TDS is an acronym for Tax Deducted at Source.
Generally Income is chargeable to the tax only in the Assessment Year. While Income is earned during the Previous Year, there may be the chance of evading the payment of Tax in the succeeding Financial Year which results in the loss of Revenue to the Government. To avoid this, Central Govt. introduced certain provisions in the Income Tax Act, 1961.
Generally in a Cash transaction between two persons, one party loses the money for the other while the other will gain the money. Now the income for the other party will be the Source of Income. The Government is of the opinion that, as the source is arising from one party on account of a transaction, so specified rate of Tax has to be deducted from the total payment made by that party. As a result the tax evasion can be controlled. Transaction means the activity for which the income has been accrued. Like Salary paid to the employee by the employer, Amount paid to Sub-contractors etc.
So, according to the Income Tax Act, 1961 the person who makes payment to the other party on certain *transactions is liable to deduct the tax (as per the rate specified in the Act) from such payment. The party which makes deduction is called as “DEDUCTOR” while the party which receives the amount after the deduction has been made is called “DEDUCTEE”. Generally deductor shall deposit the tax amount which he has deducted from the payment made to the deductee within the 7th day of the following month from the month in which the payment has been made.
For example Let us assume 2 parties X and Y. Assume that the payment had fallen in the list of transactions for which TDS has to be made by the Deductor. X has to pay Y a sum of Rs.50,000 in April. The transaction between X & Y is qualified for TDS at the rate of 1%. Now X has to deduct 1% (Rs.50,000) i.e. Rs.500 and this Rs.500 has to be deposited to the Government within May 7. Y will receive only Rs. 49,500.
According to the Income Tax Act,1961 the deductee while calculating the Total amount of tax liability he can deduct the Amount of TDS from that. For example in the above illustration suppose the total tax liability of Y is Rs.5,000 and TDS made for the aforesaid transaction is Rs. 500. Now Y’s actual tax liability will be Rs. 4,500 (5,000-500).
Non-remittance or non-deduction of TDS leads to the disallowance of Expenditure for the Deductor. (Read: Penalties & Interest on Failure to Deduct or Pay TDS under section 201)
The most important point is deductee must provide the valid PAN Card to the Deductor for the purpose of deducting TDS why because TDS rates differ from person to person. For example, in some transactions TDS is charged @ 1% for Individuals/HUF and 2% for Companies. If no PAN is submitted a maximum rate of 20% is deducted from the amount to be payable to the deductee under section 206AA.
In the next article we will see the transactions that qualify for TDS and rates that are charged for the Assessment Year 2013-14 and some other provisions related to the TDS.