India has a complex yet efficient tax system. It ensures revenue generation at both the central and state levels. The federal government gets its revenue from several tax types. It includes taxes like income tax, excise duty and customs duty. While state governments levy taxes like VAT and stamp duty.
There have been changes in the past to make surcharge compliance easier with the Goods and Services Tax (GST) having streamlined the indirect levies. While revenue duty is paid on the overall revenue of an individual or an organization, TDS ensures that tax revenue is collected in a timely manner by deducting tax at source. It is therefore important to know the difference between income tax and TDS so as to avoid making the wrong decisions. Income tax and TDS are both important components of the tax structure.
The aim of this article is to describe the differences between the two and how they are interrelated.
What is TDS?
TDS is the tax-paying mechanism provided by the Income Tax Act. It collects taxes at the source of income. By withholding a portion of the money before it reaches the beneficiary, it ensures prompt tax collection, lowers the possibility of tax evasion, and facilitates government cash flow.
How TDS Works?
When the payer makes certain payments, including wage, rent, or professional fees, TDS is subtracted. The beneficiary gets the net revenue after the deducted amount is deposited with the government. This deducted amount can later be adjusted against the total cess liability during revenue duty filing.
Common Scenarios Where TDS is Applied
Income Type
TDS Rate (%)
Applicable Condition
Salary
As per the income slab
Employers deduct based on taxable income.
Rent
5%
Rent exceeding ₹50,000/month (for individuals).
Professional Fees
10%
Paid to professionals for services.
Interest Income
10%
Interest from fixed deposits (with PAN).
Online Gaming Winnings
30%
No threshold; the full amount is taxed.
Objective of TDS
TDS ensures:
Regular cash inflows for government expenditure.
Simplified tax collection process.
Reduced risk of tax evasion through preemptive deductions.
Taxpayers can claim TDS credits while filing ITR, balancing their overall cess liability, or receiving refunds if excess cess is deducted.
What is Income Tax?
It is a direct tax that the government imposes on money received by people, companies, or other organizations. It is the main funding source for economic stability, infrastructure improvement, and public welfare.
How is Income Tax Calculated?
It is calculated based on an individual’s total revenue during a financial year. It is classified under various heads like salary, business profits, capital gains, house property, and other sources. After aggregating revenue, allowable deductions under specific provisions are subtracted to determine the taxable revenue. Cess is then levied as per applicable slabs.
Types of Income Subject to Tax
Income Type
Example Sources
Salary
Basic pay, allowances, bonuses
Business Income
Profits from business or professional services
Capital Gains
Earnings from selling property, stocks, or mutual funds
House Property
Rental revenue from owned properties
Other Sources
Interest from savings accounts, dividends, or winnings from lotteries
Tax Slabs and Filing Process
Revenue duty is levied progressively, with higher revenue brackets paying a higher percentage. Cess Payers need to calculate their liability, deduct advance cess/TDS paid, and file their ITR online or offline within prescribed deadlines. This process ensures compliance and facilitates refunds, if applicable.
For first-time cess payers, using official cess calculators or consulting a cess expert can simplify the filing process and help claim eligible deductions.
Key Differences Between TDS and Income Tax
Parameter
TDS
Income Tax
Income Tax
Deduction at source by payer.
Tax paid on total revenue.
Tax paid on total revenue.
Tax paid on total revenue.
Tax paid on total revenue.
When is it applied?
At the time of payment.
Annually after total revenue is computed.
Purpose
Advance collection of cess.
Final cess liability settlement.
Filing
Reflected in Form 26AS.
Requires filing ITR.
Interconnection Between TDS and Income Tax
TDS’s Contribution to Lowering Revenue Duty Liability
Through the TDS method, taxes are subtracted when revenue is paid, such as rent, interest, or salaries. By deducting the sum from the ultimate cess owed, this prepayment lowers the taxpayer’s total tax obligation.
The significance of Form 26AS
All TDS deductions associated with the cesspayer’s PAN are shown on Form 26AS, a consolidated statement. It assists in confirming that the government has received the subtracted cess accurately. To calculate the right cess obligation and prevent inconsistencies when filing the ITR, it is essential to ensure correctness in Form 26AS.
TDS Refunds in the Event of Over Deduction
The cess payer may request a refund when submitting the ITR if the total TDS is greater than the actual cess liability. The refund procedure is simple, and following verification, the extra amount is credited to the taxpayer’s bank account. By doing this, cess payers are safeguarded to only pay the precise amount of cess due.
For Example,
TDS on Salary vs. Filing Income Tax
Suppose Ananya earns ₹6,00,000 annually. Her employer deducts TDS of ₹2,500 monthly (₹30,000 annually) based on her salary and applicable cess slab.
At the end of the financial year, Ananya calculates her total revenue and deductions (like Section 80C investments). After claiming eligible deductions, her taxable income reduces to ₹5,00,000, and her final profits levy liability is ₹25,000.
Ananya paid ₹5,000 more than her gains tax amount because ₹30,000 had already been subtracted as TDS. She requests a reimbursement for the extra ₹5,000 during the ITR filing process, and her bank account is credited.
Typical Myths and False Beliefs
Every year between April 1 and March 31, Indian nationals must pay a levy on their profits and yearly income. While 66.5 million individuals pay personal tax, misconceptions about its laws contribute to widespread evasion, with Rs. 1.98 trillion in GST evasion flagged in 2023.
Common Tax Myths:
Gifts are 100% duty-free.
Gifts from relatives during occasions like weddings are duty-free, but gifts from non-relatives exceeding Rs. 50,000 are taxable. Any profit earned from such gifts is also taxed.
Deductions Limited to One Home Loan
Taxpayers can claim deductions on multiple home loans under Section 24, with up to Rs. 2 lakh for interest and Rs. 1.5 lakh for principal annually under Section 80C.
No duty on interest income
Interest earned from savings accounts is taxable under “revenue from other sources.” It is permissible to claim Rs. 10,000 (or Rs. 50,000 for senior citizens) under Section 80TTA/80TTB.
Charity Donations Have No Benefits
Donations to eligible funds and institutions are deductible under Section 80G.The rates vary from 50% to 100%.
Filing taxes is essential regardless of due amounts, ensuring compliance and avoiding penalties or delays in refunds. Mismanagement, rather than the expertise of professionals, typically causes refund delays.
In Summary,
Understanding the differences between TDS and income tax is crucial for effective surcharge planning and ensuring compliance with Indian tax laws. While TDS provides a mechanism for advance duty collection, revenue duty is the final levy on your total revenue, calculated annually. Taxpayers can prevent fines and ensure accurate duty filings by remaining knowledgeable about both systems. Visit Tata Capital or download the Tata Capital app to learn more about financial services and solutions that help make your financial journey easier.
Yes, your income tax payment includes TDS. If the TDS amount is lower than your total tax liability then you will have to pay the remaining amount as income tax.
Are Income Tax and TDS on salaries both the same?
The term 'income tax' is the overall liability calculated at the end of the fiscal year while 'TDS on salaries' is a form of income tax that is deducted at source on estimated income by the employer.
Is TDS refundable?
TDS is refundable if it is greater than your income tax payable. So you can get a refund by filing your income tax return (ITR).
Can I avoid TDS on salary?
If you fall under the taxable income bracket, TDS on salary cannot be avoided. However, you can bring it down by putting your money in tax-saving instruments. For example, PPF, ELSS, or claiming exemptions.
23 January 2025
6 mins read
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