Have you ever looked at your salary slip and wondered why someone stole your money before crediting it to your account?
Or have you checked your bank account and wondered why the interest you earned was less than you expected?
One common explanation for such deductions is TDS – Tax Deducted at Source
TDS is a common part of India’s income-tax system, but many people do not understand what it means. Some people think that TDS is additional tax, while others are puzzled by the whole idea of tax deduction before income.
In short, TDS means that tax is deducted at the time certain income is paid/credited to a person, instead of waiting till the end of the financial year to calculate and deduct the tax.
In this article, let us understand what TDS means, why it is deducted, where you can find it, what is Form 16 all about and what happens if more TDS is deducted than your actual tax liability.
What Is TDS?
One look at the name and we get a rough idea about the concept.
For some incomes, a portion of the tax has to be paid at the time of receipt of the income.
The payer deducts the tax amount and pays the balance amount to the payee.
For example - Let's say that you work in a company and your monthly salary is ₹30,000. If TDS is applicable, your employer might deduct some amount as tax and pay the rest amount to you.
This means that the deducted tax amount has been paid to the government on your behalf and will be considered as tax already paid.
TDS can be applicable to various incomes and not just salary. For instance - TDS can also be applicable to certain interest incomes, if the conditions as mentioned under the income-tax rules are satisfied.
Why Is TDS Deducted?
But why can't we receive the entire amount and then pay the tax?
Well, the idea of TDS is to collect tax at a regular interval instead of waiting to pay the entire tax due at once.
For instance - There might be cases where a person hasn't paid any tax till the end of the year.
If such a person has to pay the tax due at once, they might have to shell out a huge amount.
By collecting the tax in installements at the time of any income payment, the process becomes easy.
For the recipient, this serves as a record of tax that has been paid already.
How does TDS work?
The process is very simple:
Income/payment → TDS deducted → TDS deposited with government → TDS credit reflected → Taxpayer claims credit
Let us take a simple example. Suppose you are an employee who has salary from which TDS is applicable.
Your employer calculates the tax required to be deducted based on your salary and tax information, and deducts it while paying you the salary.
The deducted amount is deposited with the government and you can claim the credit of this amount.
The amount of TDS depends on the type of payment, applicable threshold, applicable rate and other conditions. It is therefore, incorrect to assume that you would always be required to pay the same percentage of TDS on your income.
TDS on Salary
Salary is probably the most common area where people come across TDS.
If TDS is required to be deducted from salary, the employer generally calculates the employee’s estimated taxable salary and deducts tax accordingly.
The calculation may involve considering relevant exemptions, deductions and tax declaration made by the employee, if applicable.
That is why two employees with similar-looking salaries may end up with different TDS deductions.
At the end of the financial year, the employer provides you with Form 16 containing details of salary, relevant deductions/exemptions and TDS for computing tax payable or refundable.
TDS on Bank Interest
Similarly, in addition to the salary, you may also find a TDS deduction against the interest you earn from your bank. This is because the bank may deduct TDS from the interest before crediting it to your account.
The amount of TDS will vary depending on the amount of interest and applicable rules. The amount of interest you receive in your bank account after the deduction may sometimes be less than the amount of interest that should be credited to you.
However, keep in mind that the above amount of TDS does not necessarily reflect your final tax liability. Your final tax liability for the year depends upon your total income and applicable income-tax rules.
Thus, if your bank has deducted any amount of TDS from the interest payable to you, it does not mean that such entire amount will also be payable by you as your final tax.
What Is Form 16A?
You’re probably already familiar with Form 16 that is basically related to salary. But what about Form 16A? Well, that is issued in cases of TDS that has been deducted from different incomes (other than salary).
For instance, if your bank deducts TDS from certain interest income, you might receive the required information on Tax Deducted at Source via Form 16A.
This document, issued on a quarterly basis, includes information about the nature of your payment, the amount of payment, TDS and any other relevant details.
It could come in handy when verifying your income and tax details or preparing your income-tax return.
Remember it with this simple analogy:
Form 16 = salary income
Form 16A = certain non-salary income
What Is the Difference Between TDS and Income Tax?
It wouldn’t be wrong to say income tax encompasses TDS. Because the latter is basically a form of the former!
Income tax is the tax you might have to pay on your taxable income for the financial year. Meanwhile, TDS is a method that lets you pay tax on certain income (on which tax is deductible) at the time of its credit or payment. (We’ll explain it shortly.)
Let’s simplify it with an example. Assume, your final tax liability for the year totals to ₹20,000. That means, you’ll have pay this amount to the government to meet your income tax requirement. During the year, ₹15,000 has already been deducted from your income as TDS.
So, that ₹15,000 can be thought of as the taxes that have already been paid by you during the year. This is basically a tax credit that you can claim by filing your income-tax return. This, while you might have to pay ₹20,000 as tax, ₹15,000 already has been accounted for as a tax deduction.
Therefore, it’s not correct to say that you have to pay more tax than you owe. (Because that would basically mean a second round of taxation for you!) So, that’s probably not how TDS deduction works! (But we’ll also see what happens if you end up overpaying tax.)
How Can You Check Your TDS?
Checking TDS is a great idea, and a really simple one at that!
In fact, checking your TDS details helps you to make sure that all the information regarding your tax is correct. There are several ways you can do so, but we’re going to mention the most commonly used ones — that is, the Form 26AS and the Annual Information Statement (AIS).
The former relates to financial information, such as TDS and TCS in particular that has been deducted and is relevant to you. AIS, meanwhile, will give you a bigger picture of all the financial information in relation to you, such as TDS/TCS or other transactions and applicable tax information.
In addition to double-checking the information provided in your Form 26AS/AIS, you could also look at your Form 16, and see if your income is reflected correctly – particularly if the TDS mentioned there corresponds directly with the details on your Form 26AS.
Similarly, you can verify any TDS amount received from a deductor other than your employer in relation to you.
Before you file your income-tax return, it is therefore always important to make sure of your TDS information. This will help you to prevent errors that can be really painful to fix!
What If TDS Is Deducted but You Don't Have to Pay Tax?
It is not unheard of, and yes, just because a TDS charge has been made against your income doesn’t automatically mean you owe money for income tax!
In other words: it is entirely possible that TDS is deducted at source on your income but you ultimately end up owing no income tax.
Here’s how it might be a confusing time for you. Let’s say, TDS is being withheld on certain interest income of yours. And when you’re calculating your income and tax for the year, it turns out that the money withheld as TDS far exceeds your final tax liability for the year.
In this scenario, you’ll be glad to know that you can file a claim for a tax refund to get back the excess amount you’ve paid as TDS, depending on your personal circumstance.
Also, certain claims can be made so that Tax Deducted at Source doesn’t get withheld on certain interest income! This is possible by submitting a declaration (Form 15G or 15H for senior citizens).
Note, however, that these aren’t universal documents by any means.
Before submitting any income-tax form stating that no TDS should be withheld (a Form 15G or 15H), it is important that you double check to confirm that you’re a ‘qualified taxpayer’ and meet all the standards for the form.
Common Mistakes People Make About TDS
You can find TDS a bit perplexing when you first encounter it, can’t you? Let’s take a look at some of the common mistakes that people make about TDS:
1. Believing that TDS is an additional tax
TDS seems like another tax to pay when the amount appears on your monthly or yearly payslip (if you’re salaried). But it really is just a way of paying tax on certain sources of income.
As we saw earlier, the amount withheld can generally be claimed as tax credit when you make the final payment of your income tax for the year!
2. Not checking Form 16
If TDS is deducted from your income and you’re salaried, make sure to check your Form 16. It contains details about your salary and the relevant TDS withheld and would be useful when you file your income-tax return.
3. Not checking Form 26AS or AIS
Another way to double-check is by reading the Form 26AS and your Annual Information Statement or AIS.
Form 26AS essentially contains tax-related information, such as details relating to TDS/TCS. AIS, meanwhile, provides a larger view of financial information reported to the tax authorities in relation to you, such as relevant TDS/TCS, certain other transactions and associated tax details.
4. Assuming that TDS implies no income-tax return
One of the biggest mistakes people make about TDS is, unfortunately, thinking that if TDS is deducted on your income, you don’t have to file an income-tax return, period — simply because the tax has been withheld at source.
But that is not an accurate assumption!
Whether or not you need to file your income-tax return will depend on your individual circumstance and the applicable criteria. If you do happen to owe any tax, for example, you’ll need to file your income-tax return and claim a tax credit for the TDS with the applicable income-tax rules.
5. Assuming every form of payment has the same rates
The applicable rate and conditions can vary depending on the nature of your TDS. So you shouldn’t assume someone else’s TDS calculation is applicable to you.
Final Thoughts
Tax Deducted at Source (TDS) may seem intimidating at first with statements such as Form 16, Form 16A, Form 26AS and AIS, but the concept itself is simple.
As the name suggests, TDS is simply a tax that is deducted from a person's payment, and is ultimately paid to the government, which can then be taken into account while calculating one's final tax.
A basic understanding of what a TDS is will enable a salaried individual to understand their salary slips and Form 16, while an individual with interest or other income can understand their deductions of TDS.
One doesn't need to be an expert in taxes to understand their finances. One must simply start understanding the fundamentals and stay on top of their financial information.
Understanding one's finances begins with understanding their income.
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