TDS (Tax Deducted at Source) :
• TDS is deducted on a periodic basis.
• TDS is the Tax Deducted by a Payer, from the Income earnings of the recipient, at the time of payment and is then remitted to the government by the payer on behalf of such payee.
• TDS amount paid is available as a credit to the Net Tax liability at the end of the year.
• TDS is applicable on transactions such as Salaries, Bank Interest Earnings, etc.
TDS is a subset of Income Taxes.
Income-Tax:
• It is a much wider term than TDS.
• Income-Tax is a Direct Tax and payable when annual income or turnover of a person exceeds the basic exemption limit.
• Thus, Income-Tax liability is a Total Tax liability for a particular Financial Year.
At the end of each financial year, a person’s Total Tax Liability is calculated and the amount of TDS Deducted during such Financial Year, is available as Credit towards the Total Tax Liability of such person.
Let me explain you the logic behind this through an example:
Illustration 1:
Trent Boult comes to India every year. He plays for Rajasthan Royals. He earns a huge amount of money. Our government now expects him to pay income tax too on his income.
Now it would be really difficult for the government to expect him to come back to India and again pay the tax.
So what do the government do? They simply ask the person paying the income to Trent Boult (BCCI, in this case) to deduct the amount of tax before paying the income to him. In other words, the amount received by Trent Boult is net of income tax and the tax deducted is TDS.
Illustration 2:
MJ & Company (employer) has thousands of employees working for it. They all are earning their income from salaries. They all will have to pay the income tax (if any) to the government.
Now can you imagine, thousands of employees filing their income tax returns and paying tax separately to the government. Won’t it be amazing from the government’s point of view if the taxes of all the employees are already deducted at the time of paying them the salary? Hence, for the sake of convenience to government TDS will have to be deducted at the time of salary payment as well by the employer (MJ, in this case)
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Now coming to the income tax part. Income tax is a tax on income earned. TDS is hence very much a part of Income Tax. The only relief to a person paying income tax is that the TDS already deducted will be adjusted against the net income tax payable.
For example:
If Mr. ‘S’ is liable to pay income tax of Rs.1,00,000 and the TDS already deducted comes to Rs.20,000 then, he is now liable to pay just Rs.80,000.
Tax received today is always better than tax received at the end of year
This is to ensure that government gets revenue as and when income flows to the assessee and it becomes easy for the government to track income of the assessee.
Here we have to note that Income is classified under 5 Heads which is:
1. Salary
2. Income from House Property
3. Profits & Gains from Business or Profession
4. Income from Long Term or Short Term Capital Gains
5. Income from Other Sources
But only Salary Income qualifies for full Tax Deduction done by the employer and remitted to the Government as per the Employee’s Salary, Standard & Other Deductions, Savings as per Income Tax Slab of 5,20,30%+4% Cess.
All other Sources of Income from 2–5 above don’t have TDS as per a person’s actual Income and actual Tax Payable. They are deducted only at a certain % from 5–10% on Income Paid/Credited.
Example-1 A Person <60 years Earns Rs.10 Lakhs Salary with No Other Income. He Saves Rs 150K in PPF,Rs 50K in NPS,Rs 25K in Medical Insurance Premium, Rs 2 Lakhs as housing loan Interest Repayment, and gives proofs of all these (Rs 4.25 Lakhs deductions) to his employer.
So from Rs 10 Lakhs his employer First deducts Rs 50K Standard Deduction & Rs 4.25 lakhs as above and his Net Salary is Rs 5,25,000/-.
On this Tax + Cess Payable is Rs 18,200/-. His Employer will deduct this full amount on monthly basis for 12 Months and Both Employer and Employee have no further responsibility of Tax.
Example 2 Keeping Example 1, if the Employee had Bank FD Interest Income of Rs 10 Lakhs per annum, with Salary of Rs 10 Lakhs, then?
Total Income is Rs 20 Lakhs Deductions are 4,75,000/- Taxable Income is Rs 15,25,000/- Now Total Tax & Cess Liability is Rs 2,80,800/-
Please note that w/o Bank FD Interest Employee was coming in 20% Tax Slab but with Bank FD Interest Income he is coming in 30% Tax Slab+4% Cess.
From this FD Interest, Bank Deducts Rs 1,00,000/- (TDS Rate is 10.00% on FD Interest) as TDS, Employer Deducts Rs 18,200/- TDS, Total TDS is Rs 18,200+1,00,000= 1,18,200/-
But Tax & Cess Liability is Rs 2,80,800 (-) Rs 1,18,200= Rs 1,62,600/- which has to be paid by the employee himself as Advance Tax during the FY Itself before 15th June Sept Dec March as 15% 30% 30% 25%, which is ₹ 24,390+48,780+48,780+40,650=Rs 1,62,600/-
If the employee does not pay this and defaults on any installment then interest u/s 234B 234C for deferment & default of Advance tax is payable which is another complex calculation.
Or the employee Should Inform his Employer about his FD Interest Income, Less Bank TDS in advance, ask them to club, all and deduct Tax on monthly basis to fully extinguish his tax liability.
But most employers may not do this additional work and ask the employee to do it himself.
Similarly if in addition to Salary & Bank Interest if there is Rent Received from Let-out Property then that is again added to the above Incomes and Advance Tax becomes payable.
I hope now the difference between TDS and Total Tax Payable is clear.
In case of any queries or clarification, please feel free to write us at camohitjain66@gmail.com
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