The Easiest and Simplest Guide To Understand TDS Implications
This article will give answers to all your TDS-related queries and concerns and help you understand how to deal with it during return filing.
None of us likes to receive lesser payment than what the client promised. Yet, often, while working with the Indian clients, you might have received lesser payment.
When asked for a reason for short payment, the client would have replied, “Hey, I deducted TDS before paying you.”
TDS? Does it sound a familiar-yet-lesser-understood term to you as well?
If you are a freelancer, solopreneur, founder of an agency, or a salaried employee, you should know the TDS provisions.
Whenever you provide services (writing, designing, web development or any other professional service) to a company , it deducts TDS at 10 percent from the payment amount.
But why do companies sometimes deduct more than 10% TDS? If the company has deducted TDS, should you still file the returns?
Here’s what you’ll learn today:
- What is TDS?
- What happens to the deducted TDS amount?
- Can I check if the client actually filed the TDS return?
- If the client has deducted tax, can I get that tax refunded from the Government?
- I don’t want a refund, but I don’t want to file my return either. Is that possible because the tax has already been paid?
- What are the TDS provisions related to payment of professional services?
- Is there any threshold limit for deducting the TDS amount?
- Why do some of my clients don’t deduct TDS while others do?
- Is TDS on salary the same as TDS on professional services?
Let’s dive deeper into the world of TDS.
What is TDS?
When a person earns any income, it is his responsibility to pay tax on such income. However, in certain cases, the Income Tax Department requires the payer (person making the payment) to deposit tax on behalf of the person who has earned the income (person to whom payment has been made).
The payer has to deduct this tax while making a payment or crediting the other person’s account, whichever is earlier. Since this tax is deducted at the source, it is called Tax Deducted at Source (TDS).
TDS is not deducted at the time of every payment or by every person who’s making the payment. There are rules and specific cases related to deduction of TDS which have to be complied with.
What happens to the deducted TDS amount?
The deductor (person deducting TDS while making the payment) has to deposit the TDS amount with the Government and file TDS return as well.
For this purpose, the clients ask the freelancers and agencies to submit their PAN numbers.
While filing the TDS return, the deductor has to mention the deductee’s name, PAN number, date of payment, amount of payment, and TDS amount.
Can I check if the client actually filed the TDS return?
While you can’t check if the client has filed the TDS return, you can definitely verify and ensure that the TDS amount deducted by the client has been marked against your PAN number.
After 15–20 days from the due date of TDS return filing, you can ask your client to send you a TDS certificate (Form-16A). It will contain all the details which have been filed in the TDS return against your PAN number.
Alternatively, you can check Form 26AS statement as well. Form 26AS is a tax credit statement which can be downloaded from the Income Tax Website.
It shows the TDS amounts marked against your PAN number in an entire Financial year apart from showing other necessary information as well.
If the client has deducted tax, can I get that tax refunded from the Government?
Yes, if the client has deducted TDS but your final tax liability is less than the deducted amount, you can ask for a refund from the Government (And the Government gives it happily :p).
But, to ask for a refund, you have to file your income tax return COMPULSORILY. You can’t claim the refund without filing your income tax return (One of the primary reasons why you should file your income tax return).
I don’t want a refund, but I don’t want to file my return either. Is that possible because the tax has already been paid?
No, if your total income for a financial year is above the basic exemption limit (Rs 2,50,000 for FY 2019–20 and 2020–21), you have to MANDATORILY file your income tax return. From the final tax liability, you can reduce the TDS amount already deposited by your clients.
If additional tax has to be paid, you can pay it and file the return. If the net tax payable (after deducting the TDS amount) becomes zero, you can just go ahead and file your returns.
But, remember, return filing is mandatory if the income is above the exemption limit.
What are the TDS provisions related to payment of professional services?
If you are a freelancer, solopreneur or agency owner, you’ll come across these TDS provisions mainly.
While making payment for professional or technical services or royalty, the payer (the person making the payment) has to deduct TDS at the rate of 10 percent under Section 194J.
However, if the payee (person receiving the payment) doesn’t submit his PAN number, the tax rate will be 20 percent.
For FY 2020–21, the government has given relief in the TDS rates for the period from 14-May-2020 to 31-Mar-2021. So, the applicable TDS rate for the said period will be 7.5 percent.
Is there any threshold limit for deducting the TDS amount?
Yes, if the onetime payment or the aggregate payment during an FY is less than Rs 30,000, then the payer won’t deduct the TDS. But this limit has a trick to it.
Let’s understand it with a help of a few examples -
Example 1
Reliance Industries Ltd paid Shruti a onetime payment of Rs 20,000 for her content writing services — NO TDS to be charged.
Reliance Industries also paid Namit the following payment during the FY 2019–20 for his graphic designing services -
1st Payment — Rs 20,000
2nd Payment — Rs 5,000
3rd Payment — Rs 10,000
4th Payment — Rs 55,000
TDS implications will be as follows -
1st Payment: No TDS to be deducted because aggregate/ onetime payment is less than Rs 30,000.
2nd Payment: No TDS to be deducted since aggregate/ onetime payment is less than Rs 30,000.
3rd Payment: TDS to be deducted since aggregate payment is more than Rs 30,000 now [20,000+5,000+10,000] = Rs 35,000.
Also, the TDS amount to be deducted will be 10% of 35,000 i.e. Rs 3,500.
4th Payment: TDS to be deducted since aggregate and onetime payment are both more than Rs 30,000.
TDS amount will be 10% of 55,000 = Rs 5,500.
Because of this reason, sometimes, it looks as if the company has deducted more than 10% TDS. But, in reality, the company accounts for all the previous payments made in a Financial Year.
In the case of third payment, Namit would be paid 10,000 [-] 3,500 = Rs 6,500.
Why do some of my clients don’t deduct TDS while others do?
Individual taxpayers are not required to deduct TDS while making the payment unless their turnover or gross receipts exceed the amount mentioned in Section 44AB, i.e. if their turnover is less than Rs 2 crores.
In simple words, generally, if the client is an individual firm (proprietorship), they won’t deduct TDS even while making payment of more than Rs 30,000.
Is TDS on salary the same as TDS on professional services?
TDS on salary is deducted under section 192, whereas TDS on professional services is deducted under section 194. Moreover, on salary payment, TDS is applicable at normal tax slab rates (5% — 20% — 30%) whereas 10 percent TDS is deducted in case of professional services.
Bottomline
Taxes are not as difficult as they seem. With a bit of understanding and prudence, you can deal with the basic aspects of taxation easily. TDS is surely one of those concepts!
You should focus on the 26AS Statement and your bank account while filing the income tax return to account for all the TDS deductions correctly.
