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The full form of TDS is tax deducted at source. It is a form of direct taxation prevalent in our country. This means that TDS is directly charged to the person who earns the income. Further, the rate of TDS is a direct percentage of the income. TDS is prescribed by the Income Tax Act, 1961, and generally is charged on services. Section 190 to section 200 of the Income Tax Act, 1961, deals with TDS. The Finance Bill passed every year often brings about several amendments in these sections, be it the addition, deletion, or modification of a section. It forms a part of the income tax.
How does TDS Work?
TDS is deduction of tax at source. This means that the tax is deducted right at the source of income. Hence there is a deductor and deductee. The deductor of TDS is the recipient of supply and payer of consideration. The deductor of TDS is the provider of supply and recipient of consideration. For example, A is a lawyer. B hires A for legal advice related to B’s business. A provides legal services to B and charges an amount of Rs. 1,00,000. B is the recipient of legal service and must pay Rs. 1,00,000 to A. The TDS rate on legal services is 10%. So, B will retain 10% of Rs. 1,00,000, i.e. Rs. 10,000, and pay the balance Rs. 90,000 to A. Rs. 10,000 is tax collected at source for A, and will be deposited with the government by B on behalf of A.
Purpose
The prime source of revenue for the government is taxes. Taxes can be direct taxes or indirect taxes. Income tax is a direct tax, and paid after the financial year is over, for the entire financial year. This means that the revenue from income tax, which is usually a huge amount and a major part of revenue, is received only once a year. This could cause problems with incurring governmental expenditure. Hence, TDS was introduced, which is basically preponement of income for the government. Instead of collecting tax only once a year, the government receives tax revenue on income which will be offered as income in the income tax returns at the end of the year, as and when the income is earned.
Another reason behind the introduction of TDS is to ensure taxability of income. Several people in India try various methods of under-reporting their income in the income tax returns to evade tax payment. It is very difficult for the government to trace the income earned of the crores of people required to pay income tax. Hence, the onus is put upon the payer of consideration to deduct and deposit tax with the central government. This will notify the government of the income of the recipient of the consideration and such recipient will be required to disclose this income in their income tax return. Hence, charging of TDS increases accountability.
Due Date for TDS
TDS is to be deducted on payment of consideration liable to TDS or passing the entry in the books of accounts for the income, whichever is earlier.
In case of non-deduction as per the prescribed time limit, an interest of 1% per month (or part of the month) of the TDS amount liable to be deducted will be charged from the date on which TDS was deductible to the date of actual deduction.
Due date for depositing TDS is the 7th of the following month. For example, the TDS on the income earned in the month of July must be deposited by 7th of August, TDS for the month of December must be deposited by 7th of January, and so on. However, the due date to deposit TDS for the income earned in the month of March is 30th April.
In case of non-deposit of TDS as per the prescribed time limit, an interest of 1.5% per month (or part of the month) of the TDS amount liable to be deposited will be charged from the date on which it is deducted till the date it has been deposited.
TDS returns must be filed as per the following due dates:
Quarter | Period | Due Date of Return Filing |
1 | April 01 to June 30 | July 31 |
2 | July 01 to September 30 | October 31 |
3 | October 01 to December 31 | January 31 |
4 | January 01 to March 31 | May 31 |
Late filing of TDS returns attracts a late fee of Rs 200 per day till the default continues up to a maximum of the TDS amount.
Conclusion
Tax deducted at source or TDS enables the government to keep a closer watch on the income of a person. As discussed above, it improves the accountability of a person earning income. It is a percentage prescribed by the Income Tax Act, 1961, based on the type of income, and applied on the income to find the TDS amount. This TDS amount will be deducted from the amount paid to the provider of supply and deposited by the deductor with the Central Government within the time limit as prescribed, failure of which will attract penalising provisions. It forms part of income tax and an important source of government revenue.
