Tax on income of previous year is usually made on the assessment year. To avoid tax evasion, the Income Tax Act has made provision to collect tax by way of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS).
Tax deducted at source is one of the modes of collecting Income-tax from the assessee in India. TDS is an indirect method of collecting tax from the tax payer/deductor by the income tax department through tax payer. TDS is pre-paid payment of tax in previous year in which incomes receive/accrued. The tax so deducted from the income of the payee is deemed to be payment of Income-tax by the recipient at the time of his assessment. Such amount of tax i.e. TDS will be deducted from Tax Liability at the time of assessment in the assessment year. TDS is final tax payable, when payee fill return, the payee pays the balance if under TDS payment in the previous year or asks for refund if over TDS payment in the previous year. Income & payment of tax both occur in the previous year. Payee is liable to pay tax on income in previous year on previous year income. Under the scheme of TDS, person (payer) is responsible for making payment of income are liable to deduct tax at source at a specified rate from the income (if such income cover under TDS provision issue by Income Tax Act) as per relevant provision of the act and balance income is either to be credited in the account of payee or is handed over. The amount so deducted is to be deposited to the Central Governments’ treasury (either deposited to bank through Challan-281 or make a book transfer without use of challan) within the stipulated time in the name of payee.
For example: -
When any employee is received salary from employer, employer is liable to deduct tax at source before payment (if employee income for this previous year is taxable).
When any payment to any contractor, payer liable to deduct tax at source (if applicable) before payment to contactor & such amount of tax deposited to the Central Govt within prescribed time.
Everyone can’t deduct tax at source or collect tax at source. If person have valid Tax Deduction Account No (TAN), then these person is eligible to deduct tax at source or collect tax at source. TAN or Tax Deduction or Collection Account No is a 10 digit alpha numeric no which is required to obtain all person who is liable to deduct or collect tax at source. It’s mandatory to quote TAN at the time of TDS/TCS return (including e-TDS/e-TCS return), payment of TDS/TCS, issue TDS/TCS certificate to payee.
Deduction should be made at a specified rate & from the following sources of Income
- Salary (section 192)
- Interest on Securities (section 193)
- Dividend mentioned on section 2(22)(e) (section 194)
- Interest other than interest on securities (section 194A)
- Winning from lottery or crossword puzzles (section 194B)
- Winning from Horse race (section 194BB)
- Payment to Contract or sub contract (section 194C)
- Insurance commission (section 194D)
- Payment to non-resident sportsmen or sports association (section 194E)
- Payment out of deposite NSC (section 194EE)
- Payment on account of repurchase of unit by MF or UTI (section 194F)
- Commission, remuneration or prize for stocking, distributing, purchasing/selling of lottery tickets (section 194G)
- Commission or brokerage (section 194H)
- Rent (section 194-I)
- Fees for professional, technical, royalty etc (section 194J)
- Payment for acquisition of immovable property (section 194LA)
- Payment of interest or any other sum of money (other than income taxable as salaries) to Non-resident assessee or Foreign company (section 195)
- Long term capital gain on units referred u/s 115AB (section 196B)
- Income from foreign currency bonds or shares of Indian Company U/s 115AC (section 196C)
- Income from securities referred u/s 115AD(1)(a) (section 196D)
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