Complete Guide on TDS
Some investors still seem to be baffled by the concept of TDS (Tax Deducted at source) and its relation to taxation. Though a very simple concept, the investors get confused if TDS is nicked from their Fixed Deposits (FDs) as they assume they need not pay any tax at maturity, or think that they need not pay any tax on their FDs interest as it was under Rs. 10,000 and TDS were not deducted.
Through this article, we would like to clarify all your doubts related to the concept of TDS.
Definition of TDS (Tax Deducted at Source)
TDS is a mechanism through which Government of India collects the tax, where tax is taken away from you at the time of transaction itself and deposited directly with the income tax department. Assuming that the recipient has some tax liability, so when calculating your tax liability at the end of year, you will pay only the balance amount as you have already paid some amount of tax in the form of TDS. This mechanism helps avoid tax evasion by letting you pay a fraction of your tax liability beforehand and allowing the income tax department to collect the tax.
Following illustrations will give you a better understanding of TDS collections:
- TDS deducted by your company:
Your employer deducts a certain amount as tax from your salary every month before paying the salary to you. At the beginning of the financial year, you are supposed to declare your 80C investments, LTA, HRA, and any additional tax deductions that you are likely to avail. Based on this, your company will estimate your tax outgo and subsequently cut a specific amount each month as tax the (TDS) and send it to the income tax department directly. While calculating your actual income tax liability at the end of year, if your tax liability comes to be more than the TDS deducted, you can pay the remaining tax amount by filing income tax return. However, if your tax to be paid comes to be less than the TDS, you can ask for a refund on the tax return.
As a salaried employee, your company deducts tax each month so you need not pay any tax at the end of year. However, if you have invested in FDs or made some other investments, where the TDS was cut, then you have already compensated some fraction of your tax liability. Your company may not be aware that you have compensated some tax through TDS so when you are asked to submit investment proofs (during Jan-Feb), deposit Form 192 and TDS certificates to your company so it can adjust the compensated TDS and pay off the extra amount in your salary in the month of March.
- TDS deducted on FDs by Banks:
Fixed Deposits earn some interest every year. According to the Indian income tax laws, if the interest amount on your FDs exceeds Rs 10,000 each year (across the same bank or its different branches), TDS will be cut by the bank. The income tax department mandates banks and other financial institutions that issue fixed deposits to cut income tax at the source itself on FDs,/ if found eligible.
The interest on FDs is a source of income and any amount earned as interest is taxable. The interest amount may vary from Rs 100 to Rs 1000 or even more, but you still have to pay tax on that amount. Whenever a bank gives an interest on FDs, it runs a check for its TDS eligibility. In case the interest amount exceeds Rs 10,000, the bank deducts the tax directly and pays it to the government. This rule ensures that you pay tax beforehand. TDS is applicable for Sweep in Accounts and Multi Option Deposit Scheme (SBI). In case the FD is in the name of a minor, the TDS will be claimed by the person who manages minor’s income.
Sometimes it may just happen that you don’t have to pay any tax at the end of year but since your FDs are incurring over Rs 10,000 as interest income, the bank deducts the TDS amount. In that case, you can reclaim it by filing a tax return. You can simply submit Form 15G/15H every year to make sure the bank does not deduct the TDS.
- TDS deducted on NRI Fixed Deposits:
In the case of NRI FDs, the TDS is deducted at the rate of 30% on any interest earned on NRO fixed deposits. Here, the rule of Rs 10,000 or above as interest is not applicable. Even if the interest comes out to be Rs 1,000, TDS is still cut at the rate of 30%. However, FDs under NRE/FCNR accounts are completely tax-free in India, so the person need not pay any TDS or tax.
Generally, the bank or financial institution that deducts your TDS and pays it to the income tax department will issue a TDS certificate as the confirmation that you have already paid the TDS. This certificate will help you prove that TDS amount has been adjusted in your income tax return.
PAN and TDS
Usually, your bank or other financial institutions ask your PAN card number before paying the interest amount. In case any TDS has to be deducted, they will first check the PAN number of the recipient. If PAN number is quoted by the recipient, the TDS is deducted at a lower rate. In contrast, TDS deducted is high in case the PAN number is not provided.
Many investors divide their investment amount and try to open lots of smaller FDs in the same bank (different branches) or in different banks. This technique to evade TDS by trying to keep your interest income below the applicable limit does not work in the present times of core banking. Today, bank officials can find out exactly how many FDs you own and how much interest you will earn from your investments just by punching your PAN number. In this way, tax officials make sure you pay your taxes anyway, even if TDS was deducted or not. It is better if the TDS was deducted, because in this way you have already paid a fraction of the tax beforehand and don’t have to fret for the entire tax amount at the end of year. You don’t want to end up skimping just to be able to pay the taxes!
Some investors invest in securities, bonds, or try to find places where TDS is not applicable. They fail to understand that TDS is a mechanism to pay tax. They believe that since TDS is not deducted, they won’t have to give any tax, which is a totally wrong conception. By seeking to invest in places where TDS is not cut, they are accruing the responsibility on themselves of paying the tax at the end of year. Therefore, declare your investment proofs and attach TDS certificates for a hassle-free filing of income tax returns and claiming back your refunds.