One of the most important aspects of tax planning in India is to be aware of the various tax deductions that are available. This can help you save a significant amount of money on your taxes.
There are many deductions that are available for individuals, as well as businesses. Some of the most common deductions include:
As per the TDS system, tax is to be deducted at source from certain payments such as interest earned on bank deposits, rent paid, commissions earned, etc. The deductor is responsible for deducting TDS and depositing it with the government. The deductor is also required to furnish a TDS certificate to the payee, which can be used by the payee for claiming a refund of taxes, if any.
The Income Tax Department has specified the rate of TDS for different types of payments in the Income Tax Act. The deductor is required to deduct TDS at the specified rate and deposit it with the government.
TDS is deducted by the deductor on behalf of the payee and deposited with the government. The amount of tax so deducted is credited to the account of the payee in his/her annual income tax return.
The purpose of TDS is to ensure that taxes are paid on time by taxpayers. It also helps in reducing tax evasion and promotes voluntary compliance with tax laws.
TDS is not a new concept and has been in existence in India for several decades. However, it was only from 1st April, 2005 that the TDS system was made mandatory for all deductors.
In India, the TDS rate for interest income is 10% and for rent income, it is 5%. However, there are certain exceptions to these rates. For instance, if the total income of an individual from all sources does not exceed Rs 2.5 lakh in a financial year, then no TDS is applicable on his/her interest income. Similarly, if the total rent paid by an individual in a financial year does not exceed Rs 1.8 lakh, then no TDS is applicable on his/her rent income.
The categories of payments from which TDS is to be deducted and the corresponding rates are given in the table below:
For example, the rate of TDS on interest earned from bank deposits is 10%, while the rate for rent paid is 2%. The maximum amount that can be deducted as TDS from any payment is Rs. 1 lakh.
However, the deductor has to obtain a Permanent Account Number (PAN) from the deductee in order to deduct TDS. If PAN is not available with the deductor, then TDS will be deducted at higher of the following two rates:
a) 20%
b) rate prescribed in relation to such income under relevant provisions of Income-tax Act
The deductor needs to obtain a Permanent Account Number (PAN) from the Assessing Officer before deducting TDS. The PAN allotted to the deductor will be used for quoting in all communications relating to TDS.
The rates of deduction and manner of deduction are specified under section 194A, 195 and 196 of Income Tax Act, 1961.
TDS is deducted on payments made to residents as well as non-residents. The rates of TDS on payments to residents and non-residents are different.
In the case of resident, TDS is deducted at the rates specified in the Income Tax Act or at the rate specified in the relevant finance act (rates notified by CBDT from time to time).
However, in respect of payment to a non-resident, TDS is required to be deducted at higher of the rate specified under Income Tax Act or at rate specified in DTAAs entered into by India with such country.
Despite these disadvantages, TDS is a useful tool for collecting taxes and it is here to stay.
There are many deductions that are available for individuals, as well as businesses. Some of the most common deductions include:
- Deductions for Home Loans: You can claim a deduction for the interest paid on your home loan. This deduction is available for both principal and interest payments.
- Deductions for Education Loans: You can claim a deduction for the interest paid on your education loan. This deduction is available for both principal and interest payments.
- Deductions for Life Insurance Premiums: You can claim a deduction for the premiums paid on your life insurance policy. This deduction is available up to a maximum of Rs 1 lakh per year.
- Deductions under 80C: You can claim a deduction of up to Rs 1.5 lakhs per year under section 80C of the Income Tax Act. This deduction is available for investments in various instruments such as life insurance policies, PPF, ELSS, etc.
- Deductions for Health Insurance Premiums: You can claim a deduction for the premiums paid on your health insurance policy. This deduction is available up to a maximum of Rs 50000 per year.
- Deductions for donations: You can claim a deduction for donations made to certain approved charitable institutions and organizations
As per the TDS system, tax is to be deducted at source from certain payments such as interest earned on bank deposits, rent paid, commissions earned, etc. The deductor is responsible for deducting TDS and depositing it with the government. The deductor is also required to furnish a TDS certificate to the payee, which can be used by the payee for claiming a refund of taxes, if any.
The Income Tax Department has specified the rate of TDS for different types of payments in the Income Tax Act. The deductor is required to deduct TDS at the specified rate and deposit it with the government.
TDS is deducted by the deductor on behalf of the payee and deposited with the government. The amount of tax so deducted is credited to the account of the payee in his/her annual income tax return.
The purpose of TDS is to ensure that taxes are paid on time by taxpayers. It also helps in reducing tax evasion and promotes voluntary compliance with tax laws.
TDS is not a new concept and has been in existence in India for several decades. However, it was only from 1st April, 2005 that the TDS system was made mandatory for all deductors.
TDS limits and rates in India
As per the Income Tax Act, any person who is responsible for making payments such as interest, rent, commission, etc. to another person is required to deduct tax at source and deposit it with the government. This tax that is deducted at source is called TDS.In India, the TDS rate for interest income is 10% and for rent income, it is 5%. However, there are certain exceptions to these rates. For instance, if the total income of an individual from all sources does not exceed Rs 2.5 lakh in a financial year, then no TDS is applicable on his/her interest income. Similarly, if the total rent paid by an individual in a financial year does not exceed Rs 1.8 lakh, then no TDS is applicable on his/her rent income.
The categories of payments from which TDS is to be deducted and the corresponding rates are given in the table below:
Type of Payment TDS Rate
- Interest on deposits with banks, post office, etc. 10%
- Rent for property 5%
- Commission or brokerage 5%
- Professional fees 3%
- Payments to contractors and sub-contractors 2% (w.e.f 14th May 2020) 1% (upto 13th May 2020)
- Winning from lottery, crossword puzzles, horse races, etc. 30%
For example, the rate of TDS on interest earned from bank deposits is 10%, while the rate for rent paid is 2%. The maximum amount that can be deducted as TDS from any payment is Rs. 1 lakh.
However, the deductor has to obtain a Permanent Account Number (PAN) from the deductee in order to deduct TDS. If PAN is not available with the deductor, then TDS will be deducted at higher of the following two rates:
a) 20%
b) rate prescribed in relation to such income under relevant provisions of Income-tax Act
How TDS works in India
In India, TDS is deducted by the payer (deductor) at the time of making payment or crediting the amount to the resident payee. The deductor is required to deposit the TDS so deducted with the government within a prescribed time.The deductor needs to obtain a Permanent Account Number (PAN) from the Assessing Officer before deducting TDS. The PAN allotted to the deductor will be used for quoting in all communications relating to TDS.
The rates of deduction and manner of deduction are specified under section 194A, 195 and 196 of Income Tax Act, 1961.
TDS is deducted on payments made to residents as well as non-residents. The rates of TDS on payments to residents and non-residents are different.
In the case of resident, TDS is deducted at the rates specified in the Income Tax Act or at the rate specified in the relevant finance act (rates notified by CBDT from time to time).
However, in respect of payment to a non-resident, TDS is required to be deducted at higher of the rate specified under Income Tax Act or at rate specified in DTAAs entered into by India with such country.
Advantages of TDS
- TDS is a simple and efficient way of collecting taxes.
- It helps in reducing tax evasion and promotes compliance with tax laws.
- It ensures that taxes are paid on time.
- It helps in identifying taxpayers who have not been paying their taxes regularly.
- It helps in better management of public finances.
- TDS also ensures that the correct amount of tax is deducted and paid to the government.
While TDS has several advantages, it also has some disadvantages. These are:
- It increases the compliance burden on businesses as they have to deduct tax at source and deposit it with the government.
- It leads to delay in payments as the deductor has to deposit the TDS with the government before making payment to the payee.
- It increases the cost of compliance as businesses have to incur costs for obtaining PAN from their employees/deductees.
- There is a risk of double taxation in case the deductor does not deposit the TDS with the government or does not furnish the TDS certificate to the payee. This can happen if the deductor defaults on his tax liability or goes into bankruptcy.
- There is a risk of under-deduction of tax as the deductor may not deduct tax at the prescribed rate or may not deposit it with the government. This can happen if the deductor deliberately tries to evade taxes.
- There is a risk of over-deduction of tax as the deductor may deduct tax at a higher rate than prescribed or may deposit more tax than required. This can happen if the deductor is not aware of the latest changes in tax rates or if he makes mistakes while calculating the taxes.
Despite these disadvantages, TDS is a useful tool for collecting taxes and it is here to stay.
