TDS Deductions - What is TDS & When TDS is Deducted

Kunal Mandke is a professional working with MDK Corp. The company has agreed to pay him ₹50,000/- in exchange for his services. MDK Corp deducts a tax of ₹5,000/- from his salary and Kunal receives a net payment of ₹45,000/-. The ₹5000/- deduction is directly deposited by MDK Corp to the credit to the government. But why can’t Kunal himself credit the ₹5000 to the government? For this, we need to understand how TDS works.

What is TDS?

Tax Deducted at Source, known commonly as TDS refers to the system launched by the Income Tax Department. It is one of the modes of tax collection. Through this system, the individual/company responsible for making specific payments is liable to deduct a specific percentage of tax, before making the full payment to the receiver, for instance salary, rent, interest, professional fees or commission. The amount that is deducted is directly credited to the government’s account.

Who is responsible for Tax Deduction at Source?

Every person who makes payments as prescribed by TDS provisions of the IT Act is responsible for tax deduction at source. The main people responsible for TDS are:

• Employer – in case of private employment

• Employee – making the payment on the employer's behalf

• Drawing and Disbursing Officer – in case of government offices

• Local authorities, company or corporations – in case of interest on securities

When is TDS deducted?

TDS is based on the simple premise that tax is deducted when a payment is due or when an actual payment is made; whichever is earlier. Let’s look at it with more examples.

Let’s say MDK Corp has to pay ₹50,000/- to Kunal in lieu of his professional services.

Example 1

Kunal was paid an advance amount of ₹30,000/- on July 15th. MDK Corp raised an invoice when the work was completed on July 31st, at which time Kunal received the rest of the payment. In this scenario, MDK Corp would have deducted 10% on the advance of ₹30,000/- i.e. 3000/- on 15th July and 10% of the total invoice amount of ₹50,000 as tax deduction, minus the deduction made when advance was paid i.e. ₹5000 - ₹3000 = 2000/-.

Example 2

In this scenario, Kunal raised the invoice on July 15th and received his entire dues on July 31st. In such a situation, the ₹5,000/- deduction is made on July 15th when the invoice was raised and Kunal receives a net payment of ₹45,000/- on July 31st.

Example 3

Kunal is to receive his entire amount of ₹50,000/- as advance, before the assignment is completed. Here, MDK Corp deducts ₹5,000/- when the advance is paid and no tax is deducted when the bill due entry is made.

What are the objectives of TDS?

TDS follows the "pay as your earn" concept. Its basic objectives are as under:

• TDS facilitates the sharing of the tax collection responsibility between the deductor and the government, ensuring a regular inflow of cash to the latter.

• TDS enables salaried individuals to pay taxes in easy instalments each month, thus preventing them from the burden of lump sum tax payments.

• It enables the government to receive the necessary funds all year round which aids it in running the country smoothly.

• It ensures that the tax net is spread wide enough and prevents tax evasion.