Tax Deducted at Source (TDS) is a tax collection process in India that aims to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.
TDS provisions under the Income Tax Act specify the rates at which TDS is to be deducted for different types of payments. The rates specified in the relevant provisions of the Act or the First Schedule to the Finance Act are applicable for most payments, while withholding tax rates specified under the Double Taxation Avoidance Agreements are considered for payment to non-resident persons. Employers must deduct TDS on salary at the average rate of income tax of the employee for the year.
TDS is deducted by the entity making the payment, known as the deductor, and the entity receiving the payment after TDS deduction is known as the deductee. The TDS deductor is required to have a TAN number (tax-deduction account number or tax-collection account number) and should quote it at the time of making the payment to the beneficiary. A TDS certificate is a document issued by the tax deductor that shows the amount of tax deducted at the time of making a payment.
The objectives of TDS are to provide the government with a consistent inflow of income, bring more people into the tax net, prevent tax evasion, and promote transparency in financial transactions. Non-compliance with TDS provisions can lead to disallowance of expenses, raising of demand, and penalties.
In summary, TDS deduction is a tax collection process in India that requires the payer to deduct tax due before paying the balance to the payee. The deductor is required to have a TAN number and issue a TDS certificate to the deductee. TDS provisions specify the rates at which TDS is to be deducted for different types of payments, and non-compliance can lead to penalties.
