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Tuesday, December 20, 2016

Tax Deducted at Source - TDS


Trying to make sense of the Indian tax system is not easy as you come across so much jargon. Take the case of tax deducted at source (TDS). You know that TDS is deducted from your salary each month, but not much else. To help you out, here is everything you need to know about TDS.

What is TDS?

TDS is a provision of the income tax law that provides for income tax to be deducted from your income before you receive it. There are many forms of income such as salary, interest, and dividend, among others, each of which comes under the ambit of TDS. Let us consider the case of salary. Your employer deducts the tax amount from your income each month. He remits the deducted amount to the government in the form of tax, on your behalf. Once TDS has been deducted from your income, you no longer have to worry about paying income tax. For the government, TDS is a way of receiving taxes in advance and preventing income tax avoidance.

How does TDS work?

Let us say you have invested Rs 10 lakh in a mutual fund. You receive a periodic dividend of Rs 10,000. At maturity, you will get the entire Rs 10 lakh. Since TDS deduction applies to mutual fund investments, the mutual fund company will deduct the tax amount before it pays you . Assuming a tax rate of 10 per cent, you will receive Rs 9,000 (net of TDS) as dividend during each period. On maturity of the fund, you will receive Rs 9,00,000, after deducting tds. The fund will transfer to the government all the deductions made. You will not have to pay any taxes on this later on. In fact, you could claim tax credit for the deducted amount when you file your income tax return.

Which incomes does TDS cover?

TDS covers several sources of income: salary, interest on bank deposits, dividends on stocks and mutual funds, interest on post office deposits, rent, professional fees, and payments related to life insurance policies. Some other types of income—such as lottery and horse race winnings—also fall under the TDS net. You can find the complete list of incomes covered under the TDS mechanism on the Income Tax Department's website.

TDS exemption thresholds

The Income Tax Department prescribes TDS exemptions for each source of income. If your income from a source is less than or equal to the exemption threshold, you do not need to pay TDS. the exemption limit for salary is the same as the income tax exemption limit—i.e. Rs 2.5 lakh per annum. For life insurance policy claims, the limit is Rs 1 lakh per annum, and for interest on bank deposits, the limit is Rs 5,000 per annum. For proceeds from the sale of property, exemption is granted up to a property value of Rs 50 lakh. In case the payer deducts TDS despite the exemption, you can file a return with the Income Tax Department and claim a full refund.

Information on TDS deductions

It is important to know the exact amount of TDS that has been deducted from your income. This ensures that the payee does not dupe you. To ensure that TDS is deducted fairly, always insist on a TDS certificate. You can also log on to or the Income Tax Department's website to verify the TDS amount that your payee has remitted to the government. In the latter case, you will need to click on the 'View Your Tax Credit' tab.

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