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  1. Here’s all you need to know about the working mechanism of Tax Deduction at Source

Here’s all you need to know about the working mechanism of Tax Deduction at Source

The Government of India took an initiative to develop a system through which it can quickly and efficiently collect taxes. To have a seamless approach, the Income-Tax Law has incorporated the system of deduction of tax at the point of generation of income, which is known as “Tax Deducted at Source”, commonly termed as TDS.

By: | Updated: February 27, 2017 6:42 PM
Under this regime tax is deducted at the origin of the income. Tax is deducted by the payer and is transferred to the government by the payer on behalf of the payee.

The Government of India took an initiative to develop a system through which it can quickly and efficiently collect taxes. To have a seamless approach, the Income-Tax Law has incorporated the system of deduction of tax at the point of generation of income, which is known as “Tax Deducted at Source”, commonly termed as TDS.

Under this regime, tax is deducted at the origin of the income. Tax is deducted by the payer and is transferred to the government by the payer on behalf of the payee.

The following provisions of deduction of tax at source are applicable to several payments such as interest, salary, commission, fees, brokerage, professional fees, royalty, contract payments, etc.

In respect of payments to which the TDS provisions apply, the payer has to deduct TDS on the payments made by him and then he has to deposit the tax which was deducted by him to the credit of the government.

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The following example will help you understand the TDS mechanism.

Mr. Kumar, who works in an MNC, has done his investments in a fixed deposit with ABC Bank. He is earning Rs 8,00,000 as annual interest on the deposits made by him. The bank here is liable to deduct tax from the interest paid to Mr. Kumar because the interest on fixed deposit is covered under the TDS mechanism and, therefore, the bank has to deduct tax from interest and has to pay the net interest to Mr. Kumar.

In the case as mentioned above, suppose the rate of TDS on interest is 10%. Therefore, the bank will deduct a net tax of Rs 80000 from the interest (10% of Rs. 800000) and by deducting the amount, the bank will pay the remaining net interest of Rs 720000 (Rs 800000 – Rs. 80000) to Mr. Kumar.

The TDS of Rs 80000 will be paid by the bank to the government where Rs. 80000 will be treated as prepaid tax of Mr. Kumar which he can claim as tax credit of Rs 80000 just like advance tax at the time of filing his return of income.

This mechanism of tax deduction at the point of generation of income is known as TDS mechanism.

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Here’s all you need to do regarding TDS:

• You must obtain tax deduction account number and quote the same in all the documents pertaining to TDS.
• You must deduct the tax at source at the applicable rate.
• You must pay the tax deducted at source to the credit of the government as per the due date
• You must file the periodic TDS return as per the due date
• Acknowledge your TDS certificate in respect of tax deduction.

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