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TDS - Tax Deducted at Source
Receiving a raise in salary is one of the happiest moments in one's life. However just as all good things in life come to an end the taxman is lurking around the corner. This time the problem is tax deducted at source. In life leaving things to chance is more than a gamble. The taxman never takes a chance. Whatever is owed to him is collected even before it reached one's hands. Think about the provincial slip between the cup and the lip and one's celebration is cut short prematurely.
What is meant by tax deducted at source?
This is mainly a tax collection mechanism where tax is deducted by one's employer and directly deposited with the Government. It is assumed that an employee of a company and a tax paying citizen of India will have some tax liability. TDS is deducted directly from one's salary by the employer. The employer estimates tax liabilities taking into account the maximum tax deductions under Section 80 C, Section 80 D, Section 80 E and other tax saving instruments and deducts a certain amount directly from one's salary and pays it as income tax to the Government. One then calculates the actual tax liability. If the tax liability is more than the TDS one pays the balance amount and if the tax to be paid is less than the TDS then one can claim a refund. The Company issues the Form 16 which contains the details of the tax deductions made by one's employer on behalf of the employee. The Form 16 consists of the income earned in the previous year, tax liabilities as well as the tax deductions. The Form 16 gives the salary for the entire assessment year or for the duration of the stay in the Company. The Form 16 is given by one's employer in the month of May or June. The deadline for filing the income tax return is July 31st.One needs to make sure that the Form 16 is in one's hands well in advance of this deadline. The Form 16 consists of the details of the PAN (Permanent Account Number) and the TAN (Tax Deduction and Account Number) of the employer who deducts the tax at source.
How is tax deducted at source?
Tax is mainly deducted from the following income. It may include salary, lottery winnings, interest from savings accounts, fixed deposits and corporate fixed deposits, property, rental fee, interest on securities, dividends from shares and mutual funds, commission and brokerage, fees for professional services, Superannuation funds, debentures and so on.
- The employer estimates the gross salary of the employee for the whole year. All exemptions as per the relevant tax slab the employee falls under and the deductions available are taken into account in consultation with the employee.
- The employee may disclose rental income, capital account gains and other income which are included in the estimate.
- The employee's net income is then calculated and the deductions, exemption limits as per the tax slabs as well as other income gives an idea of the amount of tax that needs to be deducted at source.
- The employer then deducts the tax proportionately over the year for example if the tax payable is INR 48000 per annum then a TDS of INR 4000 per month would be deducted and the TDS is paid every month with the filing of e-TDS every quarter. The employee is then issued with a Form 16.
- The employer who deducts TDS needs to mandatorily file the e-TDS otherwise a penalty needs to be paid for the non submitting of the e-TDS returns, The Central Board For Direct Taxes charges a penalty ranging from INR 200-INR 1 Lakh on non compliance of this rule.
| The Components Of The Salary | | Understanding these components | | Is This Taxed? | |
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| Basic Salary | | Under the employee provident fund one has the employer's side contribution and the employee side contribution. | | Both contributions are taxed. | |
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| Dearness Allowance | | A monthly payout to help employees adjust to the high costs of living | | Yes | |
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| Bonus | | These amounts are paid on a monthly or a yearly basis as an incentive for employee performance. | | Yes | |
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| Conveyance Allowance | | This is paid to cover expenses or costs of travel to the office. | | An amount of INR 800 per month is tax exempt | |
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| HRA | | House Rent Allowances are given by the Company to meet rent expenses. It is exempt from tax subject to the following conditions.
House Rent Allowance Received By the Employer.Rent paid minus 10 % of the Salary.
40% or 50% of the salary depending on the city one resides in. It is 50% if one resides in a Metropolitan city | | Whichever is least among the three is considered and deducted from the HRA and tax is paid on the difference. | |
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| Children's Education Allowances | | This is provided to meet the education expenses of one's child. | | Children's educational allowance is exempt up to INR 100 per month for a maximum of 2 children. | |
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| Medical Allowances | | The Company pays a certain amount yearly or half yearly known as medical allowances towards these expenses. | | Medical allowances are fully taxable.
Medical reimbursements up to INR 15000 per annum are tax free. | |
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| Telephone and other special allowances | | A monthly payout to meet these expenses. | | These are fully taxable. | |
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| Leave travel allowance | | Leave travel allowance is obtained by the Employee from the Employer for vacation travel. In order to obtain leave travel allowance the employee needs to actually travel | | Tax deductions are available for leave travel allowance. | |
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When is tax deducted at source?
- Money won from a lottery, reality show or even a horse race is subject to a TDS as high as 30%.If one wins INR 10 Lakhs in a lottery then one has to pay a TDS of 30%.The amount left behind is INR 7 Lakhs. In the case of a non cash prize such as a car worth 20 Lakhs a TDS of 30% needs to be paid or after paying INR 6 Lakhs the claim would be entertained. There is a basic exemption limit of INR 10000 for the winnings from a lottery and INR 5000 for the winnings from a horse race.
- If ones interest income exceeds INR 10000 per annum then a TDS of 10% will be charged on this amount. If one does not furnish the PAN card details then the TDS is charged at the rate of 20%.The form 15 G or Form 15 H needs to be submitted in order to avoid TDS being deducted on one's investments. Form 15 G is used by individuals below 60 years of age. Senior citizens above 60 years and even super senior citizens above 80 years of age use the Form 15 H. The estimated taxable income needs to be within the basic exemption limit which is INR 2 Lakhs for an individual below 60 years of age, INR 2.5 Lakhs for a senior citizen above 60 years of age and INR 5 Lakhs for a super senior citizen above 80 years of age. Another condition is that the total interest income should not exceed the limit of INR 10000 per annum applicable for individuals below 60 years of age but not for those above this age who file Form 15 H. In case an individual whose taxable income is below the threshold limit of INR 2 Lakhs but his interest income is above the INR 10000 threshold the banks would deduct TDS.This amount could be recovered by filing income tax returns.
- Since June 2013 a new law has been passed regarding TDS on the transfer of immovable property .On all transactions of transfer of immovable property of INR 50 Lakhs and above a TDS of 1% would be deducted on the actual amount paid by the purchaser of the property. This does not depend on capital gains. If the seller does not have a PAN card then a TDS at the rate of 20% will be charged. This deduction is not valid for agricultural land beyond municipal limits or within a specified distance from the municipal limits .This rule does not apply for payments made for the property before June 2013 when the law was not in existence. In case one signs an agreement for the purchase of a property worth 90 Lakhs and 50 Lakhs of payments were made before June 2013 then even if only 40 Lakhs is paid after this date even though less than the INR 50 Lakh limit then TDS would be deducted on INR 50 Lakhs paid before June 2013.The total consideration whether paid before or after June 2013 would be considered.The TDS is applicable only on the actual consideration and not on the stamp duty valuation which is a notional fair market value Stamp duty paid by the purchaser of the property would not be regarded as payments made to the seller for a price or a consideration and no TDS is deducted. In the case of land in a rural area TDS of 1% would be deducted if the value is above 20 Lakhs.
- If the rental income received from one's house is less than INR 1.8 Lakhs per annum no TDS is deducted. A TDS of 10% is deducted beyond this amount. The advance deposit paid by the tenant does not attract TDS. In case of joint owners of the house or property the limit of INR 1.8 Lakhs can be claimed individually by each owner.
- Cash used to purchase gold and silver in excess of INR 2 Lakhs attracts a TDS of 1 % collected by the seller at the time of purchase.
- In the case of interest earned on a debenture an amount of up to INR 5000 is not subject to TDS .Amounts beyond this attract a TDS at the rate of 10%.
I would like to end this article stating that the Income tax department takes no chances and collects its dues from the citizens of our country without waiting to see if they are generous enough to give it themselves .It is up to each one of us who is eligible for a TDS refund to claim these amounts and submit the relevant forms on time in order to make the claim.
Happy Investing!!
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