Know About the Concept of TDS Under the Income Tax Act

The concept of TDS was introduced with an aim to collect tax from the very source of income. The Government adopted this to minimize the tax evasion and maximize the collection of Income Tax. TDS refers to Tax Deducted at Source. As per this concept, any company or person while making certain payments such as rent, commission, professional fees, salary, interest etc. is required to deduct tax at the source (as per Applicable TDS rate), if the payment exceeds certain threshold limits.

It’s the responsibility of deductor to deduct TDS before making the payment and deposit the same with the government (using Challan ITNS-281 on the Government portal.) The person/Company who deduct tax at source is known as ‘deductor’, on other hand, the person who receives the payment after the tax deduction is called ‘deductee’.

The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.

INSTANCE:

“A” Pvt. Ltd. make a payment of Rs. 60,000/- for its office rent per month to the owner of the property, then “A” Pvt. Ltd. must deduct TDS @10%  i.e. Rs. 6,000/- of Rs. 60,000/- and pay the balance amount of 54,000/- to the owner of the property. Thus the owner of the property received the net amount of Rs. 54,000/- after decoction of TDS. The gross income of the owner of the property will Rs. 60,000/- and he can take credit of Rs. 60,00/- as already deducted by “A” Pvt. Ltd. against his final tax liability.

2. WHAT IS TDS CERTIFICATE?

Form No. 16, 16A, 16B and Form 16C are known as TDS Certificates. The deductor of Income tax, issued this TDS Certificate to the deductee (assesse) as while making the payment to the deductee, the deductor deducted the Tax and the same was submitted to the Government. Deductor has to issue TDS Certificates within two months of the next financial year.

3. TYPES OF TDS CERTIFICATE

TDS certificates are of two types namely, Annual TDS Certificate and Quarterly TDS Certificate:

1. Annual TDS Certificate

The employer issued Annual TDS certificate to the employee for TDS on Salary. The TDS certificate issued by employer to employee is also known as Form 16. Form 16 contains details pertaining to the TDS deducted by an employer from salary and the details of TDS deposited with Government. Where is the annual income of an employee is less than Rs. 2,50,000/- there is no need of deduction of TDS.

2. Quarterly TDS Certificate

Quarterly TDS certificates are issued for deduction of TDS on income other than salary and are issued in Form 16A. For instance, the quarterly TDS certificate is issued by banks when TDS is deducted on interest earned by the depositor on fixed deposits. For instance various types of TDS Certificates are as follows:

4. PAYMENTS QUALIFYING FOR TDS

Here are some of income/payments which fall under the ambit of TDS:

• Salary

• Amount under LIC
• Bank Interest
• Brokerage or Commission
• Commission payments
• Compensation on acquiring immovable property
• Contractor payments
• Deemed Dividend
• Insurance Commission
• Interest apart from interest on securities
• Interest on securities
• Payment of rent
• Remuneration paid to the director of a company, etc.
• Transfer of immovable property
• Winning from games like a crossword puzzle, card, lottery, etc.

5. HOW TO PAY TAX DEDUCTED/COLLECTED AT SOURCE?

Tax deducted or collected at source shall be deposited to the credit of the Central Government by following modes:

1. Electronic mode: E-Payment is mandatory for All corporate assesses; and All assesses (other than company) to whom provisions of section 44AB of the Income Tax Act, 1961 are applicable.

2. Physical Mode: By furnishing the Challan 281 in the authorized bank branch

Note: Where tax is deducted/collected by government office, it can remit tax to the Central Government without production of income-tax challan. In such case, the Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and Disbursing Officer or any other person by whatever name called to whom the deductor reports the tax so deducted and who is responsible for crediting such sum to the credit of the Central Government, shall submit a statement in Form No. 24G.to NSDL with prescribed time-limit.

6. HOW TDS CREDIT TO DEDUCTEE PAN

It is important to understand that TDS is linked with PAN. TDS deductions are linked to PAN numbers for both the deductor and deductee. If TDS has been deducted from any of your income you must go through the Tax Credit Form 26AS. This form is a consolidated tax statement which is available to all PAN holders. Since all TDS is linked to PAN, this form lists out the details of TDS deducted on your income by each deductor for all kinds of payments made to you – whether those are salaries or interest income – all TDS linked to your PAN is reported here. This form also has income tax directly paid by you – as advance tax or self-assessment tax. Therefore, it becomes important for you to mention your PAN correctly, wherever TDS may be applicable on your income.

7. HOW TO CLAIM TDS REFUND?

Individuals can claim TDS refund on the Income Tax website. However, the Income Tax Returns must be filed, and the TDS refund must be shown. Once the ITR is filed, the TDS refund will be processed by the Income Tax Department. The refund might be credited to the bank account within 6 months. Individuals can also check the status of the refund on the official website of the Income Tax Department.

8. CONSEQUENCES FOR NON-COMPLIANCE OF TDS

 Consequences of Non-compliance to TDS under Sec. 201 of the Income Tax Act, 1961, where any person including the Principal officer of a Company, who is  required to deduct any sum in accordance with the provisions of this Ac; or referred to in sub-sec. (1A) of Sec. 192, benign an employer does not deduct or does not pay or after so deducting fails to pay tax to the Govt., the whole or any part of the tax as required by or under this Act, then such without  prejudice to any other consequences which he may incur, be deemed to be an Assesse in default in respect of such tax. A deductor would broadly face the following consequences:

1. WHEN Failure to deduct TDS

If a person fails to deduct TDS from the payment he is making to a resident for which he is liable to deduct tax at source, he is liable to pay interest at the rate of 1% per month from the date on which it was deductible till the time it is deducted. 

As per Section 271C of the Income Tax Act, if any person fails to deduct the whole or any part of the tax that he was required to deduct as per the provisions of the Act, such person shall be liable to pay a penalty as imposed by the Joint Commissioner subject to the maximum of the sum equal to the amount of tax which such person failed to deduct.

2. WHEN Failure to pay TDS

As per Section 201, if a person fails to pay the amount of TDS which he has deducted from the payment he is making to a resident, Interest chargeable at the rate of 1.5% per month or part of the month from the date on which it was deducted till the date of payment.

As per section 221, if a person fails to pay the amount of the TDS that he has deducted at source from any payment, the Assessing Officer may direct to pay for a penalty for non failure to pay TDS amount subject to the maximum of total amount of tax in arrears.

It may be noted that a reasonable opportunity of being heard will be given to the person before levying of the penalty.

3.  WHEN Default in filing of returns

There is no interest penalty applicable in case of the default in filing of return. If a person fails to file the return of TDS as per the provisions of the Act, he is liable to pay Rs. 100/day of default but subject to the maximum of the total amount of TDS.

Apart from the above mentioned, there may be more consequences for non-compliance with TDS provisions, which are:

4. Disallowance of Expenditure

If a person is making any deduction of TDS while paying any sum of amount to a resident, the deductor in such a is allowed to claim deduction for payments as expenditure, if the tax that is deducted during the P.Y. has been paid before the due date that is specified for filing of return of income u/s 139(1) of the Act.

In case the person fails to deduct the amount of TDS to be deducted or has deducted the TDS but fails to pay the same, the entire amount that was deductible is disallowed u/s 40(a)(ia) for the purpose of computing income under the head “PGBP”

V. Prosecution

As per section 276B of the Income Tax Act, if any assessee who has deducted the tax at source and fails to pay the same within the time limit to the government, he may be punishable with rigorous imprisonment for a term:

• Which shall not be less than 3 months;
• But, it may extend to 7 years; including the fine.

CONCLUSION:

The Govt. adopted the concept of TDS so that people may not evade Income tax. The TDS acts as a steady source of revenue for the Government, It is much more convenient for the deductee as the tax amount payable is automatically deducted. The burden on Tax Collection Agencies to collect tax significantly reduces.

TDS provisions are a very integral part of compliance under the Income Tax law in India. It acts as a regular source of income for the Government and would also act as a reporting mechanism for incomes earned by various sections of people, thereby making the tax administration simpler. Further, the consequence of not complying with it are rigorous and all those who are cast with the responsibility for deduction and remittance cannot ignore the same. It is therefore advised to every Business entity to make a mechanism control over various payments, keeping in view the provisions of TDS.

Written by:

(TASHRIQ AHMAD, ADVOCATE)

Supreme Court of India