Understanding TDS And The TDS Returns Process

by | 27 Jun 2022 | Tax Tips

TDS or Tax Deducted At Source is an essential part of income tax and is applicable on services, not on goods. This tax is deducted from specific payments like professional payments, contract services, interest payments, rent, commission, salary, etc. TDS deductibles differ according to the service provider i.e. professional services – 10%, contract services – 2%, interest payment – 5%, and individual – 1%. 

Generally, the person receiving the payment is responsible for paying income tax. However, with TDS, the amount is deducted by the person/entity making the payment for the services (i.e. at the source). This ensures that advance tax is deducted by the payer (and submitted to the government) from the payment amount itself, and the recipient of the payment does not need to pay income tax for this payment amount. 

What is the due date for depositing TDS with the government?

TDS must be paid to the government by the 7th of next month. For instance: TDS that is cut in June must be deposited with the government by the 7th of July. However, TDS deducted in March can be paid to the government up until the 30th of April. TDS cut on rent paid or property purchased must be paid within 30 days from the month’s end in which the TDS was deducted.  

We should know the following abbreviations before we move forward with the details of TDS. 

PAN (Permanent Account Number)- Every Indian citizen has a card with a permanent account number that is linked to their income. In India, the PAN number is intended to identify various taxpayers. It is a 10-digit alphanumeric number assigned to every tax-paying entity.  All income tax filing is done on the basis of the PAN card or PAN number. A company also has its own PAN card. However, company PAN cards are not applicable for sole proprietorships, since the individual and company are the same entity, hence the filings are done on the individuals’ PAN number itself. 

TAN (Tax Deduction/Collection Account Number)- Like GST numbers, each company has a TAN number to file their TDS. Without this number, a company can neither cut TDS on its vendors nor file the amount. All private limited companies must have a TAN number. Further, all other companies should also have this number if they are applicable for audits. 

How does TDS work? 

To understand how TDS works, let’s take the following example- 

Sky Pvt. Ltd. paid its office rent of Rs. 60,000 per month to the building owner, and TDS was to be deducted at 10%. Sky Private Limited must deduct TDS of Rs. 6000 from this payment of rent, and pay only Rs. 54,000 to the building owner.

Consequently, in this case, the receiver of the amount i.e. the building owner will receive the net amount of Rs. 54,000 after the deduction of TDS. The building owner will then display a gross amount of Rs.60,000 in his income and can take credit for the TDS deducted i.e. Rs. 6000, by Sky Private Limited against his final tax liability. 

While calculating Advance tax for a company, we also have to consider TDS (only where applicable for services). The Advance tax is paid after reducing the total TDS to be paid by the recipient of the payment.

Let’s assume your business has to pay Rs. 50,000 to an outsourcing firm for professional services. If you have a tax deduction number (TAN), as a deductor, you will deduct a tax of Rs. 5,000 and make a net payment of Rs. 45,000/- (Rs. 50,000/- deducted Rs. 5,000 tax). The amount that you deducted from the outsourcing firm should be deposited to the government.

For instance, a company XYZ Pvt. Ltd. has to pay Rs.50,ooo to Mr ABC in exchange for professional services. XYZ Pvt. Ltd. deducted Rs 5000 as TDS from the payment amount to be paid to Mr ABC and paid to the government. If Mr ABC’s payable tax is Rs. 75,000, he will deduct Rs. 5,000 and pay the balance, since XYZ Pvt. Ltd. has already deposited Rs. 5,000 in his name. 

Here, two scenarios may arise: 

1- You pay the entire amount to the outsourcing firm without any tax deduction. 

2- You deduct TDS but file an incorrect amount with the Government.

In either of the above cases, as per the regulations, you cannot show this payment as an expenditure. It will ultimately increase the company’s profit margin, and therefore you’ll be paying a higher amount in tax. Worse than this, you’ll be bearing a penalty of Rs. 200 a day, under section 234E for the delay in filing TDS. 

26AS Reconciliation:

Understanding how TDS is linked to your Permanent Account Number is critical. TDS deductions are connected to both the deductor and the deductee’s PAN numbers. If TDS has been reduced from any of your income sources, you must fill out Tax Credit Form 26AS. All PAN holders have access to this form, which is a consolidated tax statement. 

Once the TDS due date has expired, the service provider, i.e. Mr. ABC will reconcile with his client, i.e. XYZ Pvt. Ltd., to ensure that the correct amount has been filed and paid. This same process has to be executed every quarter post the TDS return filing due date.

Other significant points related to TDS. 

  • Delays in TDS payments will result in you/your business having to pay an 18% fine on the amount defaulted upon per year. 
  • There are different threshold limitations for various types of services. For instance- professional service-related payments of less than Rs. 30,000 are exempt from TDS
  • TDS is cut on the invoice amount and not on the total amount with GST i.e. if the invoices are of Rs. 100 + 18%GST – 10% TDS, the amount of TDS is Rs. 10 (i.e. 10% of 100) not 10% of Rs. 118 (including GST).

When is it applicable and by whom should it be deducted?

Any person or entity making payments as specified under the Income Tax Act is obligated to deduct TDS at the time of making these specified payments. However, no TDS can be deducted if the person making the payment is an individual or HUF (Hindu Undivided Family) whose records are not required to be audited.

Individuals and HUFs are obligated to deduct TDS at a rate of 5% on rent payments exceeding Rs 50,000 per month, even if the individual or HUF is not subject to a tax audit. Individuals and HUFs who are required to deduct TDS at 5% do not need to apply for TAN. Employers deduct TDS on their employees’ salaries at the applicable income tax slab rates. Banks deduct TDS at a rate of 10%. 

What is the process?

Filing TDS returns is compulsory for all individuals who have deducted TDS. TDS returns must be paid quarterly to the government, and different information such as TAN, amount of TDS deducted, payment type, deductee’s PAN, etc. must be provided. In addition, several forms are recommended for submitting returns depending on the purpose of the TDS deduction. Form 26QTDS is required for all payments other than salary. 

Creating the right trackers to help with the process

It is imperative for all businesses to have a steady and streamlined financial process by which they can pay their employees and clients on time after a valid deduction. If you fail to manage all this, especially TDS, you might end up paying huge penalties for mismanagement of records. In this sense, QuikChex can help you manage everything smoothly and eliminate legal fines. On every payroll cycle, QuikChex will prepare a breakdown of the total TDS to be paid to the government based on the overall earnings and exemptions. It is fully automated and even creates TDS certificates so employees don’t need to spend time understanding the nitty-gritty of downloading TDS certificates from TRACES websites.

At Savage & Palmer, we know that accurate payroll and compliances like TDS are critical tasks.  If you are looking for a better and more cost-effective way to manage your financial records and compliances, we are the best accounting firm. We will take care of your entire payroll process while you focus on your core business strengths. Get in touch with us through our website or drop in a message here

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