TDS helps avoid tax evasion by making it compulsory for the income-giver to first deduct and then pay. TDS is applicable on various income sources, such as salary, interest, rent, commission, professional fees and lottery earnings.
If you are paid income after tax has been deducted, it doesn’t mean that you owe nothing more to the government. TDS often covers just a portion of your tax liability. This is because TDS is often charged at rates lower than your tax slab.
Consider rental income. If you are getting rent of more than ₹1,80,000 a year (₹15,000 a month), the entity making the payment has to deduct tax at 10 per cent. Here’s another example: say you get annual rent of ₹2,40,000, in which case the tax deducted by the payer will be ₹24,000. If you are in the 20 per cent or 30 per cent tax bucket, your actual tax liability will be ₹48,000 or ₹72,000. So you still have to pay the government the balance as advance tax over the course of the year, or as self-assessment tax before filing your return. The same applies to interest on your bank fixed deposit.
Details of all tax deducted over the year is captured in Form 26AS, which is provided by the tax authorities. So there is no escaping the additional tax liability, if any, on payments which have been subjected to TDS.
Also note that in case of non-salary payments (rent, interest, commissions, etc.) to resident Indians, payers do not deduct education cess (3 per cent of the tax amount) or surcharge (if applicable) along with the TDS. But you still owe these amounts to the government.
There’s an exception though. If you only have salary income or have declared all your other income to your employer, the tax deducted by your employer would have covered your entire tax liability. This is because employers adjust the monthly TDS such that the entire tax dues of the employee are paid to the government by the year-end. So if you want to save yourself the hassle of paying additional tax separately, declare all your income with your employer.
Make sure you get all TDS certificates from income sources at the year-end.
This is proof that you have paid the tax and will also help spot mistakes in Form 26AS.
No TDS doesn’t mean no tax
On some income sources, for instance, interest on savings bank accounts or recurring deposits, banks do not deduct tax. Also, if the interest accrued or paid on a bank fixed deposit is less than ₹10,000 a year, there is no TDS.
Similarly, if an individual (as against an entity) is paying you rent, he or she does not have to deduct tax. But you still have to pay the government its due. Make sure to do so on time.
What if your income is within the tax exemption limit but you have an income source on which tax will be deducted? For instance, consider the case of a senior citizen with annual income less than the exempt ₹2,50,000 limit. Say his major source of income is bank fixed deposit interest of ₹2,00,000. In the usual course of things, at 10 per cent, tax of ₹20,000 will be deducted by the bank. This amount will then have to be claimed as a refund by the senior citizen.
This is a cumbersome process. To avoid this, the senior citizen can submit Form 15H to the bank and claim exemption from TDS on fixed deposits. Those who are not senior citizens can also get this benefit by submitting Form 15G to the bank. These declarations have to be submitted every fiscal year, preferably at the start of the year, to get the optimal benefit. Submitting false declarations to avoid TDS can prove costly, as penalty and interest charges will be levied. Also make sure you submit your permanent account number (PAN) to the payer, or TDS will be deducted at a higher rate of 20 per cent.