What is TDS?
Tax Deducted at Source (TDS) is a way of collecting income tax directly from the income source. When any individual or entity makes a payment to any person or entity for certain services or benefits (Salary, Rent, Interest, Commission, etc.) they have to take out a part of the payment as tax and deposit it to the government on behalf of the receiver. The payee can claim the credit of the tax deducted when they file their income tax return.
How TDS Works
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The deductor (the person who is making the payment) obtains a Tax Deduction and Collection Account Number (TAN) from the income tax department and registers on the TRACES portal.
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The deductor deducts the tax from the payment as per the prescribed rates and pays the net amount to the deductee (the person who is receiving the payment).
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The deductor deposits the tax deducted to the government within the specified due dates and files the TDS returns quarterly, providing the details of the deductee, the payment, and the tax deducted.
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The deductee can verify the tax deducted and deposited on their behalf by checking their Form 26AS, which is an annual consolidated tax statement available on the income tax e-filing portal.
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The deductee can claim the credit of the tax deducted against their tax liability while filing their income tax return.
Advantages Of TDS
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It ensures a regular and steady flow of revenue to the government throughout the year.
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TDS helps to prevent tax evasion and tax avoidance by the taxpayers, as the tax is deducted from the source of income itself.
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TDS helps lower the burden of paying a lump sum tax at the end of the year for the taxpayers, as the tax is paid in installments.
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It facilitates the compliance and administration of the income tax law, as the deductor acts as an agent of the government and collects the tax on its behalf.