Are you paying your taxes on time? Do you know how the money that you pay as tax is being used by the government? Do you know the differences between income tax and TDS? If not, get all the information right here in this blog.
Overview
Understanding taxation can be complex for many individuals, leading to confusion between terms like income tax and tax deducted at source (TDS). To gain clarity in the tax system, it is crucial to distinguish between these terms.
The term “income tax” is often misconstrued, with many thinking it is synonymous with “tax deducted at source.”
Whether an individual is self-employed or working for a company, understanding the disparities between income tax and TDS is crucial, as each serves distinct purposes. In this article, we explore all things tax-related. But first, let’s understand the importance of taxes.
Importance of Taxes
Taxes are obligatory for those earning income, utilizing services, making purchases, or participating in business activities. Unfortunately, only a fraction of the population comprehends India’s tax structure.
It is essential for taxpayers to recognize that all taxes contribute to national development, supporting various initiatives such as welfare programs, education, and healthcare.
What Does Income Tax mean?
Income tax is a form of direct tax levied by the government on the earnings or profits of its citizens. Governed by the Income Tax Act of 1961, the central government is responsible for the collection of such taxes. The government holds the power to modify tax rates and income brackets, making adjustments annually through the Union Budget.
| Income, as defined for tax purposes, encompasses not only salary earnings but also income from sources like property holdings, job-related income, capital gains, business profits, and various other revenue streams. |
What is TDS?
The Tax Deducted at Source (TDS) system was introduced to streamline the collection of taxes from various income sources. According to this system, the deductor, responsible for making a payment to the deductee, is required to deduct a designated amount of tax at the source (TDS Filing) and remit that sum to the central government’s treasury.
Individuals whose amounts have been deducted can claim credit for the deducted amount by providing Form 26AS or any other TDS certificate issued by the deductor.
Simplify TDS calculation on salary with our TDS calculator. Calculate TDS online with just a few clicks.
| TDS is applicable on various transactions, such as payments to contractors exceeding one lakh rupees, rent payments over ₹2.4 lakhs, property purchases of ₹25 lakhs or more, and winnings exceeding ₹10,000. |
Differences between TDS and Income Tax
While both income tax and Tax Deducted at Source (TDS) are terms associated with taxation on income, they differ in several aspects:
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Timing of Payment:
– Income tax is calculated and paid on the total earnings for a specific financial year after its calculation at the end of the year.
– TDS is deducted at the time of payment, either monthly, quarterly, or during interest on investments.
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Payment Process:
– Income tax is directly paid by the individual on their total earnings.
– TDS is considered an indirect tax payment as it is deducted and paid by a third party, such as an employer or financial institution, on behalf of the individual.
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Scope of Application:
– Income tax is levied on an individual’s detailed earnings within a financial year, based on applicable tax slabs.
– TDS is deducted at the source, specifically from individuals making certain payments.
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Tax Evasion Measures:
– Income tax is aimed at ensuring individuals pay their exact contribution annually based on their income.
– TDS is implemented as a measure to reduce tax evasion, especially by salaried individuals, as the tax is deducted before they receive their salary.
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Contribution to Tax:
– Income tax represents the complete tax contribution an individual should make annually.
– TDS contributes partially towards the overall tax payment.
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TDS rates vary from 1 to 30 percent depending on the specific case. |
Relationship between TDS and ITR
In the Indian taxation context, the relationship between TDS (Tax Deducted at Source) and ITR (Income Tax Return) is crucial.
TDS serves as a mechanism for the government to collect taxes at the source of income generation. Employers, banks, and other entities deduct a certain percentage of tax before making payments, ensuring a steady inflow of revenue for the government.
ITR, on the other hand, is the formal document through which taxpayers declare their total income, deductions, and taxes paid to the Income Tax Department.
The TDS amount deducted during the financial year is reflected in Form 26AS, which is an annual consolidated statement. When filing the ITR, taxpayers need to reconcile the TDS details from Form 26AS with their income and claim credit for the tax already deducted. A proper understanding and coordination between TDS and ITR are essential for accurate tax compliance and avoiding discrepancies.
Conclusion
If you require further clarification or assistance with tax-related terminology, Vakilsearch’s experts are always available! For information and support related to tax filing, schedule a call with our experts today!
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