TAX DEDUCTED AT SOURCE

Tax Deducted at Source (TDS) is a means of collecting income tax in India, under the Indian
Income Tax Act of 1961. Any payment covered under these provisions shall be paid after
deducting prescribed percentage. It is managed by the Central Board for Direct Taxes
(CBDT). Under this system tax is deducted at the origin of the income. Tax is deducted by the
payer and is remitted to the Government by the payer on behalf of the payee.

The provisions of deduction of tax at source are applicable to several payments such as
salary, interest, commission, brokerage, professional fees, royalty, contract payments, etc. In
respect of payments to which the TDS provisions apply, the payer has to deduct tax at source
on the payments made by him and he has to deposit the tax deducted by him to the credit of
the Government.

It is the duty and responsibility of the payer to deduct tax at source. If the payer fails to
deduct tax at source, then the payee will not have to face any adverse consequences.
However, in such a case, the payee will have to discharge his tax liability. Thus, failure of the
payer to deduct tax at source will not relieve the payee from payment of tax on his income.
However, a deductor would face the following consequences if he fails to deduct TDS or
after deducting the same fails to deposit it to the credit of Central Governments account:-

a) Disallowance of expenditure as per section 40 of The Income Tax Act, 1961.

b) Levy of interest as per section 201 of the Income-tax Act,1961
c) Levy of penalty, as per Section 271(c) of the Income-tax Act,1961

The main payments related to TDS are as discussed below:-

Salary:-TDS on salary is covered under section 192 of The Income Tax Act, 1961. Section
192(1) of the I.T.Act, 1961 provides that every person responsible for paying any income
which is chargeable under the head salary, shall deduct income tax on the estimated income
of the assessee under the head salaries. The tax is required to be calculated at the average rate
of income tax as computed on the basis of the rates in force. The deduction is to be made at
the time of the actual payment. However, no tax is required to be deducted at source, unless
the estimated salary income exceeds the maximum amount not chargeable to tax applicable in
case of an individual during the relevant financial year. The tax once deducted is required to
be deposited in government account and a certificate of deduction of tax at source (also
referred as Form No.16) is to be issued to the employee. This certificate is to be furnished by
the employee with his income tax return after which he gets the credit of the TDS in his
personal income tax assessment.

Thus, the employer is required to compute at the beginning of the financial year, the total
salary income payable to an employee during the financial year. Further, the employer should
also take into account any other income as reported by the employee. After considering the
incomes exempt, deductions and relief, the tax liability of the employee should be determined
on the basis of the rates in force for the financial year. Every month, 1/12 of this net tax
liability as computed above is required to be deducted.
Sub-Section 2 of Section 192 provides that where a person is simultaneously employed with
more than one employer, he may furnish the particulars of salary payments and TDS to the
employer of his choice. Similarly, on change of employment the particulars of salary and
TDS of earlier employment may be furnished to the subsequent employer. These particulars
are to be furnished in Form 12 B in accordance with Rule 26A of the I.T.Rules. The employer
on receipt of such information is required to take into account the particulars of salary and
TDS and then deduct tax at source considering the aggregate salary from all sources. Further,
an employee may be in receipt of other income chargeable to tax such as interest income,
capital gains, income from house property, etc. In such a case, sub-section 2B of Section 192
enables the employee to furnish particulars of such income and any TDS thereon to the
employer/drawing & disbursing officer, and the employer will also take these into
consideration while deducting TDS under sub-section 1. The employer may also make
adjustments in the amount of deduction for any previous excess or deficient deduction under
sub-section 3.

As per Section 192 of the IT Act, any person responsible for paying any amount under the
head salaries is required to deduct tax at source at the time of payment. This section unlike
some other provisions, does not distinguish between payment of salary, to a resident, non
resident or expatriate. Thus all payments which are taxable under the head salaries, are also
covered by the provisions of TDS, irrespective of the residential status of the recipient.

To calculate the TDS on salary,

a. The gross income for the year is calculated by adding basic pay and allowances.
b. Any loss under the head income from house property is deducted under sub-section
2(b) of section 192 of the act.
c. Any investment made under section 80 is exempted from tax, and thus deducted from
the gross income.
d. As the amount is payable on the basis of the current rate of income tax, the taxpayer
has to evaluate the tax slab in which his income after deductions falls. The tax slabs as
at present(for a resident under 60 years) are:-
-Tax up to income of Rs.2.5 lakhs is NIL
-Tax up to income of Rs.2.5 lakhs to Rs.5 lakhs is 10% of the income exceeding 2.5
lakhs
-Tax up to income of Rs. 5,00,000/- to Rs. 10,00,000/-.is Rs.25000 + 20% of the
income exceeding Rs. 500000.
-Tax over income of Rs. 1000000 is Rs. 125000 + 30% of the income over Rs.
1000000

Interest on securities:- Section 193 deals with the provisions relating to TDS on interest on
securities. Tax is to be deducted under section 193 if any person pays any income by way of
interest on securities to a resident. Thus, the provisions of section 193 are not applicable in
case of payment of interest on securities to a non-resident. As per section 193, tax is to be
deducted at the time of payment or credit of interest (to any account by whatever name
called), whichever is earlier.
There are some particular cases in which tax is not to be deducted on interest:-

1. Any interest payable on 4.25 per cent National Defence Bonds, 1972, where the bonds
are held by a resident individual.
2. Any interest payable to an individual on 4.25 per cent National Defence Loan, 1968,
or 4.75 per cent National Defence Loan, 1972.
3. Any interest payable on National Development Bonds.
4. Any interest payable on 7-year National Savings Certificate (IV Issue).
5. With effect from 1-7-2012, any interest payable to a resident individual or resident
HUF on any debenture issued by a company in which the public are substantially
interested, if the following conditions are satisfied :
the amount of interest or, as the case may be, the aggregate amount of such interest
paid or likely to be paid on such debenture by the company to such individual or HUF
does not exceed Rs. 5000; and
such interest is paid by the company by an account payee cheque.
6. Any interest payable on any security of the Central Government or State Government,
other than 8 per cent Savings (Taxable) Bonds, 2003.However,no tax to be deducted
from interest on 8 per cent Savings (Taxable) Bonds, 2003, if interest payable on such
bonds does not exceeds Rs. 10,000 for the financial year.
7. Interest payable on certain notified debentures issued by any institution or authority,
or any public sector company, or any co-operative society (including co-operative
land mortgage bank or a co-operative land development bank).
8. Any interest payable to LIC/GIC/4 companies formed under General Insurance
Business Act/any other insurer in respect of any securities owned by it or in which it
has beneficial interest.
9. Interest payable on 6.5 percent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980
held by a resident individual provided total nominal value of such bonds do not
exceed Rs. 10000 at any time during the period to which the interest relates.
As per section 193 read with Part II of First Schedule of Finance Act, tax is to be
deducted @ 10% from the amount of interest. However, if the payee does not furnish
his Permanent Account Number (PAN), then the payer has to deduct tax at the rate of
20%.
Interest on dividends:- The principal officer of an Indian company or a company which
has made the prescribed arrangements for the declaration and payment of dividends
within India is liable to deduct tax at source on dividends.
Tax is to be deducted at the time of credit of such amount to account of payee or at the
time of payment whichever is earlier.
Tax is to be deducted at the rate of 10%. If the recipient of income doesnt furnish his
PAN to deductor then TDS is to be deducted @ 20%.
TDS on dividend is not required to be deducted if:-
a. Dividend is covered by sec 115-O
b. Amount of dividend paid or is likely to paid in a financial year to a shareholder
doesnt exceed Rs. 2,500 and such amount is paid by account payee cheque.
c. Any dividend payable to LIC, GIC or its subsidiaries or any other insurer in respect of
shares owned by them or in which they have full beneficial interest.
Interest other than interest on securities:- Section 194A deals with the provisions
relating to TDS on interest other than on securities. Tax is to be deducted under section
194A, if interest (other than interest on securities) is paid to a resident. Thus, the
provisions of section 194A are not applicable in case of payment of interest to a non-
resident, same as section 193.
Every person (i.e. the payer) other than an individual or a Hindu undivided family (HUF),
who is responsible to pay interest (interest other than on securities) to a resident, is liable
to deduct tax at source under section 194A. However, an individual or a HUF, whose total
sales, gross receipts or turnover from the business or profession carried on by him/it
exceeds the monetary limits specified under section 44AB during the financial year
immediately preceding the financial year in which the aforesaid amount is credited or
paid, shall be liable to deduct tax under section 194A. In other words, an individual or a
HUF is liable to deduct TDS under section 194A, if such individual or HUF was liable to
get his/its accounts audited under section 44AB in the preceding financial year. As per
section 194A, tax is to be deducted at the time of payment or credit of interest (to any
account by whatever name called), whichever is earlier.
There are some instances in which no tax is to be deducted:-
1. No tax is to be deducted if the aggregate amount of interest during the financial year
does not exceed Rs. 5,000.
However, the limit of Rs. 5,000 will increase to Rs. 10,000 in case of interest
paid/payable by banking company on time deposit or a co-operative society carrying
on banking business on time deposit and in case of interest paid/payable by post office
on deposit made under Senior Citizens Saving Scheme Rules, 2004. The limit of Rs.
5,000 will be increased to Rs. 50,000 in case of Interest on compensation awarded by
Motor Accident Claims Tribunal.
2. No deduction of tax shall be made under this section in the case of an individual, who
is resident in India, if such individual furnishes to the payer, a declaration in writing in
Form 15G/15H, as the case may be, to the effect that his income is below exemption
limit.
3. No tax is to be deducted under section 194A from interest paid to any banking
company to which the Banking Regulation Act, 1949, applies, or any co-operative
society engaged in carrying on the business of banking (including a co-operative land
mortgage bank).
Rate- As per section 194A read with Part II of First Schedule to Finance Act, tax is to be
deducted @ 10% from the amount of interest. However, if the payee does not furnish his
Permanent Account Number (PAN), then the payer has to deduct tax at the rate of 20%.
Winnings from lottery or crossword puzzle or horse race:- Under Section 194B of the
Income Tax Act, 30 per cent tax is deducted on any prize money in excess of Rs 10,000
and other winnings from games, lotteries etc. This is deducted at source. If the prizes
awarded are in kind, the prize distributor will, before releasing the prize, ensure that tax
has been paid in respect of the winnings. It will either recover it from the winner or bear
the tax liability itself and deposit TDS.
 But if prizes are partly in cash and partly in kind, tax is deducted on the total value of the
cash and kind from the cash. And, if the cash is insufficient to meet the TDS liability,
either the winner or the prize distributor pays the deficit. The basal limit in this case is Rs.
5000.
Payment to contractors:- Section 194C states that any person responsible for paying any
sum to resident contractor for carrying out any work (including supply of labor),in pursuance
of a contract between the contractor and a specified person (government, local authority,
etc.), shall deduct an amount equal to 1%, if payment is being made to an individual or HUF,
and 2% in all other cases. If the payment being made does not exceed Rs. 30000, no TDS will
be deducted. If the payment exceeds Rs. 100000, TDS will be charged at the aforementioned
rates. If the payment is being made in pursuance of a contract with a sub-contractor,TDS shall
be deduced at 1% of the amount.
The person responsible for making payment to resident contractor/sub-contractor should
deduct TDS

either at the time of crediting such sum to the account to the payee or

at the time of payment thereof in cash or

by issue of a cheque or by any other mode, whichever is earlier.

No tax is required to be deducted in the following cases:

1. Where the sum is credited or paid in pursuance of any contract, the consideration for
which does not exceed Rs. 30,000, or
2. where the aggregate of the amounts of such sums credited or paid or likely to be
credited or paid during the financial year does not exceeds Rs. 75,000, the person
responsible for paying such sums will not deduct TDS under this section.
3. Individual or HUF not to deduct tax if the payment or amount credited to contractor is
for personal use.
4. No individual or HUF shall be liable to deduct income-tax on the sum credited or paid
to the account of the contractor where such sum is credited or paid exclusively for
personal purpose of such individual or any member of HUF.
5. No deduction shall be made from any sum credited or paid or likely to be credited or
paid during previous year to the account of a contractor during the course of business
of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person
paying or crediting such amount.
Insurance commission:- Person responsible for paying to a resident commission or
otherwise for soliciting or procuring insurance business including continuance, renewal or
revival of policies is required to deduct TDS. TDS is required to be deducted at the time
of credit of such amount or payment thereof whichever is earlier at the rate of 10%. (5%
from financial year 2016-17). If the recipient of income doesnt furnish his PAN to
deductor then TDS is to be deducted @ 20%. However if payment is made to a resident
(other than company) the rate of TDS will be 5% from the financial year 2016-17.The
base limit is Rs. 20000.
Regarding life insurance policies, any person or company paying to a resident any sum
under a life insurance policy, is supposed to deduct a TDS of 1%. The base limit is Rs.
100000.
 Commission or brokerage:- Any person, (other than individual or a Hindu undivided
family) who is responsible for paying, to a resident, any income by way of commission
(not being insurance commission referred to in section 194D) or brokerage, shall, deduct
TDS. TDS is required to be deducted at the rate of 5% (as of 31st May 2016)
However, individuals and HUF who were covered under section 44AB(a) and (b) in the
preceding previous year i.e. whose gross turnover/receipts of the business/profession in
the immediately preceding financial year exceeded business/profession in the
immediately preceding financial year exceed Rs. 1,00,00,000 / 25,00,000, as the case
may be, are also required to deduct tax at source.
TDS on commission shall not be deducted when-
a. No deduction shall be made under this section in a case where the amount or
the aggregate amounts of such income to be credited or paid during the
financial year does not exceed INR 5,000
b. Payment is being made by BSNL or MTNL to their call centre franchises.
Rent:- The person (not being an Individual or HUF) who is responsible for paying any
income to resident by way of rent is liable to deduct tax at source in case the aggregate of the
amount of such income credited or paid or likely to be credited or paid during the financial
year by the aforesaid person to the account of, or to payee exceeds Rs. 1,80,000/-. Individuals
and /or HUFs who are subject to tax audit are also under an obligation to deduct the tax at
source.
Rent means any payment, by whatever name called, under any lease, sub-lease, tenancy or
any other agreement or arrangement for the use of (either separately or together). In case the
landlord collects security or advance payment at the time of letting out a building to a tenant
on the condition that the deposit will be refunded at the time of vacating the building, such a
receipt is not in the nature of income and, therefore, no tax is to be deducted at source.
The rate of TDS in this case is:-

a) Plant & Machinery-2%

b) Land or building or furniture or fitting- 10%