Tax deducted at source and actual tax liability may differ

Though there is a provision to deduct tax at the source of income, one must assess this tax position. Despite TDS, one may have to pay tax, if his tax rate is higher than the rate of TDS. One may also claim tax refund if TDS rate is higher than his tax slab rate.

There is a critical difference between Tax Deduction at Source (TDS) and the actual taxability of an income that many people fail to distinguish between. In the absence of clarity on this matter there is often a misunderstanding that creeps into the working of the taxation aspect for an individual and this can lead to a large tax payment cropping up at a later date usually with interest. There is a need to avoid this position and here is a closer look at the entire issue and how this should be treated by an individual.

Tax deduction at source

The actual meaning of the term TDS is that when there is an income that is earned then at the time of payment there will be an amount that is deducted from this figure at a fixed percentage and then the net amount will be paid to the individual. This happens at a lot of places like salary and even in interest receipts including that of fixed deposits. This act is just the deduction of the tax from the income and it no way reflects the final impact that the income will have for the individual as they would have to see their own position and then decide on the impact that this will actually have. This is the reason why the impact of the TDS has to be seen in terms of how the cash flow is affected and not in terms of what is actually to be paid as tax. The amount that is deducted can then be adjusted against the actual amount of the tax that has to be paid so this is available as a credit.

Actual taxation

The actual impact of taxation of a particular receipt of money is separate from the TDS aspect and it could be that there are several incomes that are taxable but do not have any element of TDS present in them. For example if there is an amount that you earn by working part time at some place and is just a few thousand rupees then this would be your income but it need not have a TDS element to it. The way that this amount would have to be considered is that it would have to be included in the taxable income part when you are making your calculations for the total tax to be paid at the time of filing your income tax returns.

Presence of both

There could be a situation where the individual faces a TDS like that of income from a fixed deposit where this is more than Rs 10,000 in a year but their total income is not taxable. This can happen if the total income does not exceed the basic exemption limit that is present and if this is the case then there is a solution for this. Submission of Form 15G/15H depending upon the age of the individual will ensure that the TDS is not made and this will ensure that there is no effort made in running around and trying to get a refund from the government.

On the other hand there could also be a situation where there is a TDS but still there is some additional tax to be paid. This happens because the TDS rate could be lower than what rate the individual has to actually pay on their income. For example the TDS rate on bank fixed deposits is 10 per cent but if the individual falls into the 30 per cent tax bracket then even with the TDS there is still some additional tax that remains to be paid which the individual needs to pay on their own so this is a responsibility that needs to be taken by looking at the actual position.


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