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Tax Deduction at Source

Updated on July 18, 2023

Tax Deducted at Source (TDS) is a mechanism implemented by the Indian government to collect taxes directly from the source of income. It is a means of ensuring that taxes are deducted at the time of payment itself, rather than relying solely on the taxpayer’s self-assessment and payment.

Key points relating to TDS

Applicable to various incomes – TDS is applicable to a wide range of income categories, including salaries, interest on fixed deposits, rent, commissions, contractor payments, professional fees, etc.

Deduction at prescribed rates – TDS is deducted at rates prescribed by the tax department, which may vary depending on the nature of the payment and the relevant provisions of the Income Tax Act.

Roles of deductor and deductee – The entity or person responsible for making the payment after deducting TDS is known as the deductor. The entity or person receiving the payment is referred to as the deductee.

Responsibility of the deductor – It is the duty of the deductor to deduct the applicable TDS amount from the payment before remitting it to the deductee. The deductor must also issue a TDS certificate to the deductee as proof of the tax deduction.

Linkage to PAN – TDS deductions are linked to the Permanent Account Number (PAN) of both the deductor and the deductee. This ensures proper tracking and documentation of the deductions made.

Compliance and reporting – The deductor is required to file regular TDS returns with the tax department, providing details of the TDS deductions made during a specific period.

Credit for deductee – The amount deducted as TDS is credited to the tax account of the deductee, which can be adjusted against their overall tax liability when filing their income tax return.

Preventing tax evasion – TDS serves as a preventive measure against tax evasion by collecting tax directly at the time of payment, thereby ensuring a steady flow of revenue to the government.