What is TDS?
TDS is the process of collecting tax as and when income is generated. It streamlines the process of collecting taxes for the tax department. TDS is applicable on several incomes such as salary, interest, commission, rent, brokerage, professional fees, royalty, and others. It is deducted at the prescribed rate by the tax department if permanent account number (PAN) is provided by the recipient of the income or at the rate of 20% in absence of PAN, whichever is higher. The deductor is liable to remit the collected tax into the account of the central government
How to avoid paying unnecessary TDS
The income tax department has created a list of persons (called specified persons) who have not filed income tax returns (ITR) for 2018-19 and 2019-20 but their aggregate TDS and TCS in each of these financial years exceeds Rs 50,000. These people will face higher TDS/TCS on most non-salary incomes.
Tax deductors such as banks, mutual funds, companies etc. can check if higher tax is to be deducted from interest/dividend paid to an individual. This list can be viewed at https://report.insight.gov.in. by the deductors.
As per the instruction of the Income Tax Department, with effect from July 1, 2021, higher TDS is being deducted by entities such as banks, mutual funds and companies on non-salary income paid to these individuals.
However, an individual can remove his/her name from the list and avoid higher TDS/ TCS in the rest of the months of the financial year by filing income tax return for the financial year 2020-21.
The income tax department issued a circular on June 21, 2021, clarifying that if a person files ITR for 2020-21, then his/ her name will be removed from the list and higher TDS/TCS will no longer be applicable to him/her.
How to avoid TDS?
Under section 197 of the Act, if the estimated total income of an individual for a financial year is less than the minimum liable to income tax, TDS won’t apply to her income. Typically, when your primary source of income is salary, you can declare your other incomes and investments and expenses that qualify for tax deductions and exemptions to the employer. Depending on what you declare, the employer deducts TDS. However, before the financial year ends, you need to provide proof related to these. Apart from this, to avoid TDS on non-salary incomes, you need to follow some steps.
The steps involve submitting certain forms. Here’s more about them.
Forms 15G and 15H:
These are essentially self-declaration forms for certain types of incomes—15G is for those younger than 60 years and 15H is for senior citizens—above 60 years of age. Where source of income is ‘interest on securities’ or dividend or interest other than ‘interest on securities’ or, income in respect of units under section 197A, self-declaration in these forms can be submitted.
In case of incomes such as commission, lottery tickets or brokerage, one needs to use form 13. This has to be given to the income tax assessing officer (AO) to get a certificate authorising the person cutting TDS to deduct tax at a lower rate or not at all as may be appropriate. The AO may issue this certificate if she is convinced that the total income of the applicant justifies lower or no taxation.
What should you do?
Take utmost care before furnishing forms and certificates to avoid TDS managing partner. A penalty applies if the tax department finds that the assessee is deliberately avoiding TDS to evade taxes. Moreover, there is no provision in the income-tax Act regarding withdrawal of these forms.
The forms are easily available on the tax department’s website, www.incometaxindia.gov.in, at bank and post office branches, and also with distributors of financial products and can be submitted electronically. So, while planning your investments for the year, pay attention to TDS as well and avoid paying this tax if you don’t need to.
The last date to file ITR for 2020-21 is September 30, 2021. It is crucial to correctly evaluate your income tax liability based on the source of income you have. Once you’ve calculated your total taxable income after taking into account all sources of income and claiming any necessary deductions under Chapter VI-A of the Act, you’ll need to apply the appropriate tax rates to calculate your total tax burden. Before submitting an ITR, any taxes owed on the tax return after claiming credit for prepaid taxes should be paid, including any applicable interest. Even if the tax return filing date has been extended to 30 June 2021, if such self-assessment tax exceeds Rs 1 lakh, it should have been paid before July 31, 2021 to avoid additional interest liability.