This blog explains Tax Deducted at Source (TDS), how is TDS calculated, and its applicability to different incomes like salary, rent, interest, and commissions. It includes a TDS calculation formula, real-life examples, and applicable TDS rates. Additionally, it covers interest on late TDS payments and the importance of timely compliance.
How is TDS Calculated?
Tax Deducted at Source (TDS) is a mechanism employed by the Indian Government to collect income tax from the source of income. TDS is applicable to various types of income such as salary, rent, interest, commission, and professional fees. In this blog post, we will discuss how TDS is calculated with examples.
TDS Calculation Formula and Example
TDS is calculated as a percentage of the total amount paid or credited to the recipient. The rate of TDS varies depending on the type of income and the tax status of the recipient. The TDS amount is deducted by the payer and deposited with the Income Tax Department.
The TDS calculation formula is as follows:
TDS = Total amount paid * TDS rate
Let’s understand this with an example.
Example: Interest Income
Suppose you have earned an interest income of ₹ 10,000 from a fixed deposit in a bank. The bank deducts TDS at a rate of 10% on the interest income. This example demonstrates how tds is calculated for interest income.
TDS = 10,000 * 10/100 = ₹ 1,000
So, the bank will deduct ₹ 1,000 as TDS and deposit it with the Income Tax Department. You will receive the remaining interest income of ₹ 9,000.
Types of TDS Rates
As mentioned earlier, the TDS rate varies depending on the type of income and the tax status of the recipient. Let’s take a look at the different types of TDS rates.
TDS on Salary
TDS is applicable to the salary income of an individual. The TDS rate is calculated based on the tax slab rate of the individual. The employer deducts TDS on the salary income and deposits it with the Income Tax Department.
TDS on Rent
TDS is applicable to rent income paid to a landlord. The TDS rate is 10% of the rent amount. If the rent paid during the financial year exceeds ₹ 2,40,000, the TDS rate is increased to 20%.
Our TDS calculator simplifies how to calculate TDS on salary. Get accurate TDS interest calculation results online.
TDS on Interest Income
TDS is applicable to interest income earned from fixed deposits, savings accounts, and other sources. The TDS rate for interest income is 10% if the interest income exceeds ₹ 40,000 in a financial year. If the PAN card is not provided, the TDS rate is 20%.
TDS on Commission and Professional Fees
TDS is applicable to payments made for commission, brokerage, and professional services under the Income Tax Act. The latest TDS rates are:
- Commission & Brokerage (Section 194H): 2% of the total payment exceeds ₹15,000 in a financial year. (Reduced from 5% w.e.f. Oct 1, 2024)
- Professional Fees (Section 194J): 10% if the total payment exceeds ₹30,000 in a financial year.
- Technical Services (Section 194J): 2% for technical services.
Interest on Late Payment of TDS
When taxes are deducted at source (TDS), the payer is required to deposit the TDS amount with the government within a specified due date. If the TDS is not deposited within the due date, interest is charged on the outstanding amount. The calculation of interest on TDS is governed by the Income Tax Act, 1961.
So, how is TDS calculated in terms of interest on late payments? The interest on TDS is calculated based on the period of delay in depositing the TDS and the rate of interest specified by the government. The rate of interest is generally 1% per month or part of the month, but it may be increased to 1.5% per month or part of the month if the TDS is not deposited even after one year from the due date.
For instance, suppose the TDS amount due is ₹ 10,000 and the due date for depositing the TDS is 7th of every month. If the payer deposits the TDS on 20th February instead of 7th February, the delay in deposit is 13 days (from 8th Feb to 20th Feb). In this case, the interest on TDS will be calculated at 1% per month or part of the month for 13 days, which will be approximately ₹ 33. The interest is calculated from the due date (7th February) till the actual date of deposit (20th February).
conclusion
Tax Deducted at Source (TDS) is a crucial mechanism employed by the Indian Government to collect income tax directly at the source of income. It applies to various types of earnings, including salary, rent, interest, commission, and professional fees. Understanding how is TDS calculated is essential for taxpayers to ensure compliance with tax regulations and avoid penalties. This blog has provided insights into TDS calculation with examples to help readers grasp the process. Additionally, Vakilsearch simplifies the entire TDS filing process with expert guidance.
