What is TDS?
TDS, or tax deducted at source, denotes the process of deducting tax by the payer before making any payment to the recipient. The motive behind this procedure lies in its efficacy in controlling tax evasion. By implementing TDS, the authorities ensure that tax is collected in advance, thereby preempting any potential evasion that might occur if taxpayers were solely responsible for paying taxes during the filing process.
What is Income Tax?
Income taxes are charged on the revenues of both individuals and corporations. These taxes are applicable to various income sources, including dividends, interest, winnings from gaming, sales of goods, wages, and salaries.
The term "individual income taxes" contains the overall concept of income tax returns. Employees and other individuals generating income pay these taxes. Additionally, companies, estates, trusts, and other entities must pay income taxes based on their earnings or total revenue.
What is the difference between TDS and Income Tax?
Income tax and TDS serve as two distinct methods of tax collection, each operating in a different manner. The following are four differences:
Annual vs. Periodic:
- Income Tax: Calculated on the yearly earnings based on the specific financial year.
- TDS: Deducted periodically at the source throughout the given year.
Direct vs. Indirect:
- Income Tax: The taxpayer independently assesses the liability and directly remits the payment to the government.
- TDS: Functions as an indirect method of fulfilling tax obligations, where the deductor (e.g., employers, banks, financial institutions) facilitates the tax recovery process on behalf of the government.
Gross Income vs. Certain Income:
- Income Tax: Imposed on the entirety of an individual's (assessee's) income for the financial year.
- TDS: The income tax law mandates deducting taxes at the source from specific persons making prescribed payments.
After vs. Before:
- Income Tax: Levied on the earnings of salaried individuals or entities exceeding the designated tax threshold after the completion of the specified financial year.
- TDS: Involves an obligation to pay taxes even before the recipient receives the income, with the entire process of deduction and payment acting as a preventive measure against instances of tax evasion.
Summarized table of TDS vs income tax return
| Feature |
Tax Deducted at Source (TDS) |
Income Tax |
| Timing of Payment |
Periodically throughout the year |
End of the financial year |
| Payment Source |
Deducted by the payer (employer or financial institution) |
Paid directly by the taxpayer |
| Payer's Involvement |
Payer deducts tax |
No payer intervention |
| Tax Rate Basis |
Nature of payment (specified by the government) |
Income slabs (outlined in income tax laws) |
| Applicable Payments |
Salary, interest, rent, professional fees, etc. |
Total income (salary, capital gains, etc.) |
What if the deducted tax exceeded the actual tax liability?
If the deducted tax exceeds the actual tax liability, the taxpayer typically becomes eligible for a tax refund from the government. This situation often arises when an individual has had excess tax withheld from their income throughout the year, either due to a miscalculation or changes in their financial circumstances.
In such cases, the taxpayer can file their tax return, indicating the excess amount of tax deducted. Once the tax authorities process the return and verify the information, they will issue a refund for the overpaid amount.
Taxpayers need to keep accurate records of their income, deductions, and tax withholdings to ensure they can claim the appropriate refund if the deducted tax exceeds their actual tax liability.
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