January 06, 2016

TDS Mechanism and Claiming TDS Refund

We all know that TDS is deducted if the payment made is made towards salaries, professional fees, interest, rent, brokerage, commissions etc. This article explains what happens after the TDS deduction is made. How the Tax is received by Government, how the tax credit is given and so on.


What is TDS? How to get TDS refund? - An article on basic TDS concept and credit mechanism.


Part A: TDS Concept
Part B: Credit Mechanism
Part C: Getting TDS Refund.


Part A: TDS Concept.



In the Indian Income Tax Act 1961, TDS is the short form for Tax Deduction At Source. As the name suggests, it is deduction of Tax as and when a payment is made. This may be the simplest way to explain the fundamental concept of TDS. Having said that, TDS is not applicable to each and every transaction. Neither it is to be deducted by each and every person even if she enters into particular transaction. 

There are some major aspects to decide when TDS is to be deducted. These are:

1. Who is making the payment?
2. What is the transaction?
3. To whom the payment is being made?

Whether TDS is applicable or not is hidden in the answers to above questions. But there is one exception to this concept. The exception is TDS while purchasing Immovable Property like Land or Building. Keeping this exception aside for a moment, we will discuss the fundamentals of TDS.

The answers to above 3 questions determine the TDS applicability. Let us discuss them one by one:

1. Who is making the payment?
If the payment is being made by a Company, a partnership firm, a Trust, an Association of Persons (AOP) or a Body of Individuals (BOI), then TDS is applicable. If the payment is being made by Individual or a Hindu Undivided Family (HUF), then TDS is applicable only if they were subject to Tax Audit in last financial year. Once you fit in any of the above categories, the immediate next question is to be answered.

2. What is the transaction.
As we now know who is liable to deduct tax at source, we will now see on which transactions TDS is applicable.

TDS is applicable on specific transactions like payments of Contractors, Professional Fees, Consultancy Fees, Commission, Advertisement Expenses, Car Hire, Machine Hire, Rent of Building and or property etc.

Once it is established that the person making is liable to deduct TDS and that the transaction is liable for TDS the next question is what is the Amount of payment. If the amount of payment is above the limits given the Income Tax Act 1961, TDS shall be applicable. For example, for Professional fees payment, TDS is applicable only if the annual payment exceeds Rs.30,000 during a financial year (year starting from 1st April and ending on 31st March). Again such limit is applicable to single payee. And not collectively to all the professionals the payment is made. Another example is, TDS on Rent. If the rent amount is above 1,80,000 in a financial year then TDS is applicable. 

Depending on the nature of transaction the TDS deduction rate varies. The TDS rates vary from 1% to 20% of the transaction value.

3.To whom the payment is made?

It is imperative to know whom the payment is being made. In case the payment is made to the Government, no TDS is applicable to be deducted irrespective of the nature of transaction.

Part B: Credit Mechanism.


TDS is nothing but a Tax. Instead of you paying it at year end, the Government has collected it as soon as you earned money. Now there may be one or multiple instances of your TDS being deducted. And there may some sources of income to you where no TDS was deducted. So at the year end, all the calculations are done and your total Tax Liability is worked out. Once the total Tax liability is arrived at, you need to pay the difference between the liability so arrived less the tax deducted at source by your payer / employer.

As and when TDS is deducted, the transaction amount and TDS amount is submitted to the Government along with your PAN (Permanent Account Number). This information is submitted by E-TDS return (at present required to be filed quarterly). Once that return is filed, your PAN gets credited with TDS amount. This can be verified in Form 26AS at Income Tax portals.

At year end, the payer / employer will issue a certificate ( in form 16/16A) mentioning the sum of all the amounts paid to you  and TDS deducted against it. 

This is how TDS credit mechanism works.

Part C: Getting TDS Refund:


Well, TDS refund can be obtained in only one case:

1. Your Income Tax Payable is lower than your TDS amount.

This can happen because of many reasons, like: your TDS was deducted at higher rate, your Income is below basic exemption limit, your payer did not consider the deductions and exemptions available to you like your LIC payment, PPF contribution, HRA benefit etc. In such case, you can prepare your Income Tax Return and your excess TDS would be refunded.

TDS is a very wide area. There are hundreds of judgement by various courts across the country. The main purpose of this article is to familiarize you with TDS concept and mechanism. This article should in no way be treated as advise of your TDS query. For any further queries you may reach us at info@capsandco.com.