscal year, TDS will be deducted. If PAN is updated, you will lose only 10% and if not, you will end up losing 20%.
Transactions in Real Estate: Any real estate transaction that is above 50 lakhs will invariably attract a TDS of 1%. That’s the flat rate that has been fixed for these kind of transactions.
Please remember that TDS is an approximate calculation. When you eventually file income tax return, you will have to declare your income from all sources as well as your investments. That’s when you will get to know about the exact amount of tax you need to pay. So, if unfortunately, more TDS has been deducted initially, you will be reimbursed for that additional amount. Also remember that you need to mention your income from FD whether or not it attracts TDS.