What is Tax Deducted at Source (TDS)?
Tax Deducted at Source (TDS) is a mechanism under the Indian Income Tax Act where a portion of a payment is deducted by the payer at the source before making the payment to the recipient. This deducted amount is then deposited with the government as advance tax on behalf of the payee.
Key Features of TDS:
Applicability:
TDS applies to various types of payments such as salaries, interest, rent, professional fees, commissions, and contractual payments.
Purpose:
It ensures the collection of tax at the time of income generation and minimizes tax evasion.
TDS Rates:
The rates vary depending on the nature of the payment and are prescribed by the Income Tax Department.
TAN Requirement:
The deductor must have a valid Tax Deduction Account Number (TAN) to deduct and deposit TDS.
TDS Certificate:
The deductor must provide a TDS certificate (e.g., Form 16/16A) to the recipient as proof of tax deduction.
How Does TDS Work?
For instance, if a company pays ₹50,000 as professional fees and the applicable TDS rate is 10%, the company will deduct ₹5,000 as TDS and pay ₹45,000 to the professional. The ₹5,000 deducted will be deposited with the government.
Benefits of TDS:
For Government: Ensures a steady flow of revenue throughout the year.
For Taxpayers: Provides proof of tax already paid, which can be adjusted while filing income tax returns.
TDS is a key component of India's tax system, ensuring transparency and timely collection of taxes.