Misconceptions on TDS (Tax Deducted at Source)

Misconceptions on TDS (Tax Deducted at Source)

An income tax collection method, Tax Deducted at Source (TDS), involves the collection of income tax at the source of income, thus implying the collection of revenue at the source of income. This method combines the concepts of “pay as you earn” and “collect as you earn” to create an indirect way of collecting tax.

No TDS means no Tax liability

Generally speaking, tax-free schemes and investments are thought to be tax-free if there is no TDS. An employee can withdraw his EPF money before 5 years of service if the withdrawal amount is less than Rs 30,000, in which case TDS will not be applied.

A withdrawal does not mean it is tax-free. It simply means that no deductions on these types of withdrawals are required by the employer (deductor). However, the employee must pay taxes on this amount (if any).

EPF withdrawals within five years, National Savings Certificates (5 year tenure), or any other investment is subject to tax unless the scheme specifies that the income is tax free. A PPF, for instance, enjoys tax benefits for which its interest is not taxable.

TDS deduction removes tax liability completely

A common misconception is that you should not worry about filing your income-tax return if your employer has deducted TDS from your salary. Your employer may deduct TDS only from your salary income, but you may have earned income from other sources.

If taxes have already been deducted (TDS) on your income, no additional income tax is due. Actually, TDS rates vary depending on the type of income. On salaries, employers adjust the rate so that the entire tax liability of an employee is deducted by the end of the year. Banks charge a 10 percent TDS on fixed deposit interest. When the deposit holder does not provide his permanent account number, banks deduct 20 percent tax.

TDS rates are based on income tax slab rates. If your income tax slab rate is different than TDS rate, you may have to pay the ‘balance tax’ or you may be eligible for a refund.TDS rates are based on income tax slab rates. If your income tax slab rate is different than TDS rate, you may have to pay the ‘balance tax’ or you may be eligible for a refund.

You may have to pay a differential tax (such as Advance Tax or Self-Assessment Tax) if your TDS rate is 10% and your tax slab is 20%. You can claim the TDS amount as a refund if you are not a tax assessee. If you are in a 10% tax bracket and the TDS rate is also 10%, then there is no further tax due.

No TDS means no Tax liability

Most people believe if there is no TDS on investments or schemes, they are tax-free.

As an example, TDS is not applicable for employees who withdraw their EPF funds before 5 years of service and if the withdrawal amount is less than Rs 30,000.

Although this means that the employee is not required to pay taxes on his or her EPF withdrawal, it does not mean that no TDS should be deducted from these withdrawals by the employer (deductor).

Unless it is specifically stated that the income from the scheme is tax free, whether it is withdrawals from the EPF within five years or National Savings Certificates (5 year tenure). A tax benefit, for example, is the non-taxable interest on a PPF.

TDS deduction removes tax liability completely

Often, people believe that, if their employer has deducted TDS from their income, they don’t have to file their income taxes! Employers deduct TDS from salary income only, whereas you may also have income from other sources.

It is also a common misconception that if taxes are already deducted (TDS) on income, there is no need to pay additional Income Tax. In reality, TDS rates vary based on the nature of income. For fixed deposit interest, banks charge a TDS of 10 percent. Employers adjust their TDS rates so that the entire employee’s tax liability is deducted by the end of the year. When a deposit holder does not provide his permanent account number, the bank deducts 20 percent of the interest from the deposit.

A different TDS rate may apply to your income if the slab rate of your income differs from the TDS rate. You may need to pay a balance tax or you may receive a refund.

In the case that you are in a 20% tax slab but your TDS rate is 10%, you have to pay the differential tax (which can be Self-Assessment Tax or Advance Tax). In the event you are not a tax assessee, you can claim the TDS amount as a refund. If you are a 10% tax payer and your TDS rate is also 10%, you do not have to pay any additional tax.

Leave a Reply

Your email address will not be published.