What is tax deducted at source?
For quick and efficient collection of taxes, the Income-tax Law has incorporated a system of deduction of tax at the point of generation of income. This system is called as Tax Deducted at Source, commonly known as TDS. Under this system tax is deducted at the origin of the income. Tax is deducted by the payer and the same is directly remitted to the Government by the payer on behalf of the payee.
The provisions of deduction of tax at source are applicable to several payments such as salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc. In respect of payments to which the TDS provisions apply, the payer has to deduct tax at source on the payments made by him and he has to deposit the tax deducted by him to the credit of the Government. The following illustration will explain the TDS mechanism.
Mr. Raja has made a fixed deposit with XYZ Bank. Annual interest on the deposit is Rs. 8,40,000. Will the bank be liable to deduct any tax from the interest paid to Mr. Raja?
Interest on fixed deposit is covered under the TDS mechanism and, hence, the bank has to deduct tax from interest and has to pay the net interest to Mr. Raja.
The rate of TDS on interest is 10% and, hence, the bank will deduct tax of Rs. 84,000 from the interest and will pay the net interest of Rs. 7,56,000 (i.e., Rs. 8,40,000 – Rs. 84,000) to Mr. Raja.
The TDS of Rs. 84,000 will be paid by the bank to the Government and Rs. 84,000 will be treated as prepaid tax by Mr. Raja and he can claim tax credit of Rs. 84,000 just like advance tax at the time of filing his return of income.
The above mechanism of deducting the tax at the point of generation of income is called as TDS mechanism.
What are the payments covered under the TDS mechanism?
Sections 192 to 196D give various items in respect of which tax is to be deducted at source. Following is the list of items covered under the TDS mechanism:
|Nature of payment|
|192||Salary (to resident as well as non-resident)|
|193||Interest on securities|
|194||Dividends (dividends on which dividend distribution tax is levied under section 115-O are exempt from tax and hence are not liable to TDS)|
|194A||Interest other than interest on securities|
|194B||Winnings from lottery or crossword puzzle or card game or other game of any sort (to resident as well as non-resident)|
|194BB||Winnings from horse races (to resident as well as non-resident)|
|194C||Payment or credit to a resident contractor/sub-contractor|
|194E||Payment to non-resident sportsman or sports association|
|194EE||Payment in respect of deposits under National Savings Scheme, 1987|
|194F||Payment on account of repurchase of units of Mutual Fund or Unit Trust of India|
|194G||Commission on sale of lottery tickets|
|194H||Commission or brokerage|
|194I||Rent of land or building or furniture or fitting or plant or machinery|
|194IA||Payment/credit of consideration to a resident-transferor for transfer of any immovable property (other than rural agricultural land)|
|194J||Professional fees, technical fees, royalty or remuneration to a director|
|194LA||Payment of compensation on compulsory acquisition of certain immovable property|
|194LB||Payment/credit by way of interest by infrastructure debt fund to a non-resident|
|194LC||Payment/credit of interest by an Indian specified company on foreign currency approved loan/long-term infrastructure bonds from outside India|
|194LD||Interest on a rupee denominated bond of an Indian company or Government security (from June 1, 2013)|
|195||Payment/credit of other sum to a non-resident|
|196B||Payment/credit of income from units (including long-term capital gains on transfer of such units) to an offshore fund|
|196C||Payment/credit of interest of foreign currency bonds or GDR (including long-term capital gains on transfer of such bonds) (not being dividend referred to in section 115-O)|
|196D||Payment/credit of income from securities (not being dividend, short-term or long-term capital gain) to Foreign Institutional Investors|
At what rate tax is to be deducted by the deductor?
Under the Income-tax Law, different rates of TDS are prescribed for different payments. The rates of TDS for various payments are as follows :
|Rate of TDS||Nature of payment|
|Normal rate (*)||Salary (to resident as well as non-resident)|
|10%||Interest on securities|
|10%||Dividends ( other than dividend on which dividend distribution tax is paid under section 115-O)|
|10%||Interest other than interest on securities|
|30%||Winnings from lottery or crossword puzzle or card game or other game of any sort (in case of payment to non-residents, surcharge and cess will apply as per the applicable rates)|
|30%||Winnings from horse races (in case of payment to non-residents, surcharge and cess will apply as per the applicable rates)|
|Payment or credit to a resident contractor/sub-contractor :
(a) payment/credit to an individual or a Hindu undivided family
(b) payment/credit to any person other than an individual or a Hindu undivided family
|20%||Payment to non-resident sportsman or sports association (surcharge and cess will apply as per the applicable rates)|
|20%||Payment in respect of deposits under National Savings Scheme, 1987 (in case of payment to non-residents, surcharge and cess will apply as per the applicable rates)|
|20%||Payment on account of repurchase of units of Mutual Fund or Unit Trust of India (in case of payment to non-residents, surcharge and cess will apply as per the applicable rates)|
|10%||Commission on sale of lottery tickets (in case of payment to non-residents, surcharge and cess will apply as per the applicable rates)|
|10%||Commission or brokerage|
(a) land or building or furniture or fitting
(b) Plant and machinery
|1%||Payment/credit of consideration to a resident-transferor for transfer of any immovable property (other than rural agricultural land)|
|10%||Professional fees, technical fees, royalty or remuneration to a director|
|10%||Payment of compensation on compulsory acquisition of certain immovable property|
|5%||Payment/credit by way of interest by infrastructure debt fund to a non-resident (surcharge and cess will apply as per the applicable rates)|
|5%||Payment/credit of interest by an Indian specified company on foreign currency approved loan/long-term infrastructure bonds from outside India (surcharge and cess will apply as per the applicable rates)|
|5%||Interest on a rupee denominated bond of an Indian company or Government security (from June 1, 2013), (surcharge and cess will apply as per the applicable rates)|
|(#)||Payment/credit of other sum to a non-resident|
|10%||Payment/credit of income from units (including long-term capital gains on transfer of such units) to an offshore fund (surcharge and cess will apply as per the applicable rates)|
|10%||Payment/credit of interest of foreign currency bonds or GDR (including long-term capital gains on transfer of such bonds) (not being dividend referred to in section 115-O) (surcharge and cess will apply as per the applicable rates)|
|20%||Payment/credit of income from securities (not being dividend, short-term or long-term capital gain) to Foreign Institutional Investors (surcharge and cess will apply as per the applicable rates)|
|(#)||Payment/credit of other sum to a non-resident|
(*) Normal rate means the rate of tax applicable to an individual on the basis of his income. Further, surcharge @ 10% (if net income exceeds Rs. 1 crore) and education cess @ 2% and secondary and higher education cess @ 3% will also apply.
(#) Rates will be determined on the basis of nature of payment.
(1) Generally tax is to be deducted at above rates, however, if the payee does not furnishes his Permanent Account Number (PAN), then the payer has to deduct tax at the higher of following rates:
- At the rate specified in the relevant provision of the Income-tax Act; or
- At the rate or rates in force, i.e, the rate prescribed in the Finance Act; or
- At the rate of 20%.
(2) In case of TDS on payments to non-resident, tax is deductible at the above rates or the rates specified in Double Taxation Avoidance Agreements (DTAA) entered into by the Central Government (whichever is lower).
Is there any minimum amount upto which tax is not deducted?
In respect of various items liable to TDS, the Income-tax Law has prescribed a threshold limit. If the expenditure incurred/payment made during the year is below the threshold limit, then there is no requirement to deduct tax at source. Following list gives the threshold limit in respect of various items covered by TDS provisions:
|Limit||Nature of payment|
|Rs. 5,000||Interest other than interest on securities (the limit is Rs. 10,000 for interest on time deposits with banks/ co-operative society engaged in banking business and Senior Citizen Saving Schemes, 2004 of post office)|
|Rs. 10,000||Winnings from lottery or crossword puzzle or card game or other game of any sort|
|Rs. 5,000||Winnings from horse races|
|Rs. 30,000 per contract and Rs. 75,000 for aggregate amount during the year||Payment or credit to a resident contractor/sub-contractor|
|Rs. 20,000||Insurance commission|
|Rs. 1,000||Commission on sale of lottery tickets|
|Rs. 2,500||Payment in respect of deposits under National Savings Scheme, 1987|
|Rs. 5,000||Commission or brokerage|
|Rs. 1,80,000||Rent of land or building or furniture or fitting or plant and machinery|
|Rs. 50,00,000||Payment/credit of consideration to a resident transferor for transfer of any immovable property (other than rural agricultural land)|
|Rs. 30,000||Professional fees, technical fees or royalty (no limit for remuneration to a director)|
|Rs. 2,00,000||Payment of compensation on compulsory acquisition of certain immovable property|
(*) No tax is to be deducted if the taxable salary (after allowing certain deductions under section 80C to section 80U) does not exceed the basic exemption limit applicable in case of an individual taxpayer (i.e., Rs. 2,00,000 or Rs. 2,50,000 or Rs. 5,00,000, as the case may be).
Can the payee request the payer not to deduct tax at source and to pay the amount without deduction of tax at source?
No, the payee cannot request the payer for non-deduction of tax at source. However, in respect of TDS on interest other than interest on securities, the payee (not being a company or a firm may) issue Form 15G/15H to the payer (if the conditions specified in this regard are satisfied) and on furnishing of such form, the payer will not deduct tax at source from interest.
Form No. 15G can be accepted only if the amount of interest to be paid does not exceed the exemption limit.
Further, the payee may approach the Assessing Officer by making an application in Form No. 13 for issuance of certificate for non-deduction of tax or lower deduction of tax at source. If the payee has obtained such certificate, then on production of such certificate to the payer, the payer will not deduct tax or will deduct tax at lower rate as provided in the certificate issued by the Assessing Officer.
What to do if tax is deducted but the ultimate tax liability of the payee is nil or lower than the amount of TDS?
In such a case, the payee can claim the refund of entire/excess amount of TDS (as the case may be).
If the payer does not deduct tax at source, will the payee face any adverse consequences by means of action taken by the Income-tax Department?
It is the duty and responsibility of the payer to deduct tax at source. If the payer fails to deduct tax at source, then the payee will not have to face any adverse consequences. However, in such a case, the payee will have to discharge his tax liability. Thus, failure of the payer to deduct tax at source will not relieve the payee from payment of tax on his income.
What are the duties of the person deducting tax at source?
Following are the basic duties of the person who is liable to deduct tax at source.
- He shall obtain Tax Deduction Account Number and quote the same in all the documents pertaining to TDS.
- He shall deduct the tax at source at the applicable rate.
- He shall pay the tax deducted by him at source to the credit of the Government (by the due date specified in this regard).
- He shall file the periodic TDS statements, i.e., TDS return (by the due date specified in this regard).
- He shall issue the TDS certificate to the payee in respect of tax deducted by him (by the due date specified in this regard).
How can I know the quantum of tax deducted from my income by the payer?
To know the quantum of the tax deducted by the payer, you can ask the payer to furnish you a TDS certificate in respect of tax deducted by him. You can also check Form 26AS from your e-filing account at https://incometaxindiaefiling.gov.in
You can also use the “View Your Tax Credit” facility available at http://www.incometaxindia.gov.in
What to do if the TDS credit is not reflected in Form 26AS?
Non-reflection of TDS credit in Form 26AS can be due to several reasons like non-filing of TDS statement by the payer, quoting incorrect PAN of the deductee in the TDS statement filed by the payer. Thus, in case of non-reflection of TDS credit in Form 26AS, the payee has to contact the payer for ascertaining the correct reasons for non-reflection of the TDS credit in Form 26AS.
At what rate the payer will deduct tax if I do not furnish my Permanent Account Number to him?
As per section 206AA, if you do not furnish your Permanent Account Number to the payer (i.e., deductor), then the deductor shall deduct tax at the higher of the following rates :
- At the rate specified in the relevant provision of the Act.
- At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
- At the rate of 20%.
I do not have PAN. Can I furnish Form 15G/15H for non-deduction of TDS from interest?
As per section 206AA , a declaration in Form No. 15G or Form No. 15H is not a valid declaration, if it does not contain PAN of the person making the declaration. If the declaration is without the PAN, then tax is to be deducted at higher of following rates :
- At the rate specified in the relevant provision of the Act.
- At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
- At the rate of 20%.
Would I face any adverse consequences if instead of depositing TDS in the government’s account I use it for my personal needs?
Yes, failure to remit TDS in the government’s account within stipulated time-limit would attract interest, penalty and rigorous imprisonment of upto seven years.
I have not received TDS certificate from the deductor. Can I claim TDS in my return of income?
Yes, the tax credit in your case will be reflected in your Form 26AS and, hence, you can check Form 26AS and claim the credit of the tax accordingly. However, the claim of TDS to be made in your return of income should be strictly as per the TDS credit being reflected in Form 26AS. If there is any discrepancy in the tax actually deducted and the tax credit being reflected in Form 26AS then you should intimate the same to the deductor and should reconcile the difference. The credit granted by the Income-tax Department will be as per Form 26AS.
If I buy any land/building then is there any requirement to deduct tax from the sale proceeds to be paid by me to the seller?
Yes, Budget, 2013 has introduced section 194IA which provides for deduction of tax at source in case of payment of sale consideration of immovable property (other than rural agricultural land) to a resident. section 194IA is not applicable if the seller is a non-resident. Tax is to be deducted @ 1% if the sale consideration of the property exceeds Rs. 50,00,000. However, if the sale consideration is below Rs. 50,00,000 then there is no need to deduct tax. If the sale consideration exceeds Rs. 50,00,000, then tax is to be deducted on the entire amount and not only on the amount exceeding Rs. 50,00,000.
If the seller is a non-resident then tax is be deducted under section 195 and not under section 194IA. Thus, in case of purchase of property from non-resident TDS provisions of section 195 will apply and not of section 194IA.
What is the difference between PAN and TAN?
PAN stands for Permanent Account Number and TAN stands for Tax Deduction Account Number. TAN is to be obtained by the person responsible to deduct tax, i.e., the deductor. In all the documents relating to TDS and all the correspondence with the Income-tax Department relating to TDS one has to quote his TAN.
PAN cannot be used for TAN, hence, the deductor has to obtain TAN, even if he holds PAN.
However, in case of TDS on purchase of land and building (as per section 194IA) as discussed in previous FAQ, the deductor is not required to obtain TAN and can use PAN for remitting the TDS.
Clarifications to issues some of the issues relating to TDS:
Whether capitalization of interest payable attracts TDS U/S 194A?
- A) Yes, Capitalization of interest payable attracts the provisions of TDS.
TDS is to be made on interest payment regardless of the fact whether borrower uses funds for acquiring fixed assets, capital assets or stock-in-trade or for making payments of trading debts.
How TDS U/S 194B is deducted in case where gift (prize by way of winnings from lottery) is given in kind?
- A) Generally we come across two types of situations in case gift is given in kind-
(i) If prize is given partly in cash and partly in kind- Tax will be deducted from cash prize with reference to the aggregate amount of the cash prize and the value of price in kind. And where in the part of cash is not sufficient to meet the liability for tax deduction in respect of whole of the winnings then payer has to collect the balance from the payee.
(ii) Where the prize is wholly in kind- The payer has to collect the liability for tax deduction from payee.
Example – Mr.” X “wins a Maruthi-Zen value of Rs.3,70,000/- on August 20, 2014, in a draw of lot organized by Maruthi Udyog. Tax liability on prize in kind comes to Rs.1,14,330/- (i.e., 30.9% of Rs.3,70,000/-) which may be recovered by the Maruthi Udyog from Mr. “X” and the same can be deposited with the government on account of tax deduction.
Whether payment made to Disk jokey (DJ) is covered under 194C or 194J, explain briefly?
- A) Artistic performances and services provided by persons are covered U/S 194J. Even though a contract is entered with him, he is rendering professional services only and hence it is subjected to TDS u/s 194J.
Whether definition of profession U/S 194J is inclusive or exclusive?
Exclusive, almost all the definitions in the act which are favorable to the revenue is not inclusive in nature.
Whether TDS U/S 194J is to be made inclusive of reimbursement of expenditure or exclusive?
TDS on reimbursement is not required to be made if separate bills are raised one is for professional fee and the other is for reimbursement of expenditure.
If a single bill is raised for the professional fee inclusive of reimbursement of expenditure, in such a case TDS is to be made on gross amount.
The above view is supported by a case law ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71 (ITAT).
Where as per CBDT circular No. 715 dated 8-8-1995, TDS should be on total payment including reimbursement of expenses. But ITAT in the above decision it was held that reimbursement of expenses for which bill is separately raised did not attract the provisions of section 194J, the above circular attracts only in case bill is raised inclusive of reimbursement of expenditure.
Whether contract U/S 194C must be in writing?
A contract may be written or oral. Even implied contracts are also attract provisions of section 194C. Circular: No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
Whether order of visiting cards, scribbling pads, letter heads in the name of company attracts TDS provisions?
Yes, section 194C would apply in respect of supply of printed material as per prescribed specifications.
Circular: No. 715, dated 8-8-1995.
Whether TDS U/S 194I to be made on rent is inclusive of maintenance or exclusive?
TDS U/S 194I on maintenance charges is not required to be made if separate bills are raised one is for rent and the other is for maintenance charges .
How ever payments made towards maintenance charges attracts sec 194C.
What are the due dates for filing quarterly TDS Returns?
The due dates for filing quarterly TDS returns, both electronic and paper are as under:
|Quarter||Due Date for Government Deductors||Due Date for Other deductor|
|April to June||31 July||15 July|
|4July to September||31 October||15 October|
|October to December||31 January||15 January|
|January to March||15 May||15 May|
What is due date for remittance of TDS certificates? (Form-16 and Form-16A)
In this regard, your attention is invited to the CBDT circulars 04/2013 dated 17.04.2013, No. 03/2011 dated 13.05.2011 and No. 01/2012 dated 09.04.2012 on the Issuance of certificate for Tax Deducted at Source in Form 16/16A as per IT Rules 1962. It is now mandatory for all deductors to issue TDS certificates after generating and downloading the same from “TDS Reconciliation Analysis and Correction Enabling System” or http://www.tdscpc.gov.in (hereinafter called TRACES Portal).
In view of above circulars, it may kindly be noted that the TDS Certificates downloaded only from TRACES Portal will be valid. Certificates issued in any other form or manner will not comply to the requirements referred in the Income-tax Act 1961 read with relevant Rules and Circulars issued in this behalf from time to time.
Please be advised that under the provisions of section 203 of the Income Tax Act, 1961 read with rule 31A, Certificate of tax deducted at source is to be furnished within fifteen (15) days from the due date for furnishing the statement of tax deducted at source. Failure to comply with the provisions of the Act will attract penalty under the provisions of section 272A of the Act, a sum of one hundred rupees for every day during which the failure continues.
Whether plant include vehicle? Whether payment of hire charges attracts Sec 194I (TDS on rent)?
- A) (i) Yes, plant includes vehicle. According to Sec.43 (3) Plant includes-
- Scientific apparatus and
- Surgical equipment used for the purpose of business or profession.
But it excludes-
- Tea bushes,
- Furniture and fittings.
(ii) Yes, payments made towards hire charges of vehicles attracts Sec194I
W.e.f. A.Y.2007-08, rent means any payments by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for use of (either separately or together) any-
- Land, or
- Building (including factory building), or
- Land appurtenant to a building (including factory building), or
- Machinery, or
- Plant, or
- Equipment, or
- Furniture, or
- Whether or not any or all of the above are owned by the payee.
Difference between TDS and TCS?
TDS is Tax deducted at source and TCS is tax collected at source. The meaning can be understood from its definition itself. TDS is for expense and where as TCS is for revenue (Ex- scrap sale).
Whether any person is exempted from TDS deduction? Is there any such relaxation? If so what is the procedure that should be followed?
- A) Yes, if the assessing officer is satisfied that the total income of the recipient is below the basic exemption limit or the tax liability of the person is NIL, he should, on an application in Form-13, may issue a certificate on a plain paper for deduction of tax at lower rate or no deduction of tax.
Difference between Form-15G and Form-15H?
Form-15G: It is declaration given by an individual or other person (not being a company or firm) to the person responsible for deducting tax at source not to deduct tax, since the total income including the current receipts will not exceed the maximum amount which is not chargeable to income tax.
Form-15H: It is declaration given by an individual who is the age of 60 years or more to the person responsible for deducting tax at source not to deduct tax, since the total income including the current receipts will not exceed the maximum amount which is not chargeable to income tax.
Whether conversion of out standing interest on loan into loan attracts TDS?
There are two situations generally we come across while dealing the above case-
(i) Interest payment to banks/financial institutions- Any interest paid or credited to the banks/financial institutions is not subject to tax deduction U/S 194(3)(iii), hence TDS is not required to be made on interest payments.
Even the interest payments does not attract TDS provisions, hence there is no question of TDS in case of capitalization of interest on loan as loan.
(ii) Interest payments to others (other than persons those who are covered under 194(3)(iii))- According to sec-194A, TDS is to be made at the time of credit or payment which ever earlier.
So the liability to deduct TDS arises at the time of credit or payment, where as the conversion of interest out standing into loan arises after a long period from the time interest liability becomes due for payment. This is due to inability of the borrower in making the interest payments.
There is a point of timing difference between the interest due and conversion of interest into loan.
Hence the liability to deduct TDS arises only at the time the interest becomes due but not at the time of conversion of interest outstanding into loan.
Source: ITD Website