What is TDS and how does it work?

TDS stands for 'Tax Deducted at Source'. It was introduced to collect tax at the source from where an individual's income is generated. The government uses TDS as a tool to collect tax in order to minimise tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date.

TDS is applicable on various incomes such as salaries, interest received, commission received, dividends, sale of property etc. The TDS has been expanded to the incomes earned from cryptocurrencies, non-fungible tokens and online gaming from FY 2022-23.

However, TDS is not applicable to all incomes and persons for all transactions. Different TDS rates have been prescribed by the Income-tax Act,1961 for different payments and different categories of recipients. For example, payment of redemption proceeds by a debt mutual fund to a resident individual is not subject to TDS but for a Non-resident Indian is subject to TDS.

TDS works on the concept that every person making specified types of payments to any person shall deduct tax at the rates prescribed in the Income-tax Act at source and deposit the same into the government's account against the PAN of the deductee.

The person who is making the payment is responsible for deducting the tax and depositing the same with the government. This person is known as a 'deductor'. On the other hand, the person who receives the payment after the tax deduction is called a 'deductee'. Form 26AS is a statement which shows the amount of tax deducted and deposited in a person's name/PAN in a particular financial year. Apart from this, the TDS details and income earned from a particular source will be reflected in the Annual Information Statement (AIS) as well. The AIS was launched by the income tax department in November 2021 to provide the taxpayer a complete picture of total income received from various sources, tax deducted if any.

An individual can, therefore, view/check the TDS from incomes paid to him by viewing this Form 26AS and AIS. Each deductor is also duty bound to issue a TDS certificate certifying how much amount is deducted in the deductee's name and deposited with the government.

Also Read: What does your AIS show to income tax department?

Rates prescribed for different types of payments
There are different rates for TDS described in the different sections of the Act, depending on the nature of the payments.

Also Read: How TDS on crypto, other NFTs will work

Also Read: How gaming companies will deduct TDS from online wins

Also Read: TDS on EPF withdrawals reduced in certain cases

Also Read: TDS is applicable on Mahila Samman Savings Scheme, says CBDT

How TDS works
The entity making a payment (which is subject to TDS) deducts a certain percentage of the amount paid as tax and pays the balance to the recipient. The recipient also gets a certificate from the deductor stating the amount of TDS. The deductee can claim this TDS amount as tax paid by him (i.e., the deductee) for the financial year in which it is deducted.

The deductor is duty bound to deposit the TDS with the government. Once deposited this amount reflects in the Form 26AS/AIS of individual deductees.

TDS only applicable above a threshold level
One must remember that TDS on specified transactions is deducted only when the value of payment is above the specified threshold level. No TDS will be deducted if the value does not cross the specified level.

Different threshold levels are specified by the Income Tax department for different payments such as salaries, interest received etc. For example, there will be no TDS on the total interest received on FD/FDs from a single bank if it is less than Rs 40,000 in a year from that bank. For senior citizens, TDS on interest received on FD will be applicable if it crosses Rs 50,000 in a single financial year.

How to avoid TDS
If a person expects that his total income in a financial year will be below the exemption limit, he can ask the payer not to deduct TDS by submitting Form 15G/15H. However, it may happen that an individual is not allowed to submit Form 15G/H to avoid TDS on certain incomes. For instance, an individual cannot submit Form 15G/H to avoid TDS on money earned from playing online games. On the other hand, TDS can be avoided on incomes such as dividend, interest from fixed deposits by submitting Form 15G/H.

While receiving payment which is subject to TDS, the deductee is required to provide his PAN details to avoid tax deduction at the higher rates.

What is TDS?
TDS stands for tax deducted at source. The payer of income deducts the tax from the gross payment due and pays the net amount (i.e. net of tax).

Is TDS deducted at the same rate from all types of income which are subject to TDS?
No, TDS is not deducted at the same rate from all incomes which are subject to TDS. There are different TDS rates for different types of incomes.

Who are deductor and deductee?
A deductor is the person responsible for deducting tax. The person who receives the payment after the deduction of tax is called the deductee.

How can I check if TDS is deposited with the government?
Once the TDS is deposited with the government by the deductor, then the TDS amount deposited will be reflected in your Form 26AS. Further, the deductor is required to issue you a TDS certificate.

What is the rate at which TDS on salaries is deducted?
According to income tax laws, TDS on salary is deducted at the income tax rates applicable to one's incomes inclusive of cess.

Can TDS be avoided?
TDS can be avoided by submitting Form 15G/Form 15H to the Deductor.

What is the current TDS rate?
TDS rate depends on the type of income received by you. Each income has different threshold and once that threshold is crossed at the TDS rate specified in the Income-tax Act.

Can TDS be refunded?
TDS that has been deducted can be claimed as refund provided your tax liability for the financial year is lower than the tax deducted. To claim TDS refund, you are required to file an income tax return.