If you are under the impression that you pay tax only while filing income tax returns; you are wrong. Tax is deducted before the income reaches your hands, and hence the term TDS (Tax Deducted at Source). Accept it, the government’s smarter than you think it is. Expenditure, like payments as salary, payments to freelancers and consultants, payment of rent, commission income from lotteries and interests from banks are taxed or reach the receiver only after a tax deduction.
When a payment is made under any of the above mentioned categories, a part of the payment is withheld by the payer as tax. By payer we mean the source which makes these payments. This source can be an individual, a firm, or an organization and is called as the deductor. The person whose payment is withheld as tax is called the deductee.
Now that we have cleared what a ‘TDS’ is all about, let us go a couple of notches higher and understand how this works? For the citizen who receives his income by way of salary or as a payment, paying taxes at the end of the financial year would mean the reconciliation of completing of accounts with the Income Tax department by filing the total income along with expenditure that is allowed as a tax exemption. Most of the tax, due to the government is deducted by way of ‘TDS’. The filing of returns is only a statement of accounts for the tax payer which may reflect tax due, tax refund or a zero difference.
The TDS effect
Shailendra is a freelance designer who works with companies for retainer and assignment based fee. He’s slapped with a standard 10% as TDS on every payment he receives. Let us take a look at how his earnings are calculated when files a return.
Individuals like Shailendra are allowed a deduction on every business expense. These are expenses they incur while performing services or expenses that are necessary for performance of the service. The purchase of equipment and assets are allowed a depreciation depending on its expected life. They use the ITR – 4 form to file returns.
Shailendra’s gross income was – INR 9,00,000/-
His business expenses amounted to – INR 1,75,000/-
This expenditure included depreciation on Laptop of INR 10,000/-
Business Travel Expense of INR 40,000/-
Rent Paid for premises – INR 1,00,000/-
Electricity telephone and Internet Expenses – INR 25,000/-
All of the above expenditure are deductible as Shailendra is a freelancer. His Taxable Income now will amount to INR 7,25,000/-
He’s paid a TDS of INR 76,120/–
Take a look at his ITR for the assessment 2016-17
Shailendra’s exemptions are as below:
Note that Shailendra is now eligible for a tax refund of INR 19920/- which is TDS of INR 76120 – Tax due of INR 56200/-
Tax Deduction at source occurs on the aggregate income based on the tax slab and on the source and type of income of the individual. It is only upon filing the ITR does the individual know the actual tax he is liable to pay.
What you must know about TDS?
- Every individual who pays TDS must ensure that the TDS certificates issued by the deductor are downloaded from TRACES (TDS Reconciliation Analysis and Correction Enabling System of the Income Tax Department)
- See if the digital signature on the form is checked or verified.
- The Deductee must also check to see if his PAN number and TAN of the deductor along with the amount paid as TDS are correct.
- Form 26AS is the tax credit statement for every individual who pays a TDS. This statement provides details regarding the deductor’s name, PAN of the deductee TDS paid to the government etc.,
- It is also important to cross the details on the TDS certificate against the details on the Form 26AS.
TDS payments benefit the government and allows the Income Tax department to collect tax almost every time a payment is made to the individual. It is up to the individual to keep track of these payments and file for returns every year in order avail all the tax exemption and benefits of expense deductions.
If you are freelancer or someone who receives payment for the practice of a profession or an individual who receives income from other sources and not as salary, talk to a financial advisor today to know more about TDS and how much you can save on tax.
This article has been contributed by Right Horizons