What is TDS: Definition, Types & Advantages?

  • May 08, 2024
  • Dushyant Sharma
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The responsibility of paying the income tax lies on the person receiving the income. However, TDS makes sure that the tax gets deducted from the payment itself in advance. 

In this article, we will discuss what TDS is, from its definition to its types and advantages. 

What is meant by Tax Deducted at Source (TDS)?

Tax Deducted at Source, or simply TDS, was introduced in India to improve the process of tax collection. According to this concept, a person (deductor) who owes another person (deductee) a payment of a certain kind is required to deduct tax at the source and send it to the Central Government. 

Based on Form 26AS or a TDS certificate that the deductor issues, the deductee from whose income tax has been deducted at source would be entitled to get credit of the amount deducted. 

How exactly does TDS work?

TDS is based on the idea that anyone who makes a certain kind of payment to another person must deduct tax at the source at the rates prescribed in the Income Tax Act and deposit the same into the account of the government. 

By looking at the Form 26AS, the deductee can see or verify the TDS from incomes paid to him. It is the responsibility of each deductor to provide a TDS certificate which attests to the amount withheld in the name of the deductee and deposited with the government.

What are the Different Types of TDS?

Even while you’re making payments as an individual taxpayer, you are required to deduct TDS on certain payments made.

Here are the various types of payments which attract TDS:

  • Salary Transfer
  • Rent Payments
  • Transfer of Property
  • Professional Fee
  • Consultation Fee
  • Commission & Brokerage-related Payments
  • Interest earned on Securities & Deposits
  • Dividend on company shares and mutual funds
  • Lottery, lucky draw and other similar winnings
  • Royalty Payment
  • Director’s Remuneration
  • Other interest payments

What are the TDS rates in India?

To govern the various kinds of payments on which TDS is applicable, the Indian Tax system has several sections. Here is a list of the common types of payments on which the tax is to be deducted at source, along with the relevant sections (of the Income Tax Act) and applicable TDS rates.

TDS Rates for 2024-25 

Section of the Income Tax Act

Type of Payment

TDS Rate (in Percentage)

192

Salary Income

As per the slab rates

192A

Premature withdrawal of Employees Provident Fund (EPF)

10% (30% if the PAN is not provided)

193 

Interest earned on securities 

10% 

194 

Dividend 

10%

194A 

Interest income earned other than that on securities

10%

194A 

Interest that is earned apart from post office/ bank securities

10%

194B

Income earned through the winnings from card games, lotteries, and/or other games

30%

194BB 

Earnings from horse races 

30% 

194D 

Insurance commission payments 

Companies: 10%Individuals: 5%

194DA

Life insurance policy payments 

5% 

194E 

If the payment is made to sportsman who is a non-resident 

20% 

194EE 

In case NSS deposits are sold

10% 

194F

Payment which is made towards repurchase of units by Unit Trust of India or Mutual Funds

20%

194G 

Any commission received when lottery tickets are sold 

5% 

194H 

Brokerage or Commission 

5% 

194I 

Plant & Machinery Rent / Rent of Furniture, Building, or Land

2% / 10%

194IA

If Immovable Property is transferred (apart from agricultural land)

1%

194IB 

Rent 

5%

194IC 

In case monetary compensation is paid (under the Joint Development Agreements) 

10%

194J 

Fee paid for technical/professional services 

10% or 2% 

194LA 

Compensation that is paid in case an immovable property is purchased 

10% 

194LB 

Interest which is earned from an Infrastructure Bond (for NRI)

5% 

194LBB

Investment fund which pays income to the unit holder [except for incomes that are exempt under Section 10 (23FBB)

10%

194LBC

Income generated from investments in securitisation trust (as per Section 115TCA)

25%

194LD 

Interest in some government securities and bonds 

5% 

194N 

Any cash withdrawals made by an individual from a bank account which exceed the amount of Rs.1 crore during the financial year.

2%

194Q 

Goods that are purchased 

0.10% 

194P 

For senior citizens who are above 75 years

As per the slab rates

194S

Virtual Digital Assets payment

1%

206AA

In case PAN is not available

20% of rate in force or double the rate as per the act, whichever is higher 

206AB 

In case ITR is not filed at higher rates 

Rate in force or double the rate


Double the rate as per the act or 5%, whichever is higher

Source:  Bank Bazaar

Note: The TDS rates are subject to change. In order to stay updated with the latest TDS rates, you can visit the official website of the Income Tax Department.

What are the Advantages of TDS?

The TDS deducted is defined by how much an individual earns. Whether we talk about the taxpayers or the Government of India, the Tax Deducted at Source has proved to be advantageous for both. Here are the main advantages of TDS, which highlight its importance.

Prevention of Tax Evasion

One of the major concerns of the Government of India is tax evasion. To help with this problem, Tax Deducted at Source plays an essential role. TDS prevents tax evasion and keeps a check on the taxes paid by the taxpayers in India. 

In addition to this, it creates transparency between the citizens who are paying the tax and the Government. Due to transparency, there is no discrepancy or evasion when it comes to the payment of tax.

TDS acts as a stable income for the Government of India

TDS is one of the best and the most stable incomes for the Indian government. With this, the Government of India is able to provide the citizens with several basic necessities like water, electricity, law and order, salaries of government employees, advancement and upgradation of science and technology, and so on.

TDS is an automatically deducted tax which serves as a relief to the Taxpayers

Many individuals face complications while paying taxes. However, with the help of TDS, the tax payment process becomes much easier and smoother for the taxpayers since the Tax Deducted at Source (TDS) gets automatically deducted.

TDS reduces the burden on the Tax Collectors

Due to TDS, the burden on tax collectors is reduced since the TDS is deducted automatically. Because of this, the taxpayers are not required to keep a check on the same constantly. 

Conclusion

Tax Deducted at Source (TDS) is an essential component of the tax system in India since it ensures efficient tax collection and compliance with the rules and regulations related to income tax. It is important for both individuals and business entities to understand TDS and its implications for maintaining financial discipline and meeting their tax obligations. 

Your tax planning can be optimized by staying aware of the latest applicable rates for TDS, exemptions and deductions. This can help you minimize your overall tax burden. In order to ensure accurate compliance with the TDS regulations or TDS returns in India, you can consult with Chartered Accountants and Tax Consultants at Registrationwala.

 


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Dushyant Sharma
Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.

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