Tax Deduction at Source or TDS is mandatory by the Income-tax Act with an aim to collect tax from the source of income. The TDS is deducted from the taxpayer at the time of making payment (if the price value is above the predefined limit) by the deductor. The deducted amount will be forwarded to the Government on behalf of the taxpayer. Within a prescribed time, the deductor has to pay the tax deducted at source to the Government. TDS is applicable to various income – salaries, interest received, commission, etc. The main focus of TDS deduction is the idea of paying tax along with earning.
How TDS is calculated?
Expenditure such as salary, lotteries, interest from banks, rent payment, payments to freelancers all fall under the purview of TDS. When making payments under these segments, a percentage of the payment is withheld by the deductor. The deductor can be an individual or an organization. The person whose payment is getting deducted is the deductee. For example, for the employed, the employer is the deductor and the employee is the deductee.
Advantages of Tax Deduction at Source
TDS deduction takes place throughout the year and ensures a consistent flow of revenue to the Government. TDS will help to increase the tax reach and prevent fraud because it is deducted at the time of payment itself. It is also a measure to prevent tax evasion. As TDS is deducted automatically from the individual’s income, the payment of tax becomes convenient.
The TDS return has to be filed quarterly and the deductor has to deposit the deducted TDS to the Government. The deducted TDS info to be filed in the form of a TDS return. It is mandatory to submit the TDS along with the Tax Deduction and Collection Account Number (TAN) of the deductor, PAN of deductee, amount of TDS deducted, type of payment, etc.
The deductor has to issue a TDS certificate to the person for the TDS deducted from his / her income at the time of payment. Form 16, 16A, 16B, and 16C are all TDS certificates. Form 16 is issued to the employees by the employer annually. Form16A is issued by the bank to the depositor on deducting TDS for the interest received on the fixed deposit. Form 16B and 16C are issued for deducting TDS on sale of property and rent.