IT & E-FILING

UNIT - 3

What is TDS?

TDS stands for Tax Deducted at Source. It's a mechanism employed by the Indian government to
collect income tax at the time of income generation itself, rather than waiting for individuals to
file their tax returns.

TDS is a direct taxation mechanism which was introduced to collect taxes from the source of
income itself or at the time of income payout. TDS full form is Tax Deducted at Source. Under
this mechanism, if a person (deductor) is liable to make payment to any other person (deductee)
will deduct tax at source and transfer the balance to the deductee. The TDS amount deducted will
be remitted to the Central Government. Deductee can check the Tax Deducted at Source (TDS)
amount in the Form 26AS for TDS Certificate issued by the deductor.
TDS helps in keeping a check on tax evasion. Not only this, in this mechanism, taxpayers are not
required to pay a lump sum amount as annual tax at the end of the financial year.
To understand TDS meaning better, let’s take an example. If the nature of payment is
professional fees and the specified tax rate is 10%. ABC Ltd makes a payment of Rs 20,000/-
towards professional fees to Mr. X, then ABC Ltd shall deduct a tax of Rs. 2,000/- and make a
net payment of Rs. 18,000/- (20,000/- deducted by Rs. 2,000/-) to Mr. X. They will directly
deposit the amount of Rs. 2,000/- deducted by ABC Ltd to the credit of the government.

Here's a breakdown of how it works:

● A deductor (payer) is someone responsible for making specific payments like salary,
rent, interest, commission, or professional fees.
● The deductor is required to deduct a specific percentage of tax (TDS) from the total
payment amount.
● The deducted TDS amount is then deposited to the Income Tax Department on behalf of
the recipient (deductee).
● The recipient receives the net amount (payment amount minus TDS).

Who deducts TDS?

● Employers deduct TDS from salaries.

● Banks deduct TDS on interest earned on fixed deposits or savings accounts.
● Tenants paying rent above a certain limit may have TDS deducted by the landlord.
● Businesses making professional fee payments or commission payments may need to
deduct TDS.
How to claim TDS credit?

The deducted TDS is reflected in Form 16 (for salary) or TDS certificate (for other income
sources). You can claim this deducted TDS amount as a credit when filing your income tax
return. This reduces your overall tax liability.

What are the rules for Tax Deducted at Source?

There are rules concerning not just income tax return filing but also concerning TDS. If an
individual or organization meets these rules adequately, they will be able to avoid penalty, fees or
interest. The main rules related to TDS are:
1. One of the first essential rules is that Tax Deducted at Source needs to be deducted at the
time when the payment either gets due or when the actual amount is made, whichever is
earlier
2. Delay in deduction of TDS will attract interest @ 1% per month until the tax is deducted
3. Every person, whether an employer or otherwise, needs to credit the tax deducted to the
government’s account by the 7th day of the following month
4. In case of late or non-payment of TDS, an interest @ 1.5% per month will be levied until
the tax has not been deposited

TDS Payment Due Dates

Every employer or deductor, who deducts the TDS from any employee or individual providing
any professional service, is required to credit the tax deducted at source to the Central
Government’s account before the specified due date. The monthly due date for TDS payment is
as below:
Month Due date

April On or before 7th of May

May On or before 7th of June

June On or before 7th of July

July On or before 7th of August

August On or before 7th of September

September On or before 7th of October

October On or before 7th of November

November On or before 7th of December

December On or before 7th of January

January On or before 7th of February

February On or before 7th of March

March On or before 30th of April

TDS Returns
TDS returns need to be filed every quarter. In case of late or non-filing of the return, a fine or
fees of Rs. 200/- per day under section 234E of the Income Tax Act, 1961 until you finally file
the return. However, this sum should not exceed the amount of tax to be paid. Following are the
due dates of filing TDS returns:
Quarter Quarter Period Due date to file TDS return

1st Quarter April to June On 31st of July of the same

FY

2nd Quarter July to September On 31st of Oct of the same

FY

3rd Quarter October to December On 31st of Jan of the same

FY

4th Quarter January to March On 31st of May next financial

year

PROCESS FOR DEDUCTION OF TDS BY DEDUCTOR

Tax Deducted at Source (TDS) is a mechanism introduced by the government to collect taxes at
the source of income. It ensures that tax is deducted upfront from payments made to individuals
or entities, thus facilitating a steady collection of taxes throughout the year. Here's an overview
of the process involved in the deduction and remittance of TDS by the deductor:

​ 1. Identification of TDS Applicability: The deductor first identifies whether TDS is

applicable to a particular payment or transaction as per the provisions of the Income Tax
Act, 1961. TDS is applicable to various payments such as salary, interest, commission,
rent, professional fees, etc.
​ 2.Obtaining Tax Deduction Account Number (TAN): The deductor needs to obtain a Tax
Deduction Account Number (TAN) from the Income Tax Department. This number is
used for all communication related to TDS and for depositing TDS payments.
​
​ 3. Determination of TDS Rate: Once it is established that TDS is applicable, the deductor
determines the applicable TDS rate as per the provisions of the Income Tax Act and
relevant sections thereof. The rates may vary depending on the nature of payment and the
status of the payee.
​
​ 4. Calculation of TDS Amount: The deductor calculates the amount of TDS to be
deducted based on the prescribed rate and the amount of payment made. This calculation
must be accurate to ensure compliance with tax regulations.
​
​ 5. Deduction of TDS: TDS is deducted at the time of making the payment to the payee.
The deductor deducts the calculated TDS amount from the total payment and remits the
net amount to the payee.
​
​ 6. Issuance of TDS Certificate: After deducting TDS, the deductor issues a TDS
certificate to the payee. This certificate provides details of the TDS deducted, such as the
amount, rate, and nature of payment. Different types of TDS certificates are issued
depending on the nature of payment, such as Form 16 for salary income and Form 16A
for non-salary payments.
​
​ 7. Deposit of TDS: The deductor is required to deposit the deducted TDS amount to the
government within the prescribed time frame. The deposited amount is credited to the
payee's PAN (Permanent Account Number) and can be verified through the Form 26AS
available on the income tax department's website.
​
​ 8. Filing TDS Returns: The deductor is also required to file quarterly TDS returns
providing details of TDS deducted and deposited. These returns are filed online using the
prescribed forms such as Form 24Q, Form 26Q, etc.
​
 ​ 9. Issuance of TDS Certificate to Payee: Finally, the deductor issues TDS certificates to
the payees, confirming the TDS deductions made during the financial year. These
certificates are essential for the payees to claim credit for the TDS deducted while filing
their income tax returns.
​
​ 10. Compliance and Record Keeping: The deductor must ensure compliance with all TDS
provisions and maintain proper records of TDS deductions, deposits, and filings. These
records should be readily available for scrutiny by tax authorities if required.

By following these steps diligently, the deductor ensures compliance with TDS provisions and
contributes to the efficient collection of taxes by the government.

TDS Return Forms: An Overview

As the deductor is liable to deduct tax and file the TDS Return form as the supporting document,
it is important to note that there are various types of TDS Return Forms for different situations.
The type of TDS Return Form to be submitted is based on the Nature of Income of the deductee
or the type of deductee who pays the TDS.

Type of TDS Particulars of the TDS Return Forms

Return Forms

Form 24Q Statement for tax deducted at source from salaries

Form 26Q Statement for tax deducted at source on all payments other than salaries.

Form 27Q Statement for tax deduction on income received from interest,
dividends, or any other sum payable to non residents.

Form 27EQ Statement of collection of tax at source.

Form 24Q
​ It is used for preparing eTDS returns for the TDS deducted on salary under Section 192
of the Income Tax Act, 1961.
 ​ It has to be submitted on a quarterly basis by the deductor.
​ It contains details like salaries paid and the TDS deducted of the employees by the
employer.
​ It contains 2 annexures namely Annexure-I and Annexure II. Annexure-I contains details
of the deductor, deductees and challans, while Annexure II contains the salary details of
the deductees.
​ Annexure-I is to be submitted by the deductor for all the four quarters of the financial
year.
​ Annexure II need not be submitted in the first three quarters of the financial year, but has
to be furnished and submitted in the fourth quarter of the financial year with details of the
employees’ salaries of the entire financial year.

Form 26Q
​ It is to be submitted for tax deduction at source for all the payments received other than
the salary.
​ It is submitted on a quarterly basis by the deductor and is applicable for tax deducted at
source under section 200(3), 193 and 194 of the Income Tax Act of 1961.
​ The income on which the tax is deducted at source includes interest on securities,
dividend securities, professional fees, directors’ remuneration, etc.
​ It is compulsory to furnish PAN by the deductors who are non-government deductors. For
government deductors “PANNOTREQD” has to be mentioned on the form.

Form 27Q
​ It is applicable for payments made to non-resident Indians and foreigners other than
salary.
​ It has to be filled in for the declaration of Tax Deducted at source for the NRIs and
Foreigners.
​ It is submitted on a quarterly basis by the deductor and is applicable for tax deducted at
source under section 200(3) of the Income Tax Act of 1961.
 ​ The income on which the tax is deducted at source includes interest, bonus, any
additional income or any other sum owed to non-resident Indian or foreigner.
​ It is compulsory for non-government deductors to furnish PAN. For government
deductors the code “PANNOTREQD”has to be mentioned on the form.

Form 27EQ
​ It is a quarterly statement that furnishes the details and information of the tax collected at
source as per section 206C of the Income Tax Act of 1961.
​ The form 27EQ is submitted on a quarterly basis. In this form it is mandatory to furnish
TAN.
​ It is the statement to show the Tax Collected at Source (TCS), which is the tax collected
by the seller. When a buyer purchases certain goods or commodities, the seller collects
the tax from the buyer through the TCS route. This tax is collected on the payment
received from the buyer either in cash, credit, cheque, demand draft or from any other
mode of payment.
​ It is to be furnished by corporate deductors and collectors but not by government
deductors and collectors. It is compulsory to furnish PAN by the deductors who are
non-government deductors. For government deductors, the code “PANNOTREQD” has
to be mentioned on the form.

ADVANCE PAYMENT OF TAX

Advance payment of tax, also known as advance tax, refers to a system where you pay a portion
of your estimated income tax liability throughout the year, instead of a lump sum at the end. It's
essentially a "pay-as-you-earn" approach to income tax.

Here's a breakdown of the meaning:

● Advance: This signifies that the tax is paid before the official due date for filing your tax
return, which is typically at the end of the financial year.
● Payment: It's a partial payment towards your total tax liability.
● Tax: Refers to the income tax you owe on your earnings.
Why is there advance tax?

● Spreads out the burden: It prevents a large tax bill at year-end, making tax payments
more manageable.
● Steady income for government: Ensures a consistent flow of tax revenue throughout the
year.
● Reduces tax evasion: Encourages people to pay taxes on their income as it's generated.

Who needs to pay advance tax?

In India, you are liable to pay advance tax if your estimated tax liability for the financial year
exceeds Rs. 10,000. This applies to individuals and businesses with income sources beyond
salary income (where tax is deducted at source - TDS).

How is advance tax paid?

● Advance tax is a "pay-as-you-earn" system, requiring you to pay a portion of your tax
liability throughout the financial year, in installments.
● There are four installments with specific due dates:
○ 15% of the estimated tax liability by June 15th.
○ 45% (15% + 30%) of the estimated tax by September 15th.
○ 75% (45% + 30%) of the estimated tax by December 15th.
○ Remaining tax liability by March 15th (the end of the financial year).

What happens if you don't pay advance tax?

● Not paying advance tax attracts interest charges.

○ 1% per month is levied on the shortfall amount from September 15th onwards.

Adjusting advance tax installments:

● You can revise your estimated tax liability throughout the year and adjust your advance
tax payments accordingly.

Benefits of paying advance tax:

● Avoids a large tax payment at the year-end.

● Helps with cash flow management.
● Reduces interest charges for underpayment.
DIFFERENCE BETWEEN TDS AND ADVANCE PAYMENT OF TAX

Feature Advance Tax TDS

Who initiates The deductor (payer) - your employer,
deduction? You (the taxpayer) bank, etc.

Timing of In installments throughout the At the time of making a specific

deduction financial year payment (salary, rent, etc.)

Applies to individuals and

businesses with income beyond Applies to specific types of payments
Applicability salary (where TDS is deducted) like salary, rent, interest, etc.

Basis for Predefined rates based on income type

deduction Estimated tax liability for the year and tax bracket

The deductor is responsible for

Payment You are responsible for calculating deducting and depositing TDS with
responsibility and paying the advance tax. the government.

In simpler terms:

● Advance tax: It's like paying an advance on your income tax bill, based on your
estimated income for the year. You manage the calculations and installments.
● TDS: It's like a tax withholding at the source. The payer deducts a portion of your
income as tax and deposits it with the government on your behalf.

Here's an analogy:

Imagine buying groceries on credit.

● Advance tax: It's like giving the grocery store an estimated payment upfront for your
groceries throughout the month.
● TDS: It's like the store automatically deducting a portion of your salary and using it to
pay your grocery bill directly.
CHALLENGES ASSOCIATED WITH ADVANCE TAX AND TDS

​ 1. Cash Flow Impact: Adhering to advance tax payments or facing TDS deductions can
impact cash flows, especially for businesses and individuals with irregular income
streams. It may necessitate careful budgeting and financial planning to manage tax
outflows effectively.
​
​ 2. Estimation Challenges: Estimating taxable income for advance tax payments can be
challenging, particularly for businesses with uncertain revenue projections or individuals
with income from various sources. Underestimating income may lead to interest
penalties, while overestimating income can result in excess tax payments and liquidity
issues.
​
​ 3. Compliance Burden: Taxpayers need to ensure timely and accurate compliance with
advance tax payment deadlines and TDS provisions. This may require dedicating
resources to tax planning, accounting, and compliance functions, which can be
burdensome for small businesses and individuals.
​
​ 4. Complexity of Tax Laws: Tax laws governing advance tax and TDS are subject to
frequent changes and can be complex, especially for taxpayers with diverse sources of
income or international transactions. Understanding and complying with these laws may
require professional expertise, adding to compliance costs.
​
​ 5. Reconciliation and Rectification: Taxpayers subjected to TDS may encounter
challenges in reconciling TDS credits claimed with Form 26AS and in rectifying
discrepancies, leading to delays in tax refunds or adjustments. This requires proactive
monitoring and follow-up with tax authorities.

ADVANTAGES OF FOLLOWING TDS RULES

​ 1. Systematic Tax Payment: Advance tax and TDS mechanisms promote a systematic
approach to tax payment. Taxpayers are required to pay taxes in installments throughout
the financial year rather than in a lump sum at the end. This helps in better financial
planning and management of tax liabilities.
​
​ 2. Reduced Tax Burden: By paying taxes in installments through advance tax or having
taxes deducted at source via TDS, taxpayers can avoid the burden of paying a large sum
 of tax at once. This can help in managing cash flows more effectively, especially for
individuals and businesses with fluctuating incomes.
​
​ 3. Compliance with Tax Laws: Adhering to advance tax and TDS mechanisms ensures
compliance with tax laws and regulations. It helps taxpayers avoid penalties and legal
consequences associated with non-compliance, thereby fostering a culture of tax
compliance.
​
​ 4. Availability of TDS Credit: Taxpayers subjected to TDS can claim credit for the tax
deducted at source while filing their income tax returns. This reduces the effective tax
burden on the taxpayer, as the TDS amount is treated as tax already paid.
​
​ 5. Documentation and Record-keeping: Advance tax payments and TDS deductions
require proper documentation and record-keeping. This promotes financial discipline and
ensures that taxpayers maintain accurate records of their income and tax payments, which
can be beneficial during tax audits or assessments.

Overall, while adhering to advanced tax and TDS mechanisms offers benefits such as systematic
tax payment and compliance, taxpayers may face challenges related to cash flow management,
compliance burden, and complexities in tax laws. Effective tax planning, financial management,
and professional assistance can help taxpayers navigate these challenges more efficiently.