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What is TDS

What is TDS, How it works

TDS is Tax Deduction at Source.

In the Income Tax Act, chapter for TDS has been included to explain the provisions for its charge, payment, due date, return and many more. As the name suggests that tax be deducted at the source of income, the Government introduced such practice to create a regular tax income flow.

TDS Concept

On a broader level, we have explained the brief steps need to be followed to understand TDS working:

  • The tax has to be deducted on certain kind of expenses as per Income Tax Act and Rules and deposited to the account of Government on or before the due date.
  • After a fixed interval, details of tax payment and deductees has to be submitted with Government, it is called TDS Return.
  • Certificate of tax deduction in Form 16 or Form 16A has to be issued from traces website to the deductee after processing the TDS return data.
  • In case any error is found anywhere then TDS return can be modified and TDS certificates can be re-issued. 

TDS Deductor Definition

Tax deductor is a person who is making payment for any service after deducting tax at a certain rate.

TDS Deductee Definition

Tax deductee is a person who is receiving payment against service provided by it after tax deduction by the deductor.


TDS Applicability & Registration

TDS is applicable only when deductor records the expense in its books or makes payment for services (not goods) rendered to itself whichever is the earlier basis of certain limits. Ex. company ABC took services of professional nature from Mr. Z and decided to pay Rs 2 Lakhs, now when ABC will receive the invoice and record in its books or makes payment whichever is earlier then basis of limit and tax rate, TDS shall be deducted and will be paid on or before the due date.

Basis the applicability, Income Tax Act has defined a certain list of expenses and related provisions, whose payment is to be made after deduction of tax.

TDS provisions are applicable not to all kind of business entities rather they are applicable to the following:

  1. A registered company with ROC.
  2. Any other business entity like Proprietorship or Partnership firm, Limited Liability Partnership, Trust, Society, etc. who is liable for tax audit under the Income Tax Act.

Every entity who is liable for a tax deduction and related liabilities, it will apply for Tax Deduction and Collection Account Number (TAN). This number is mentioned in every transaction related to TDS like TDS Payment Challans, TDS Return Filing, TDS Return Correction, TDS Demand, and Recovery Process, etc. It is a 10 digit alphanumeric number just like PAN (Permanent Account Number).

TDS Accounting

1. As and when any expense for service is recorded in accounting books, TDS liability also recorded and it's shown under Current Liabilities in Balance Sheet as on date. As in above example when ABC paid or booked Rs 2 Lakh as a professional expense to Mr. Z and deducted tax at the rate of 10% so the following accounting entry shall be passed in books of accounts:

Professional Fee a/c Dr     200000

To TDS Payable Cr              20000

To Bank / Mr. Z Cr              180000

Accordingly, the TDS liability shall be shown under Current Liability head in the Balance Sheet as on month / quarter / year end.

2. When the payment of tax shall be done via challan then the following entry will be passed in books of accounts:

TDS Payable Dr     20000

To Bank Cr             20000

3. When TDS Return is filed or TDS certificates are generated then there won't be any accounting entry because there is no financial transaction involved, it's the only filing of information with the Income Tax Department.

Verification of TDS Deduction and Payment

When TDS is deducted by an entity then deductee has always a question that whether TDS will be deposited with Government by the deductor or not? There are following ways to verify the above:

1. Deductee can ask for TDS challan by which it is deposited. But most of the times, Deductor deposits TDS collectively and not individually for each party so in this case, you won't be able to cross verify it.

2. Deductee can ask for Form 16 or Form 16A from Deductor but it will have to wait till TDS return is filed for the quarter and even some more time for its processing. Many times Deductors are reluctant to generate and share TDS certificates with all deductees and even deductees forget to demand these tax certificate, in that case, point no. 3 is the best.

3. 26AS, Yes. You check your 26AS statement by accessing your income tax Efiling website account (https://www.incometaxindiaefiling.gov.in/home) or by accessing your bank account.

The 26AS Statement is a detailed tax account statement generated and provided by the Income Tax Department to every pan holder. It details out the all tax deductions by every deductor with Name, TAN, Amount Paid, Tax deducted, Date, etc.

The 26AS statement is 100% correct and trusted document to verify your tax deductions by various deductors. In case you don't find any tax deduction in it then it means either deductor has not paid tax or has not filed the TDS return with the department or has mentioned incorrect PAN of deductee in TDS return. Then you must reach to deductor to solve the problem.

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