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TDS | What is Tax Deducted at Source and How is it Calculated | YES BANK

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TDS stands for Tax Deducted at Source and under the Indian Income Tax Act of 1961, it represents a system where a certain percentage is deducted as tax from the salary, rent or fees before it is paid to the receiver of the payment.

What is Tax Deducted at Source?

TDS is the tax that is collected before a payment is made to a person. Most commonly, TDS is charged on the incomes of salaried employees. However, it is also applicable to other payments like:

  • Professional Fees

  • Rent

  • Commission

  • Interest

What is a TDS certificate?

The Income Tax Department issues a TDS certificate to the persons from whose payments the tax is being deducted. There are two types of TDS certificates issued by the Income Tax Department.

  • Form 16A: A certificate issued to a professional who charges fees for providing services to an organisation. A suitable example of this would be a company’s professional consultant who is not on the payroll. Even banks provide TDS certificates to fixed deposit account holders since their savings are subject to TDS.

  • Form 16: A certificate issued to salaried professionals that includes details of the tax deducted through the year. Employees of a company who are on the organisation’s payroll are eligible for tax deduction at source.

Though the Income Tax Department calculates the amount to be deducted, it is also better for you to know how TDS is calculated.

How to calculate TDS?

According to the existing Indian Income Tax laws, there is no fixed rate for the TDS; it depends on what tax slab your income comes under. Here is the step-by-step process on the calculation and deduction of TDS:

Step 1 – First, calculate your gross monthly income which includes:

  • basic income

  • perquisites

  • other allowances

Step 2 – Calculate the exemptions such as travel, medical and house rent allowance (HRA), available under Section 10 of the Income Tax Act.

Step 3 – Deduct the above exemptions from your gross monthly income.

Step 4 – You can calculate TDS on your yearly income by multiplying the final figure above by 12. This indicates your yearly taxable income from the salary.

Step 5 – The figure you get will also be subject to some additions and deductions. For example, if you earn rent from a property every month, it is an addition to the final figure, as mentioned in step 4. The same will be a loss from paying home loan interests, and you can deduct it from the figure.

Step 6 – If you have investments in the form of:

  • Public Provident Fund (PPF)

  • Mutual funds

  • Life insurance premiums

  • Home loan repayment

Under Section 80C, you’re eligible for a deduction of up to ₹1.5 lakhs. You can deduct this amount from the final amount calculated in the previous point.

Step 7 – Consider the tax bracket you come under. For an income bracket of ₹2.5 lakhs to ₹5 lakhs, the income tax rate is 10%, and for an income tax bracket of ₹5 lakhs to ₹10 lakhs, the rate is at 20%. Income above this bracket incurs an income tax rate of 30%. Also, under Section 194J of the Income Tax Act, 1961, the TDS is deducted as per the following rates for professional services, technical services and royalty:

 

Scenario

TDS rate

Effective June 01, 2017, if the payee is a call centre professional.

2%

Effective April 01, 2020, if the payee charges technical services fees for consultancy or managerial tasks.

2%

Professional royalty that pays a royalty on the sale, distribution and exhibition of cinematographic film.

10%

For fees of other professional services.

10%

If the payee cannot produce a PAN card.

20%

Conclusion:

To sum it up, the TDS process includes a deductor and a deductee, where the former withholds a percentage of the payment made to the latter. The deductor is usually an organisation or a person. Also, a deduction is made at the source only when the payment or salary exceeds the basic exemption limit.

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