What is Tax Deducted at Source (TDS)?

Every person is liable to pay Income Tax whose income exceeds the stipulated limit as prescribed by Income Tax Department as per the order of the Government of India from time to time.  Income tax is charged on the income earned in the previous year.  It is the duty of the tax payer to pay the tax on self-assessment basis, so it is the duty of the tax payer to assess the income and tax thereon. 

Since the income tax is calculated for the previous year, the tax payer pays the tax only in the Assessment year.  But the government wants the tax for its functions and it can’t wait till the year end.  So, the responsibility of paying tax is transferred to the tax deductor, who is paying income to the tax payer.  Deductor is to deduct the tax on behalf of tax payer and remit the tax to the department within the stipulated time period and that’s how it is called Tax Deducted at source.

For example, an employer gives salary to his employees only after deducting TDS from salary and remits the same to the department.  All theses deductions are categorized under different sections (see table as below – frequent catetories) and the limit for tax deductions is also mentioned. 

Section	Nature of Payment	Threshold Limit (During the F.Y.)	TDS Rate (Individual/HUF)	TDS Rates (Others)
194 A	Interest paid by banks Interest paid by others	10,000 5,000	10 10	10 10
194 C	Payment to Contractors – Single Transaction Payment to Contractors – During the F.Y.	30,000 75,000	1 1	2 2
194 H	Commission / Brokerage	5,000	10	10
194 I	Rent - Rent – Plant & Machinery	1,80,000 1,80,000	10 2	10 2
194 J	Payment to Professional (fees) Directors Fees	30,000 -	10 10	10 10
194 IA	Transfer of Immovable Property other than Agricultural land	50,00,000	1	1
192	Salary Income	Applicable Slab	Slab Rates	-

The above mentioned details are applicable only for the F.Y.2013-14.  The department change or let the rates remain from time to time.

After deducting tax, the deductor remit the same by filling up the Challan No.281 through the authorized banks mentioning his TAN, Code, Assessment year, Amount paid and deducted amount.

In order to deduct the TDS the deductor should obtain Tax Deduction Account Number (TAN) and he/she should mention this number every time he/she pays the TDS to the department.  Deductors are also required to file the TDS Returns every quarter furnishing the deduction details.

Whether TDS should be deducted on Service Tax?

It has been a debate among TDS deductors whether TDS to be deducted on the amount including Service Tax or not. 

The Income tax department has clarified the same in their Circular No.4/2008 dated 28/04/2008 which says that the TDS to be deducted only on the Rent paid excluding the Service Tax under Section 194-I.  Though this circular has clarification only for the amount related to Rent, and there is no further clarification for other sections which are related to Tax Deducted at Source.

So, they have issued further notification F.No.275/73/2007-IT (B) dated 30/06/2008 in which they clarified that the Circular No.4/2008 dated 28/04/2008 is applicable only to Rent.  It clarifies that the amount paid under section 194J will be subject to TDS including Service Tax. 

As per the Section 194-I, only Income by way of rent subject to TDS and the Service Tax part is not income for the landlord so it is to be excluded when TDS is deducted.  Whereas in the case of Section 194J, it says that any sum by way of fees for Professional services or Technical services, so TDS is to be deducted on the whole amount of fees including Service Tax.

So, TDS should be deducted on any sum paid and on Income. The deductor should understand the difference between ‘any sum’ and ‘income’, and deduct TDS accordingly.  We assume that this is applicable to all the other sections come under Tax Deducted at Source and whenever the word ‘any sum’ included in any section, TDS should be deducted on the whole amount including Service Tax.

Certificate for Lower/NIL Deduction of TDS: Application Procedure

When a person makes any payment to the other person should deduct TDS (Tax Deducted at Source) either at the time of credit to the account of that person or at the time of making payment whichever is earlier. 

Section 197 of Income Tax Act, 1961 helps to reduce the burden of claiming refund from the Income Tax Department if the tax deducted is more than actual tax liability.  When a person who receives income assumes that his total income tax liability calculated as per the Income Tax Rates is lower than TDS amount deducted, he may request for lower or nil deduction of TDS by making an application in Form 13 to the Income Tax Officer. 

The Income Tax Officer after receiving the application and if he satisfied that the total income of the recipient is eligible for lower or nil deduction, may issue a certificate for such lower or nil deduction of TDS.  This certificate is given to the person responsible for deducting TDS and he has to deduct TDS at the rates specified in the certificate or deduct no tax up to the time when the certificate is valid.

The certificate for lower or nil deduction of TDS contains the details of the persons who are responsible to deduct TDS and period when the certificate is valid.  Only those whose name mentioned in the certificate can deduct at lower rate or nil TDS.

Important Details to be provided in the Form 13:

• Status regarding if Individual, HUF, Company, etc.
• Residential Status
• Permanent Account Number (PAN)
• Tax Deduction and Collection Account Number (TAN)
• Details of returns due but not filed
• Details of returned income or assessed income for the last three assessment years (copies of returns along with enclosures, copies of assessment orders to be enclosed)
• Details of tax payment for the last three assessment years
• Details of sales, profit, etc. for the last three previous years if the income includes the income from the head ‘Profits and Gains of Business or Profession’.
• Details of existing tax liability under Income Tax Act, 1961 and Wealth Tax Act, 1957
• Assessment year to which the payments related
• Details of payment of Advance tax and tax deducted or collected already for the assessment year relevant to the current previous year till date.

Note: This certificate of lower or nil deduction of TDS is not applicable for the Interest income other than interest on securities received from banks and others as per Section 194A. Form 15G or Form 15H can be submitted for nil deduction of TDS for the Income from Interest.

Click HERE to download the Form 13

Attention TDS Deductors: Non-deposit of TDS on time attracts Prosecution

Recently Central Board of Direct Taxes (CBDT) has said that the TDS deductors who fail to pay the deducted TDS amount to the Central Government within stipulated time will be liable to prosecution. 

There are TDS deductors who default in paying the TDS amount, even after deduction, to the government.  Those deductors will be prosecuted under Section 276B of the Income Tax Act, 1961.  If convicted they have to serve imprisonment for a term which may be extended to seven years.

It says, the offence u/s 276B of the Income Tax Act can be compounded by Chief Commissioner having jurisdiction on the case, either before or after the launching of prosecution proceedings.  It also modified the retention period of 12 months, which has been dispensed with.  So, any delay even one day from the due date will attract imprisonment.

All about TDS on Rent u/s 194-I

Any amount of Income paid to a resident as rent is subject to Tax Deduction at Source (TDS).  Deduction should be made either at the time of credit to the account of payee or at the time of payment by cash, cheque, draft or any other mode, whichever is earlier.

Who is liable to deduct TDS on Rent?

Any person who is responsible to pay rent to any resident is liable to deduct TDS.  Individuals and Hindu Undivided Families (HUF) are excluded from deducting TDS on rent provided that those total sales, gross receipts or turnover from the business or profession carried on by him doesn’t exceed the monetary limits specified under clause (a) or clause (b) of Section 44 AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid.

Monetary Limits as per Section 44 AB:

Individuals and HUFs are responsible to deduct TDS if,

(a) the total sales, gross receipts or turnover from business exceeds 1 Crore Rupees in any previous year; or

(b) the gross receipts from profession exceeds 25 Lakh Rupees in any previous year.

Suppose if an individual’s total sales from business during the previous financial year (say 2012-13) is less than Rs.1 Crore, then he need not to deduct TDS on rent credited or paid to the account of payee in the current financial year (2013-14).

Suppose if an individual’s gross receipts from business or profession exceeds Rs.25 Lakh Rupees in the previous year (say 2012-13) then he need to deduct TDS in the current financial year (2013-14).

Percentage of TDS to be deducted:

Particulars	Percentage of TDS to be deducted
Any Machinery or plant or equipment	2%
Land or Building or Furniture or fittings	10%
If PAN not submitted	20%

Note:  Land or Buildings include factory buildings and land appurtenant (furnishing added support) to a building.

No Deduction of TDS

If the aggregate amount of rent credited or paid/likely to be credited or paid during the financial year doesn’t exceed Rs.1,80,000/- then there is no need of TDS to be deducted.

TDS on Professional Fees, Technical Services

TDS should be deducted on any sum paid by any person to a resident by way of professional or technical services under section 194J of Income Tax Act.

TDS should be deducted @ 10% on the following payments either at the time payment or at the time of credit to the account of the payee whichever is earlier:

• Fees for professional services
• Fees for Technical Services
• Any sum paid to a director other than the amount on which tax is deductible under section 192.  The sum includes remuneration or fees or commission
• Royalty
• Any sum referred to in clause (va) of section 28

No Deduction of TDS

• TDS need not to be deducted if the aggregate sum credited or paid or likely to be credited or paid during the financial year doesn’t exceed Rs.30000/- (Rupees Thirty Thousand).

• No TDS to be deducted if the sum credited or paid before 1^st July 1995.

• Individuals or Hindu undivided family (HUF) need not to deduct TDS, if their total sales, gross receipts or turnover from their business or profession doesn’t exceed Rs.1 Crore in case of business and Rs.25 Lakhs in case of profession.

• No individual or HUF need not to deduct TDS, if the sum paid by way of professional services exclusively for personal purposes of such individual or any member of HUF.

Other Points:

• Professional Services includes the services of legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising and other services as may be notified by the Board for the purposes of section 44AA or of this section.

• Any sum referred above (section 194J) is credited to any account, whether called ‘Suspense account’ or by any other name in the books of accounts of the person liable to pay such sum shall be deemed to be credit of such sum to the account of the payee and all the provisions of this section shall apply accordingly.

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TDS on Commission or Brokerage under Section 194H

When any person pays any sum by way of commission or brokerage to a resident is liable to deduct TDS on such commission or brokerage @ 10%.  TDS should be deducted either at the time of credit or payment whichever is earlier. 

TDS need not to be detected if the commission or brokerage paid does not exceed Rs.5000/-in a financial year.

Individuals, Hindu Undivided Families (HUF) need not to deduct TDS if their total sales, gross receipts or turnover from the business or profession within the monetary limits specified under clause (a) or (b) of Section 44AB during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid.

For example, if the monetary limit exceeds in the financial year 2012-13, and the commission is credited or paid in the year 2013-14, then TDS should be deducted on such commission or brokerage in the year 2013-14.

The monetary limits specified in the Section 44AB is Rs.1 Crore from business and Rs.25 Lakhs from profession.

Commissions paid by Insurance companies are not liable for deduction under this section. Insurance commission comes under the section 194D.

Further no deduction shall be made if the commission or brokerage paid by Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) to their public call office franchisees. 

The words "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.

The rate of TDS to be deducted is 10%, if PAN has not been submitted by the person receiving the payment; TDS is to be deducted at 20% on the payment.