TDS Explained: What You Need To Know Before Filing Income Tax Returns

(Last Updated On: December 9, 2020)

Have you filed your Income Tax returns yet? The Government has stated that the last date to file Income Tax is December 31st. For a lot of us, filing Income tax seems like a scary task, but it is pretty simple to do when you know the important sections under it. TDS (tax deducted at source is a very important part of Income-tax!

In this blog, we will discuss the basics of TDS:

What is Tax deducted at source and how to calculate it?

For anyone employed with a company or running a business, TDS is the amount that is automatically reduced from payments owed to them like salary, commission, rent, and professional fees.  TDS falls under the ambit of the Indian Revenue Service and is managed bu the Central Board of Direct Taxes.

Therefore, if you are a business who makes the payment, you will deduct the tax at source, and the person who receives the payment/income will have to pay the tax. Turns out, TDS will help reduce tax evasion risks as the tax is collected at the time of making the payment itself.

The folks at Bajaj Finserv explain it perfectly –

“ Assume that the nature of payment is professional fees on which the rate specified for TDS is 10%. An ABC organisation pays INR 50,000 as professional fees to Ms XYZ. In this case, the ABC organisation is liable to deduct INR 5000 and make a net payment of INR 45,000 to Ms XYZ. The INR 5000 deducted by the company will be deposited directly to the credit of the Government”

There’s more.

What documents do you need for TDS

Issue a TDS certificate – There are two types of TDS certificates that should be issued at the time of filing income tax. These are –

Form 16: This form/certificate is issued by a company employer/tax dedicator (person making the payment) which carries all the details of the tax deductions made in that year.

Form 16A: This is more applicable for freelancers, consultants and anyone who is independent of an organisations payroll.

Who is eligible for TDS?

Anyone associated with an organisation has books audited every fiscal year and pays income tax is liable for TDS. You do not have to pay TDS or are exempt if:

  1. Your total taxable income is below the taxable limit, you need not pay tax.
  2. The payee gives a self-declaration stating they have investment proof via Form 15G/15H
  3. Payments made to the Reserve Banks of India or the Indian Government directly.

Also read: Looking to save on taxes? Here’s how you save taxes as a business! 

How to file TDS return

You can view paid TDS once you download the Form 26AS from the Income Tax Department. To claim it, you need to file Form 27A separately.

In order to file your TDS return, there are few things you must ensure. They are as follows:

  • Have a valid TAN (Tax Deduction and Collection Account Number) and make sure it is registered for e-filing. If you are deducting TDS for employees, maintain a TAN. There is a penalty of Rs.10,000 for not quoting TAN. Anyone paying a salary or commission is required to get a TAN.
  • Tax Deducted at Source has to be deposited using Challan ITNS-281 on the income tax portal.
  • Prepare your TDS statements using Return Preparation Utility before validating the same using File Validation Utility.
  • Provide bank account details of your company, and ensure that both parties PAN and Aadhar details are entered before you upload your returns using the online verification code.
  • You receive a token number or receipt to confirm that returns has been filed

TDS rules everyone needs to know

According to Profitbooks, you need to file tax deducted at source before the due date to avoid penalty and increased fees. Tax dedicated at source must be deposited to the Government before the 7th of the coming month! For example, TDS deducted in the month of September must be paid to the Government in the month of November.

Deduct TDS on time – Deduct tax at the time of payments due. A delay in TDS will incur interest at 1% per month till the tax id deducted. Not paying it will attract interest @ 1.5% per month until the tax is deposited.

TDS return filing rules: TDS returns are required to be filed timely on the 31st day of July, October, January, and May during a financial year. Non-filing or filing of return after the due date will attract a penalty fee of Rs 200 per day (up to the maximum amount of tax) till the return is filed.

Importance of documents – The business or individual who makes the payments should have a valid PAN card, along with the PAN details of the payee, else the TDS rates increase!

Date for refunds – Tax refunds are credited to bank accounts of payees in 6 months

Understanding taxes and GST for small businesses with ClearTax

A lot of the information you see here is referred from ClearTax, a premier tax filing and GST organisation that helps both businesses and individuals with taxes. Given how over 5 million MSMEs are liable to pay tax and GST this year, it makes sense to keep yourself informed about it.

Why not get a certificate and an entire online course, curated by ClearTax?

In this course, you learn:

  • The basics of GST and if it applies to your business
  • How to register for GST and various slabs under GST
  • How to correct Invoices in case of data mismatch


1 comment
  1. It’s helpful to know how important it actually is to make sure that there are no unnecessary interests when filing taxes on time. That might be a good enough reason to consider hiring a service that does income tax prep for businesses someday. Managing finances would be something I would need professional help for because that’s the aspect that I tend to not grasp very well when it comes to the prospect of running a business.

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