Full Form Of Tds Tax Deducted At Source How It Works

Full Form of TDS – Tax Deducted at Source

The full form of TDS is Tax Deducted at Source. TDS provisions are in the Income-tax Act, 1961. Using TDS, income tax is collected at the source of income generation. One who makes a payment to another person deducts TDS from the amount and remits the amount to the government on the receiver’s behalf. In this fashion, the tax authorities get a specified tax percentage in advance. Then, at a later date, the receiver will file his income return, offer the income for tax, and take credit for the TDS deducted earlier.

TDS Deduction Process

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The payer (‘Deductor’) deducts a specified percentage of tax on specified income on behalf of the income’s recipient (‘Deductee’). The amount deducted in E-Challan ITNS 281 deposits with the government. The deductor also must file quarterly TDS returns. The receiver can claim credit of the TDS deducted while filing the Income-tax return by deducting the tax payable amount. The person who should deduct TDS must specify under the sections covering TDS. It deducts at the time of payment or credit, whichever is earlier.

Example

If A pays ₹10,000 to B as consultancy charges, then A needs to deduct 10%, ₹1,000, remit to the government, and pay B ₹9,000. The amount received by B will be ₹9,000 as a bank receipt and ₹1,000 as TDS credit with the government. B can adjust the TDS credit when filing the income return with the tax payable by B. For example, at the end of the year, if B has a tax payable of ₹5,000, B can adjust ₹1,000 of TDS credit and remit the balance of ₹4,000 to the government.

Types

It has specified the TDS deduction for different types of payments in TDS sections 192 to 196 D.The common and most frequent heads where it deducts are payment in nature of salary, interest, dividend, commission or brokerage, contractors, rent, transfer of immovable property, payment to a non-resident, and professional consultancy. The rate of TDS deduction is enclosed as an annexure. It deducts as per the rates, and deduction is subject to threshold limits of payment given under these sections. In payment to non-residents, rates per DTAA also need to be considered.

Why is TDS Deducted?

The government uses Tax Deducted at Source as a tool to check tax evasion. It is deducted at the time of income generation by the third party rather than by the income earner. In this way, the government collects tax in advance rather than at a later date while filing income tax returns or paying advance tax. It also brings to the knowledge of the tax authority’s various incomes earned by the receiver of income, which they can verify using the income tax return filed.

TDS Certificate

The deductor issues Tax Deducted at Source certificate to the deductee. It is mandatory to issue the certificate to the deductee. Form 16 is the annual TDS certificate relating to salary, and Form 16 A is a quarterly TDS certificate for other than salary. They provide all TDS details for transactions between the deductor and the deductee. One should generate a TDS certificate only from the Traces portal. The process for a TDS certificate is: Deductor logs into the traces portal and goes to the “Download” tab. One must select the form and details filled in, after which one can download the TDS certificate. One must issue a TDS certificate within 15 days of filing quarterly TDS returns.

Payment Due Dates

The due date for TDS payment is as follows:

For government deductors – 7th of the next month if paid through challan. The same day, if paid through book entry.For non-government deductors – For April to Feb – the 7th of next month, and for March – the 30th of April.

The due date for filing a TDS return is as below:

TDS on property purchase – the time limit is the 30th day of the following month in which purchased the property.

Procedure for E-Filing of TDS Return

Prerequisites:

Valid TAN no and E-filing portal login.Prepare statements using Return Preparation Utility (RPU) validated with File Validation Utility (FVU) downloaded from Tin-NSDL.Valid DSC must register in e-filing. Alternatively, one can link the Principal contact’s PAN with Aadhar or bank account validated to file using EVC.

Procedure to Upload:

Log in to the Income-tax e-filing portal.Go to TDS – Upload TDS.Select appropriate details for “FVU Version,” “Financial Year,” “Form Name,” “Quarter,” and “Upload Type.”Click validate to validate statement details.Upload the TDS ZIP file. A statement prepared using the utility downloaded from the Tin-NSDL website or third-party software.Affix the digital signature and click on the “Upload” button.

Advantages

It helps in the prevention of tax evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. read more.It generates steady cash flow for the government.It helps the deductee reconcile income generated with the TDS deduction by the deductor.The burden of tax collection responsibility of the government lessens as the tax deposit shifts to the deductor.

Disadvantages

Increase in compliance burden for deductors.The blockage of cash flow as TDS is deducted at the time of income generation, while credit is available only when filing an income tax return.In case of the wrong deposit of TDS by the deductor, the deductee could not claim TDS credit for no fault of his.

Points to Remember

Interest, penalties, and prosecutions are associated with TDS provisions. Hence, the deductor should be careful in timely compliance with provisions of TDS. Further, the rates of tax and sections should be correctly accounted for by filing quarterly returns. One should correctly enter the PAN number of parties. One must track the due dates of various filings and tax deposits.