Tax Deduction or Tax Taken?

Picture of by Neha Raheja
by Neha Raheja

Partner, Direct Tax

“You don’t pay taxes – they take taxes” – Chris Rock.
How simple and apt is this quote by Chris Rock? It puts into perspective the whole idea of taxation! Indeed, we never pay taxes – the government takes them from us. The government has implemented systems where one gets taxed while selling or purchasing goods & services, from the net income (income minus expenses), salary, etc.

In this article, we introduce the most common form of tax payment i.e., Tax Deducted at Source, more commonly known as ‘TDS’ or Withholding Taxes. 

TDS is a form of direct tax deducted from the very source of income. As per this concept, the deductor i.e., the person making the payment shall deduct TDS & deposit the same with the Central Government. Taxes could be withheld on various types of payments, for example – during the purchase of immovable property, payment of rent, payment of salary, payment of commission or interest, etc.
The Income Tax Act 1961 (‘ITA’) has notified various provisions & sections thereof under which it becomes mandatory for persons making payments to deduct TDS at the time of such payments or credits whichever is earlier. The government is introducing various TDS sections intending to widen the tax base. In the following paragraphs, we briefly elaborate on the provisions of TDS:

Deduction of tax at source on Salary (s. 192B of ITA):

Any person responsible for paying income chargeable under the head ‘salaries’ must deduct tax at source on the amount payable. Tax must be calculated at the rates prescribed for the financial year in which the payments are made. 

Deduction of tax at source on dividend (s. 194 of ITA):

When an Indian company declares a dividend within India to a shareholder who is an Indian resident, TDS needs to be deducted from the dividend amount at the prescribed rate. 

Deduction of tax at source from interest other than interest on securities (s. 194A of ITA):

Interest paid by a company/bank on interest other than interest on securities is liable to tax deduction at the source at the rate in force. 

Deduction of tax at source on payments to contractors / sub-contractors (s. 194C of ITA):

Payments made to a resident contractor for carrying on work (including supply of labour) in pursuance of a contract between a specified person & resident contractor must undergo tax deduction at source. Tax must be deducted at the source, where the amount paid or credited to a contractor or subcontractor exceeds INR 30,000 in a single payment or INR 1,00,000/- in aggregate during a financial year (‘FY’). 

Deduction of tax at source from commission or brokerage (s. 194H):
Any person who is responsible for paying commission/brokerage to a resident shall deduct at the source. Tax is required to be deducted at source when commission/brokerage paid/credit in the FY exceeds INR 15,000/-.
Deduction of tax at source from payment by way of rent (s. 194I):

Any person who pays rent to a resident shall deduct tax at the source. Tax must be deducted at source when  commission / brokerage paid/credited in the FY exceeds INR 2,40,000/-. Rent means any payment for using land, building, plant, equipment, machinery, furniture & fittings.

Deduction of tax at source for professional/technical services (s. 194J):
Any person responsible for payment of professional fees, technical fees, royalty, non–compete fees referred to in s. 28(va) to a resident shall deduct tax at the source. Tax must be deducted at source when commission/brokerage paid/credited in the FY exceeds INR 30,000/-. Professional services are defined to mean services rendered in nature of medical, legal, consultancy, interior decoration or advertisement, or such other professions notified by the Board. Royalty includes consideration in respect of rights, property, or information.
Deduction of tax at source for the purchase of goods (s. 194Q):
The buyer of goods is required to deduct TDS under this provision. In this context, buyer means a person whose gross receipts/turnover/total sales from business from him exceed INR 10 crores in the immediately preceding FY. The buyer may be a resident or non–resident. However, tax is deductible under this section only if the seller is a resident. This section becomes applicable only when the value of the purchase of goods exceeds INR 50 lacs in the previous year.
Deduction of tax on benefit/perquisite in respect of business or profession (s. 194R):

TDS under this section must be deducted and paid when a person provides any benefit or perquisite whether in cash or kind to a resident arising in the course of business/profession. The liability to deduct TDS arises only when the aggregate value of benefit/perquisite exceeds INR 20,000/-. 
Tabulated here below are the TDS rates for AY 2023 – 2024:

Section

Particulars

Rate

192

Salary

Slab Rates

194

Dividend

10%

194A

Interest other than ‘interest on securities’

10%

194C

Payment to Contractor/Sub – Contractor

Individual/HUF

Others

1%

2%

194H

Commission/Brokerage

5%

194I

Rent

Plant & Machinery

Land or Building or Furniture or Fitting

2%

10%

194J

Fees for professional or technical services

Technical Services

Royalty for sale, distribution, or exhibition of cinematographic films;

For business of operation of call center;

Any other sum

2%

2%

2%

10%

194Q

Payment for purchase of goods aggregate value of which exceeds INR 50 lacs

0.1%

194R

Benefit/perquisite provided to a resident arising from business of exercise of a profession & where aggregate value of such benefit/perquisite exceeds INR 20,000

10%

Due Date for the Payment for TDS

TDS deducted during months of April – February: 7th of the following month;
TDS deducted in March: 30th April
Illustration: TDS deducted for the  month of April shall be deposited on or before 7th May.

What happens in case of a delay in TDS payments?

If any person deducting TDS fails to deposit the whole or any part of TDS to the income tax department, such person shall be liable to pay simple interest on TDS. 
Interest at 1.5% shall be payable for every month or part thereof on the TDS amount from the TDS deduction to the date of TDS payment to the income tax department.

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