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Sunday, December 4, 2016

What is 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.



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