January 21 , 2013
Income tax is finally (and obviously!) the liability of the person earning income. However, the government makes you pay some or all of this tax while you earn the income itself, and makes it the responsibility of the person giving you that income. This is called Tax Deducted at Source or TDS. Here is quick view of what TDS is.
When is TDS applied?
TDS works on the principle of 'pay as you earn'. So every time your salary, interest, commission, etc is credited TDS is deducted from it by your employer or bank, whoever pays you, as the case may be.
Where does TDS apply?
Here is a list of incomes on which TDS is applicable:
- Insurance commission
- Fee on professional/technical service
- Compensation on property that was compulsorily acquired by government authorities
- Rental income above Rs 1.2 lacs a year
- Winning lottery, puzzles, games or horse race
- Contracts, brokerage and sale of lottery tickets
In case of salary, TDS takes care of almost the entire income tax liability of the employee. The employer is responsible for calculating and deducting this, so you as an employee need to do nothing other than declare to the employer your rent, loans and investments. In case of other incomes (such as interest on fixed deposits), TDS takes care of only part of the liability. Here, it is only meant to give the Income Tax Department a trail of the transaction. You are then responsible to take this into account, declare the income, and complete the tax calculation and payment.
TDS ratesTDS becomes applicable only if income from a source crosses a particular limit regardless of whether the person's total income is taxable or not. Except for salary TDS rates are fixed. For salary income applicable tax rate is based on tax slab of the individual.
TDS certificateThe tax deductor (for eg your employer) is supposed to hand a TDS certificate to you showing tax that has been deducted for the year. Certificates are different for different sources of income. In case of salary it is Form 16. This is given by April 30 th of the next financial year. You can demand for one if you do not receive it. TDS certificate is useful while you file tax returns.
TDS is a two-edged sword. On one hand TDS is a great convenience (in the case of salary) for you, it also checks evasion in a lot of other cases by providing a trail of your income. So when you file returns, do make sure every single income is declared and the applicable tax paid.While you do not have control over your TDS you can reduce your tax liability. If your income is below taxable limit declare this to your bank through Form 15G (or Form 15H in case of senior citizens) where you have FD and they will not deduct tax on your interest. Similarly certain amounts made towards investments or as expenses can be deducted from your income and thus you can lower your taxable income. These have to be declared and claimed back while filing tax returns. Most of these deductions come under chapter VI A tax rebates.