India’s Most Comprehensive Guide On TDS (May 2020)

What is TDS?

Tax Deducted at Source (TDS) is a system introduced by Income Tax Department, where the person responsible for making specified payments such as salary, commission, professional fees, interest, rent, etc. is liable to deduct a certain percentage of tax before making payment in full to the receiver of the payment. As the name suggests, the concept of TDS is to deduct tax at its source. Let us take an example of TDS assuming the nature of payment is professional fees on which the specified rate is 10%.

XYZ Ltd makes a payment of Rs 50,000/- towards professional fees to Mr. ABC, then XYZ Ltd shall deduct a tax of Rs 5,000/- and make a net payment of Rs 45,000/- (50,000/- deducted by Rs 5,000/-) to Mr. ABC. The amount of 5,000/- deducted by XYZ Ltd will be directly deposited by XYZ Ltd to the credit of the government.

In this comprehensive guide on TDS, we are answering 15 frequently asked questions by business owners. Check out.

 

1) What Is TAN and How to apply for TAN?

TAN stands for Tax Deduction Account Number. It is a 10 digits alphanumeric number required to be obtained by all persons who are responsible for deducting or collecting tax. Under Section 203A of the Income Tax Act, 1961, it is mandatory to quote Tax Deduction Account Number (TAN) allotted by the Income Tax Department (ITD) on all TDS returns. The procedure for the application of TAN is very simple and can be done online by filling up Form 49B. Please refer to NSDL Site in order to Apply For TAN.

 

2) What is the TDS Certificate?

TDS certificates are issued by the deductor (the person who is deducting tax) to the deductee (the person from whose payment the tax is deducted). There are mainly two types of TDS certificates issued by the deductor.

1. Form 16: which is issued by the employer to the employee incorporating details of tax deducted by the employer throughout the year, and
2. Form 16A: This is issued in all cases other than salary.

For example, Mr. Gupta is working as a salaried employee at a company, and tax is deducted on his salary @ 15%. The company shall provide Mr. Gupta with a Form 16 describing particulars in detail regarding the amount of salary paid and tax deducted on the same.

However, had Mr. Gupta been working as a professional and received professional fees from an organization that is subject to TDS, then he will be provided Form 16A for the same.

 

3) When TDS should be deducted?

The concept of TDS is based on a simple principle i.e. tax is to be deducted at the time of payment getting due or actual payment whichever is earlier. A set of scenarios will be helpful in understanding the concept:

Say, ABC Private Limited has to make payment of Rs 50,000/- to Mr. XYZ in exchange for professional services.

Scenario 1:
Mr. XYZ was paid Rs 30,000/- in advance on 15^th July. XYZ raised the invoice after completion of work on 31^st July and the rest of the payment is to be made.

In such a case the company should have deducted tax in the following manner:

On 15^th July: Rs 3,000/- (@ 10% on the advance of Rs 30,000/-)

On 31^st July: Rs 2,000/- (@ 10% of the total invoice amount as deducted by tax already deducted i.e. Rs 5000/- deducted by Rs 3,000/-)

 

Scenario 2:
Mr. XYZ raised the invoice on 15^th July and was paid whole consideration at one go on 31^st July.

In such a whole amount of Rs 5,000/- shall be deducted on 15^th July, the date when payment got due, and a net payment of Rs 45,000/- shall be made on 31^st July.

 

Scenario 3:
Mr. XYZ is to receive the whole amount of Rs 50,000/- well in advance before completion of the assignment.

In such a particular case tax of Rs 5000/- shall be deducted right at the time of payment of advance and no tax is to be deducted at the time of making an entry for the bill due.

 

4) How much tax should be deducted from salary?

Persons responsible for paying salary are liable to deduct tax on estimated salary at a prescribed rate of 15% subject to the following:

1. Exemption Limit: No tax is required to be deducted at source unless the estimated salary exceeds the basic exemption limit.
2. Exempt allowances: Allowances such as LTC, HRA, conveyance, traveling exempt as per prescribed limits and other perquisites not forming part of salary should be deducted from total salary while calculating taxable salary.
3. Other deductions: Other deductions such as deductions under section 80C, 80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E, 80EE, etc. should be considered before the calculation of tax on salary.

 

5) What is the minimum salary one should have for TDS to be deducted by the employer?

If after comprehensive calculation of allowable allowances, taxable perquisites, and deductions under chapter VI-A, income from salary head exceeds a sum of basic exemption limit, then tax has to be deducted by the employer @ 15% on the amount over and above the basic exemption limit. For example, the salary of Mr. A arrives at Rs 2,80,000/- assuming that all the allowances, perquisites, and deductions have been taken into consideration, tax @ 15% on Rs 30000/- (2,80,000 – 2,50,000) shall be deducted by the employer.

Hence, provisions of TDS shall attract only if the minimum salary is above the basic exemption limit.

 

6) What are the rates of TDS?

There are around 20-25 sections that prescribe different types of payments on which tax is deductible at source. Here, we are going to discuss some of the most commonly encountered nature of payments on which tax is to be deducted at source.

Rates for tax deduction at source (Updated May 2020)

In order to provide more funds at the disposal of the taxpayers for dealing with the economic situation arising out of COVID-19 pandemic, the rates of Tax Deduction at Source (TDS) for the following non-salaried specified payments made to residents has been reduced by 25% for the period from 14^th May, 2020 to 31^st March, 2021:-

 

S. No	Section of the Income Tax Act	Nature of Payment	Existing Rate of TDS from 01/04/2020 to 13/05/2020	Reduced rate from 14/05/2020 to 31/03/2021
1	193	Interest on Securities	10%	7.5%
2	194	Dividend	10%	7.5%
3	194A	Interest other than interest on securities	10%	7.5%
4	194C	Payment of Contractors and sub-contractors	1% (individual/HUF) 2% (others)	0.75% (individual/HUF) 1.5% (others)
5	194D	Insurance Commission	5%	3.75%
6	194DA	Payment in respect of life insurance policy	5%	3.75%
7	194EE	Payments in respect of deposits under National Savings Scheme	10%	7.5%
8	194F	Payments on account of re-purchase of Units by Mutual Funds or UTI	20%	15%
9	194G	Commission, prize etc., on sale of lottery tickets	5%	3.75%
10	194H	Commission or brokerage	5%	3.75%

11	194-I(a)	Rent for plant and machinery	2%	1.5%
12	194-I(b)	Rent for immovable property	10%	7.5%
13	194-IA	Payment for acquisition of immovable property	1%	0.75%
14	194-IB	Payment of rent by individual or HUF	5%	3.75%
15	194-IC	Payment for Joint Development Agreements	10%	7.5%
16	194J	Fee for Professional or Technical Services (FTS), Royalty, etc.	2% (FTS, certain royalties, call center)10% (others)	1.5% (FTS, certain royalties, call centre) 7.5% (others)
17	194K	Payment of dividend by Mutual Funds	10%	7.5%
18	194LA	Payment of Compensation on acquisition of immovable property	10%	7.5%
19	194LBA(1)	Payment of income by the Business trust	10%	7.5%
20	194LBB(i)	Payment of income by Investment fund	10%	7.5%
21	194LBC(1)	Income by the securitization trust	25% (Individual/HUF) 30% (Others)	18.75% (Individual/HUF) 22.5% (Others)
22	194M	Payment to the commission, brokerage etc. by Individual and HUF	5%	3.75%
23	194-O	TDS on e-commerce participants	1% (w.e.f.1.10.2020)	0.75%

 

 

7) How to calculate TDS?

Numerous transactions are covered under the purview of TDS sections and calculation of TDS can be tricky in some sections. Here, we shall discuss some examples of different sections to make the calculation clear.

Example 1:
Under the section, 194A tax is to be deducted on payment of interest other than interest on securities. However, no tax is required to be deducted if the amount of such interest paid or credited or is likely to be paid or credited does not exceed Rs 10,000/- in case of a banking company, co-operative society engaged in the business of banking and post office deposits and Rs 5,000/- in any other case in a financial year. Also, note that no tax is to be deducted on savings account interest.

• Scenario 1: Suppose interest paid or credited or is likely to be paid or credited by a banking company to a person in a financial year is Rs 9,000/-, then no tax is required to be deducted as the amount has not exceeded the cap of Rs 10,000/-.
• Scenario 2: Say interest paid or credited or is likely to be paid or credited by a banking company to a person in a financial year is Rs 12,000/-, then tax is required to be deducted on the whole amount of Rs 12,000/- @ 10% i.e. TDS of Rs 1200/-. Please note that Rs 10,000/- is a cap just for fixing responsibility of banking company for TDS and is not an exemption limit i.e. tax is to be deducted from the whole amount of Rs 12,000/- as soon as the amount exceeds the cap amount of 10,000/-

Similar examples are relevant for other interests, except in those cases the cap amount shall be Rs 5,000/- instead of Rs 10,000/-.

 

Example 2:
Under the section, 194C tax is to be deducted on payment or credit to a resident contractor/sub-contractor. The definition of a contract is derived from the Indian Contract Act, 1872 and covers almost all types of contracts under its purview. However, no tax is to be deducted where:

• the sum is credited or paid in pursuance of any contract, the consideration for which does not exceed Rs. 30,000/-, or,
• where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed 75,000/-

Applicable @ 1% if payment/credit is made to resident individual or HUF, @ 2% if payment/credit is made to any resident person other than individual / HUF and @ 20% if PAN is not available.

Scenario 1: Mr. A, an individual provided contractual services to a firm and was made payments in 3 installments, 1^st installment of Rs 25,000/- and the second installment of Rs 26,000/- and last installment of Rs 28,000/-.

In this case, the firm need not deduct tax on installments since the amount hasn’t exceeded the cap of Rs 30,000/-. But, if we sum up all 3 installments the total arrives at Rs 79000/- which exceeds the yearly cap of Rs 75,000/-. Hence, in this case, the tax is to be deducted from the whole amount of Rs 75,000/- @ 1% (being an individual), which arrives at Rs 750/-. Please note that once the total amount exceeds Rs 75,000/- in a financial year, the tax is to be deducted from each and every payment irrespective of the fact whether such part payments are more or less than Rs 30,000/-.

 

Scenario 2: M/s ABC, a partnership firm provided some contractual services to Mr. A and was made payments in 3 installments of Rs 50,000/-, Rs 12,000/- and Rs 14,000/-.

In this case, tax @ 2% (being a partnership firm) shall be deducted at the time of payment of Rs 50,000/- as the sum exceeds the cap of a single payment of Rs 30,000/-.

No tax shall be deducted when the sum of Rs 12,000/- is paid as the sum is far below the cap of a single payment of Rs 30,000/- and the total payment during hasn’t exceeded the yearly cap of Rs 75,000/-.

Tax @ 2% shall be deducted from the whole amount of Rs 12000/- and Rs 14000/- as they might not have exceeded the cap of single payments, but the yearly cap of Rs 75000/- is exceeded as and when the final installment of Rs 14000/- is paid to M/s ABC.

 

8) What are the due dates for TDS?

Payment of TDS each month and filing of quarterly return of TDS are 2 separate processes and due dates for these processes are different

The due dates for the payment of the deducted TDS are on or before the 7th of next month. It means, if the deductor has deducted tax from payments in the month of November, then he has to pay the TDS  on or before the 7th of December. The key point to note here is that the due dates are the same for all types of assesses whether its Salaried case or non-salaried case.

These due dates are applicable to all non-Government assesses and also to Government assessees who deposit tax with Challan as specified by the income tax department.  If the challans are not used to make payment of TDS by government assesses, then the due date for payment of TDS will be the same day on which the amount is deducted.

Monthly due dates for payment TDS.

Month	The due date for payment of TDS
April	7th of May
May	7th of June
June	7th of July
July	7th of August
August	7th of September
September	7th of October
October	7th of November
November	7th of December
December	7th of January
January	7th of February
February	7th of March
March	30th of April

 

You can even pay TDS online. In the next question, we will cover the Due date for filing of TDS returns.

 

9) Which are the different forms prescribed for TDS Return?

Before that, we will get a general idea about which forms are applicable to different cases. These forms are to be prepared in consultation with your tax advisor to avoid any mistake and then to file the corrected TDS return.

Here is how ProfitBooks can help

Form	Detector type
Form 24 Q	Deductions made in a salaried case
Form 26 Q	Deductions made in the non-salaried case
Form 27 Q	Deductions made in the case of NRIs

 

Now that we know the different forms, in the below table we can see the due dates for different forms and different quarters as well:

Quarter	Form 24Q & 26Q	Form 27Q
April to June	15 July	15 July
July to September	15 October	15 October
October to December	15 January	15 January
January to March	15 May	15 May

 

 

What are penalty provisions for non-deduction of TDS?

There are several instances where interest, fees, and penalties are levied on non-compliance of TDS provisions. The same are discussed here step by step:

1. Consequences of non-deduction of TDS
   If a person who was responsible for deducting tax at source fails to do so, then the ASSESSING OFFICER has powers to disallow whole of such expenditure for ascertaining taxable profits. For example, ABC Limited paid a commission of Rs 2,00,000/- during the year to a single person and omitted to deduct tax on the same, then the Assessing Officer has powers to disallow deduction whole of such expenses while ascertaining taxable profits.

 

2. Late deduction of TDS
   Tax is to be deducted at the time of payment/credit getting due or payment whichever is earlier. In terms of income tax, even a single day is counted as a month for the purpose of calculating interest. In cases of late deduction of tax, interest @ 1% per month of the TDS amount subject to the maximum amount of TDS is levied. For example, ABC company was supposed to deduct tax of Rs 20000/- on 15^th July but instead the same was deducted by the company on 1^st August. In this case interest of Rs 200/- (@1% for one month) is required to be paid by the assessee.

 

3. Late payment of TDS
   Tax is to be deducted and paid to the credit of government on every 7^th day of the succeeding month in which the tax has been deducted, otherwise, interest @ 1.5% per month of TDS amount subject to the maximum amount of TDS is levied. For example, ABC Ltd was supposed to deposit TDS of Rs 20000/- deducted in the month of April by the 7^th of May but fails to deposit the same on time and actually deposited the same in the following month. In this case interest of Rs. 300/- (@ 1.5% for one month) is required to paid by the assessee.

 

4. Late filing of return of TDS
   TDS returns are required to be filed in the last month of the following quarter i.e. 31^st July, 31^st October, 31^st January, and in the case of March, it is 31^st May. Fees under section 234E are levied @ Rs 200/- per day subject to a maximum amount of TDS until the return is filed. Example, M/s ABC, a partnership deducted and paid a total TDS of Rs 40000/- in the first quarter of FY and was supposed to file its TDS return by 31^st July but filed its return on 31^st August. Total fees of Rs 6200 (200/- per day for 31 days) shall be paid before filing of return.

5. Penalty for late filing of TDS return
   Assessing officer may direct a person who fails to file the statement of TDS within due date to pay a penalty minimum of Rs. 10,000 which may extend to Rs.1,00,000. The penalty under this section is in addition to the penalty u/s 234E and also covers the cases of incorrect filing of TDS return.

 

11) How do I know how much TDS has been deducted and whether it has been credited to me?

It is very simple to know how much TDS has been deducted and whether it is credited to you or not. Follow these simple process to find it out:

Step 1: Log on to Income Tax India eFiling website and click on the link “Register Yourself”

Step 2: Enter your details as per PAN and generate a password

Step 3: Once you have logged into the portal, click on the option “View Tax Credit Statement (26 AS)”

Step 4: After clicking on this link you will be directed to another website called TRACES (TDS Reconciliation Analysis and Correction Enabling System) where you can know about complete details of your tax deducted at source, advance tax paid and other important details.

26AS is a tax credit statement and covers all the amounts of TDS deducted by others. This might happen that someone has deducted your tax but the same isn’t appearing in your tax credit statements, which may be simply due to non-filing of TDS return by the deductor. In such cases, please make sure to obtain a TDS certificate as this will be an ultimate proof that your tax has been deducted at source.

 

12) Can I request tax deductions to not deduct tax from an amount and pay the whole amount to me?

Yes, if your gross income is well below the basic exemption limit then you can request the person who is responsible for TDS, to not deduct tax on such income. For doing the same you have to options:

1. Apply to the Assessing Officer under whose jurisdiction you fall in Form 13 to get a certificate approving deduction of tax at a lower rate or NIL rate.
2. Submit a declaration in Form 15G/15H in which you declare that your income is below the basic exemption limit during the financial year and tax is required to be deducted at source. This certificate has to be submitted every year and non-submission may lead to deduction of tax. Please note that Form 15G is for individuals and Form 15H is for senior citizens.

One major difference between Form 13 and Form 15G/15H is Form 15G/15H can be issued only by individuals assesses, whereas request in Form 13 can be submitted by any person i.e. individual, partnership firm, company, etc. to the ASSESSING OFFICER to get approval for deduction of taxes at lower or NIL rate.

 

13) How to apply for a TDS refund?

There is this major misconception that refund of excess TDS is different from an income tax refund and is called a TDS refund. However, the fact is that there is only one kind of return that you claim while filing your annual income tax return. Nowadays, it is compulsory to quote bank account details such as account number and IFSC code while filing of return and non-entering of such details will not generate a valid .xml file. In case if someone has deducted more tax than he should have deducted, then income tax refund will arise which can be claimed upon the filing of your annual income tax return.

For example, you own a goods transport agency and yours is a proprietorship firm. You presented an invoice of Rs 50,000/- and the person paying freight paid you a net amount of Rs 49,000/- (after deducting tax of Rs 1,000/- @ 2% under section 194C). In this case, the deductor deducted tax @ 2% instead of 1% and hence deducted excess TDS by Rs 500/-. This excess TDS will arise as a refund in the income tax return.

 

14) What is the applicability of TDS on transactions of immovable property?

There are mainly two sections that prescribe for deduction of taxes on transactions related to immovable property:

1. Section 194-I: Section 194-I requires for deduction of tax at source on rental income @ 10% for rent on land & building if the total amount of rent paid/credited or to be paid/to be credited exceeds the cap of Rs 1,80,000/- during a financial year. Please note that individuals and HUFs who are not subject to tax audits under section 44AB need not deduct tax at source on such rental expenses.

2. Section 194IA: Section 194IA came into effect from June 2013 which required deduction of tax by the transferee before making payment to transferor @ 1% of the consideration for immovable property. Any sum paid by way of consideration for the transfer of any immovable property (other than agricultural land) is covered under section 194-IA, provided the consideration for the transfer of immovable property is not less than Rs. 50 lakhs.

3. Section 194LA: Section 194LA provides for deduction of tax at source @ 10% for the payment to be made to the assessee as compensation on account of compulsory acquisition of immovable property. Please note that no deduction shall be made under this section where the amount of such payment or, as the case may be, the aggregate amount of such payments to a resident during the financial year does not exceed Rs 250000/-.

 

15) What are the TDS rules?

There are certain rules set out by the tax authorities in regard to TDS, that if complied properly you will not end up paying penalty, interest, and fees.

1. Tax deduction rules: Tax is required to be deducted at the time of payment getting due or actual payment whichever is earlier. Delay in deduction of tax will attract interest @ 1% per month until the tax is deducted.
2. TDS payment rules: Every person is required to pay the tax deducted to the credit of government by the 7^th day of the following month. Non-payment or late payment of TDS will attract interest @ 1.5% per month until the tax has not been deposited.
3. TDS return filing rules: TDS returns are required to be filed timely on the 31^st day of July, October, January, and May during a financial year. Non-filing or filing of return after the due date will attract fees under section 234E @ Rs 200/- per day until the return is filed. However, this amount shall not exceed the amount of tax.

 

Final Thoughts

If you do not have an accounting background, managing tax compliance can be a difficult task. A good accounting software can not only help you keep your books in order but can also help you avoid penalties arising due to non-compliance.

ProfitBooks is one such accounting software that will help you comply with new GST laws. It helps you right from creating GST invoices to filing GST returns online.

Manage Taxes Like A Pro With ProfitBooks 

 

 

Important Links:
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Important GST Concepts Every Business Should Know