TDS Certificate (Form-16) | Tax Deducted at Source

TDS, or Tax Deducted at Source, refers to the tax deducted by the payer (the deductor) when making certain payments to the payee (the deductee). The tax amount is deducted from the total payment and deposited with the Income Tax Department. A TDS certificate is a document provided by the deductor to the deductee, confirming that Tax Deducted at Source (TDS) has been deducted and deposited with the Income Tax Department. This certificate is essential for the deductee to claim tax credits and applicable refunds.

Example:

If a bank pays interest exceeding Rs. 40,000 in a financial year, it may deduct TDS at 10%. For an interest payment of Rs.50,000, the bank would deduct Rs.5,000 as TDS and pay Rs.45,000 to the account holder. Here, the bank acts as the deductor, and the account holder is the deductee. The deducted tax is deposited with the Income Tax Department, associated with the deductee's PAN.

The deductee can claim the TDS amount as a credit while filing their Income Tax Return (ITR), offsetting it against their total tax liability.

Why is It in the News?

A Public Interest Litigation (PIL) has been filed in the Supreme Court challenging the constitutionality of the Tax Deducted at Source (TDS) system. Advocate Ashwini Kumar Upadhyay, the petitioner, argues that the TDS system is arbitrary, irrational, and violates Articles 14 (equality), 19 (profession), and 21 (life and liberty) of the Constitution.

The plea highlights the disproportionate burden on economically weaker sections and small earners, citing administrative expenses and technical hurdles. It also claims the system violates Article 23 by imposing tax collection duties akin to forced labor on private citizens.

The petition seeks:

1. A declaration that the TDS system is unconstitutional.

2. Directions to NITI Aayog and the Law Commission to examine and recommend changes in the TDS framework within three months.

The Centre, Ministry of Law and Justice, NITI Aayog, and Law Commission have been made respondents in this case.

Importance of TDS

Tax Deducted at Source (TDS) is a system implemented by the government to collect taxes at the origin of income. It aids in reducing tax evasion as deductors are required to report TDS details quarterly, ensuring transparency about taxpayers’ income. This encourages taxpayers to accurately disclose their income and meet their tax liabilities when filing Income Tax Returns (ITRs).

If any income is not reported in the ITR, automated return processing systems detect discrepancies, which can lead to tax recovery actions by authorities.

TDS also serves as a source of interim revenue for the government, enabling partial tax collection within the financial year when the income is generated.

Common TDS Rates and Thresholds

The government specifies TDS rates and thresholds for various types of payments. Below are some common examples:

Note:

• These rates apply to payments made to resident Indians. Different rates may apply to non-residents.

• TDS does not exempt taxpayers from paying additional taxes if their total tax liability exceeds the deducted amount. For instance, if the taxpayer's marginal rate is 30%, and TDS is deducted at 10%, the taxpayer must pay the remaining 20% (plus cess and surcharge).

Who Issues a TDS Certificate?

Any person or entity responsible for deducting TDS is required to issue a TDS certificate. To deduct TDS, the deductor must have a Tax Deduction and Collection Account Number (TAN), which is usually allotted automatically during company registration.

Types of TDS Certificates

TDS certificates are categorized into two main types:

1. Annual TDS Certificate (Form 16):

• Issued by employers to employees for TDS on salary.

• Contains details of TDS deducted from salary and the corresponding deposit with the government.

• Not required for employees whose total income is below Rs.2,50,000, as TDS is not applicable in such cases.

• Issued for non-salary income where TDS has been deducted.

• Commonly issued by banks for TDS on interest earned on fixed deposits

Deadlines for Issuing TDS Certificates

The Income Tax Act mandates specific deadlines for issuing TDS certificates:

• Form 16: Must be issued within 15 days after filing the fourth-quarter TDS returns.

• Form 16A (Quarterly Certificate):

Digital Signature on TDS Certificates

TDS certificates can be digitally signed using a Digital Signature Certificate (DSC). A verified digital signature will display a checkmark, whereas an unverified one will show a question mark.

Penalty for Not Issuing TDS Certificates

Failure to issue the TDS certificate within the prescribed timeline attracts a penalty of Rs.100 per day per certificate. However, the total penalty cannot exceed the TDS amount for the respective quarter.

Cross-Verification with Form 26AS

Form 26AS is an annual summary containing details of tax deductions. Taxpayers should cross-verify the TDS certificate details with Form 26AS. In case of discrepancies, the taxpayer must contact the deductor for corrections.

Conclusion

Form 16A is an important document for taxpayers as it aids in accurate tax calculation and simplifies the process of filing income tax returns (ITR). Employers are obligated to issue Form 16A to their employees either quarterly or annually. Retaining this document is essential for addressing future tax-related queries and during tax filing. A clear understanding of Form 16A is important for precise tax computation and seamless ITR submission, regardless of whether the income is from salary or other sources.

Frequently Asked Questions

Q1. Is it mandatory to issue a TDS certificate?

Ans. Yes, as per Section 203 of the Income Tax Act, 1961, it is mandatory for the deductor to provide a TDS certificate whenever tax is deducted at source from an individual's income. This certificate must include the amount of TDS deducted.

Q2. What is TDS and why is it important?

Ans. TDS stands for Tax Deducted at Source. It is a system where the person making a payment (deductor) deducts tax before paying the balance to the recipient (deductee). The deducted tax is then transferred to the Central Government. TDS ensures regular tax collection and reduces the burden of paying taxes in lump sum amounts.

Q3. Why is a TDS certificate important?

Ans. A TDS certificate, such as Form 16A, is important because it allows individuals to claim tax credits for the tax deducted at source, which helps reduce their overall tax liability. It also ensures compliance with tax regulations, as issuing this certificate is a legal requirement for deductors under the Income Tax Act.

Q4. Who is eligible for TDS?

Ans. Employers, organizations with a valid TAN, individuals whose accounts are audited under Section 44AB, and those holding government or company offices are eligible to file TDS returns. These individuals or entities are required to file TDS returns quarterly.

Q5. Who will issue the TDS certificate?

Ans. The person responsible for deducting tax at source (the deductor) is required to issue the TDS certificate to the deductee. This certificate will specify the TDS amount, rate, and other required details. The certificate can be downloaded from the TRACES website (https://www.tdscpc.gov.in) after the TDS statement is processed.