All About Tax Deducted at Source (TDS)

What is TDS?

Tax Deducted at Source (TDS) is a system introduced by Income Tax Department, where person responsible for making specified payments such as salary, commission, professional fees, interest, rent, etc. is liable to deduct a certain percentage of tax before making payment in full to the receiver of the payment. As the name suggests, the concept of TDS is to deduct tax at its source. Let us take an example of TDS assuming the nature of payment is professional fees on which specified rate is 10%.

XYZ Ltd makes a payment of Rs 50,000/- towards professional fees to Mr. ABC, then XYZ Ltd shall deduct a tax of Rs 5,000/- and make a net payment of Rs 45,000/- (50,000/- deducted by Rs 5,000/-) to Mr. ABC. The amount of 5,000/- deducted by XYZ Ltd will be directly deposited by XYZ Ltd to the credit of the government.

 Objectives of TDS:

Tax Deducted at Source  was introduced in India to facilitate the payment of tax while receiving  the income and it follows the concept of “Pay as you earn”. However,  the purposes of tax deducted at source is changing slowly. Now, the  objectives of tax deducted at source are:

  

·  To enable the  salaried people to pay the tax as they earn every month. This helps the  salaried persons in paying the tax in easy installments and avoids the  burden of a lump sum payment.

 

·  To collect the tax at the time of payment of income to various assessees such as contractors, professionals etc.

 

·  Government requires  funds throughout the year. Hence, advance tax and tax deducted at source  help the government to get funds throughout the year and run the  government smoothly.

 

·  It helps to spread  the tax net wide enough to include persons who might otherwise have  evaded taxes. The minimum thresholds are raised and the rates are  reasonable and comparable with the rates prevailing in other countries.  Hence, it is very vital to make all the persons earning the taxable  income pay the tax. But, the best way to make them pay is to deduct tax  at source.

 

Who shall deduct tax at source?

Every person  responsible for making payment of nature covered by TDS provisions of  Income Tax Act shall be responsible to deduct tax.