written by Sourish | June 8, 2021

What is Tax Deducted at Source, Deduction Rules & Payment Method

You should deduct TDS if the payment is taxable when received by the payee. The person who deducts tax is a deductor, and they have the responsibility to deduct and pay the same to the government. The payee or person who receives the payment after deducting TDS is a deductee.

What is TDS?

TDS or Tax Deducted at source is a system introduced by the government to help collect taxes by deducting tax at the time of payment. The Income Tax Act mentions the rates of TDS deduction for certain payments and the threshold limits for deducting them. You must deduct the TDS or Tax Deducted at Source at the time of payment or crediting the account payee cheque, whichever occurs earlier.

 Types of Payments under Tax Deducted at Source (indicative list) 

  1. Salary
  2. EPF payment
  3. Winnings and lotteries
  4. LIC Maturity
  5. Compensation on compulsory acquisition of property
  6. Commission payments
  7. Interest payments by banks
  8. Consultation or Professional fees, etc.

In the case of items 1 to 5, the TDS deduction occurs only at the time of payment. But, if your tax liability is nil or excess TDS was deducted then, you can claim a tax refund after filing your ITR.

Also Read: How To Pay Your Income Tax Online With Challan 280

Rates for TDS

There are flat rates for payments, i.e. fixed rates. But in the case of salary and payments made to a Non-Resident or Foreign company, you must deduct tax after considering the surcharge and Health and Education Cess (HEC).

The above rates apply for those who have to furnish their PAN or Permanent Account Number to the deductor. According to Sec. 206 AA of Income Tax Act, 1961, in case, the deductor does not give his PAN, the TDS rate will be higher of:

(a) rate as per respective section, or

(b) rate @ 20%

The above section does not apply to a non-resident or a foreign company that does not have a PAN for payment of dividend, interest, royalty, fees for technical services, and payments on the transfer of capital asset.

The deductee must provide the following details:

  1. Name, Email ID, and contact number
  2. Address in the country outside India of which the deductee is a resident
  3. Tax resident certificate (TRC) if any
  4. Tax identification number for the country outside India or any unique number available by which the Government of that country can identify the deductee.

Also Read: Income tax Calculator - Calculate Your Taxes For FY 2021-22 Use Tax Calculator Online

Threshold Limit For Tax Deducted At Source

Income Tax Act, 1961 has defined the threshold limit for tax deducted at source. It is given under different sections of the Income Tax Act. The threshold limit refers to the total amount of payment made during the year-end, which does not attract TDS. The limit exempts the deductor from the responsibility of deducting tax at the source.

Section Number

Nature    of Payment

TDS Rate 

Threshold limit

Sec. 192 

Payme]

nt of salary

Normal slab rate plus surcharge and education cess Surcharge as follows 

10% (if Rs. 50 lakh > total income > Rs. 1 crore), 

15% (If Rs. 1 crore > total income > Rs. 2 crore), 

25% (If Rs. 2 crore  > total income > Rs. 5 crore), 

37% (If total income > Rs. 5 crore) plus HEC @ 4%.

Net taxable income is less than the exemption limit given. The employer must consider the details of other income and deductions made. You can consider losses from house property. 

Sec. 192A 

Payment of amount for the accumulated balance relating to a provident fund

10

No TDS if the Taxable amount withdrawn is less than Rs. 50,000. TDS is applicable if it is taxable in the hands of the employee.

Sec. 193 

Interest on securities

 
 

a. interest on debentures/securities [No TDS if you pay interest to LIC, GIC, or Other insurance, Government securities, and Demat Securities]                   

10

For any Government security paying 8% Savings (taxable) Bonds, 2003 or 7.75% Savings (Taxable) Bonds, 2018, then TDS is not applicable only if the interest amount is less than Rs. 10,000 during the financial year

 

b. any other interest on securities (including interest on non-listed debentures)

10

No TDS if the interest amount paid at the year-end is less than Rs. 10,000                                   

Sec. 194

Dividend

10

No TDS if the total dividend amount credited into the account or paid into the account in one financial year is less than Rs. 5000.

Sec. 194A

Interest other than interest on securities

10

No TDS if the amount of interest credited into account or paid on time deposit at the year-end exceeds Rs 40,000 (except for when the payee is a resident senior citizen, then the limit is Rs 50,000 from Rs. 10,000 to Rs. 40,000.

Sec. 194B

For Winnings from lottery/crossword puzzle/card game  / other game of any sort

30

No TDS if the amount paid at the year-end is less than Rs. 10,000.

If the winnings are in kind, the organiser must pay the TDS to the government before distributing the winnings.

Sec. 194BB 

Winnings from horse races

30

No TDS if the amount paid at the year-end is less than Rs. 10,000.

Sec. 194C 

Payment made to a resident contractor/sub-contractor—

a. Payment made to an individual or a Hindu undivided family

b. Payment made  to any person other than an individual or an undivided Hindu family

For 

 

a. 1

 

b. 2

a) If a single payment to a contractor is less than Rs.30,000                             

b) If the total sum credited in the account or paid to a contractor is less than Rs. 1,00,000 during the financial year

c) No TDS if the contract is for personal purpose in case of individuals and HUF

Sec. 194D

Insurance commission

10

No TDS if the amount paid or credited at the year-end is less than Rs. 15,000

 

– if the recipient is a resident (other than a company)

5

 

– if the recipient is a domestic company

10

Sec. 194DA 

Payment related to maturity proceeds of life insurance policy

5

No TDS if the amount paid or payable at the year-end is less than Rs. 1 lakh.

Sec. 194EE 

Payment related to deposits under National Savings Scheme, 1987

10

No TDS if the amount of payment or aggregate amount of payments in the financial year is less than Rs. 2,500. In case of payments that heirs receive, no TDS applicable

Sec. 194F

Payment on account of repurchase of Mutual Funds or UTI units

20

NA

Sec. 194G

Commission on sale of lottery tickets

5

No TDS if the amount of income in the financial year is less than Rs. 15,000

Sec. 194H

Commission or brokerage

5

No TDS if the amount paid or credited at the year-end is less than Rs. 15,000. You don’t need to deduct TDS if the commission is payable by BSNL or MTNL to their franchises (call office) public franchisees.

Sec. 194-I 

Payment of amount for Rent

a. rent of plant and machinery

b. rent of land or building or furniture or fitting

For

 

a. 2

 

b. 10

No TDS if the amount paid or credited at the year-end is less than Rs. 2,40,0,000. No tax deductions shall be made if the rent payment is to a business trust, which is a real estate investment trust (REIT), in respect of any real estate asset, referred to in section 10(23FCA) as it is exempt

Sec. 194-IA

Payment made to a resident person for transfer of any immovable property (except rural agricultural land)

1

No TDS if the consideration paid or payable for transfer of immovable property is less than Rs. 50 Lakhs. For part payments, you must deduct TDS partly as per payments made. Consideration will include all kinds of fees, charges, and others.

Sec. 194-IB 

Payment of amount for rent by an individual or HUF not subjected to tax audit under Section 44AB

5

No TDS if the amount of rent is less than Rs. 50,000 for a month or part of a month.

The deduction should not exceed the amount of rent for last month

Sec. 194-IC 

Payment to a resident individual or HUF under Joint Development Agreement who transfers land or building as per such agreement

10

NA

Sec. 194J

Fees for professional or technical services.                                       If the payee is in the business of call center and  the sum paid or payable towards royalty the rate is 2%

10

No TDS if the amount paid or credited at the yearend is less than Rs. 30,000.

Sec. 194LA 

Payment of amount for compensation on acquisition of certain immovable property

10

No TDS if the sum is less than Rs. 2,50,000 during a financial year.

For rural agricultural land, TDS doesn’t apply.

Sec. 194LBA(1) 

Payment of amount for nature referred to in section 10(23FC) or section 10(23FC)(a) or section 10(23FCA) by business trust to resident unitholders

10

NA

Sec. 194LBB

Payment related to units of investment fund specified in section 115UB

10

NA

Sec. 194LBC(1)

Payment related to an investment in a securitization trust specified in clause (d) of the Explanation related to section 115TCA (with effect from June 1, 2016)

5

NA

Sec 194M 

Payment of amount for contractual work, commission (not being insurance commission referred to in section 194D), brokerage or professional fees by an individual or a HUF not covered under section 194C, section 194H and 194J

5

No TDS if the total amount paid or credited at the year-end is less than Rs. 50 lakhs.

Sec 194N

Payment in cash by banking company or co-op. bank or post office

2 or 5

No TDS if the aggregate amount withdrawn is less than Rs. 1 crore during the previous year. 

Note: The threshold limit will be Rs. 20 lakhs if the person has not filed his ITR for the last three years immediately before the previous year in which cash is withdrawn, and the due date for filing ITR under section 139(1) has also expired.

Sec 194K

Payment of amount for Income in respect of units payable to resident

10

No TDS if the amount of income paid or payable does not exceed Rs. 5,000 during the financial year

 

Also Read: TDS On Salary Under Section 192

Conclusion

We have covered  what is TDS and the deductor and deductee meaning . The TDS deduction rules will help you in determining when and how to deduct TDS. But you must stay updated with changes made by the government from time to time. This will help you follow the laws and avoid any penalty.

FAQs

Who has the responsibility for the payment of tax in the case of TDS?

The Deductor handles deducting and paying the tax to the government. If the deductor fails to fulfill his responsibility, the deductee cannot pay the tax.  Hence, the deductor has the sole responsibility. 

Can I make a payment without tax deduction at the source at the request of the payee?

A payee can ask his payer not to deduct any TDS only if they provide a declaration in Form 15G or 15H to the payer. The declaration states that the tax on his estimated total income will be Nil. Form 15G is for individuals, and Form 15H is for senior citizens.

When is a Deductor deemed as an assessee-in-default?

The government deems a deductor as an assessee-in-default if they fail to deduct TDS or does not deposit it to the government's account in the following situations:

The deductor has not furnished the ITR under section 139, 139

The payer has not considered such expenditure or amount for computing income in the above-filed return. 

The deductor has not paid the amount of tax due as per the return

Are there any adverse effects on the deductee if failure is on the part of the deductor?

The payer handles the payment of TDS to the government. If the payer fails, then the deductee does not receive any penalty. 

What should I do in case of TDS not showing in FORM 26AS?

This can happen when PAN is incorrectly quoted, or TDS returns are not filed. The payee must contact the payer to find the reasons.

What is the difference between PAN and TAN?

PAN or Permanent Account Number is the document provided by the deductee. You apply for a TAN or Tax Deducted Account Number only when you need to deduct TDS.
 

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