Income Tax Vs TDS: Both Income Tax and TDS are methods of collecting tax. They work differently in terms of time, responsibility, range, flexibility and documentation.
Income Tax Vs TDS: Income Tax and Tax Deducted at Source (TDS) are two essential factors of the taxation system, which play an important role in revenue collection and compliance. Although they both involve taxes, they serve different purposes and operate under different systems. It is important for individuals and businesses to understand the difference between income tax and TDS to navigate the tax effectively.
Income Tax
Income tax is a direct tax imposed by the government on the income earned by individuals, companies and other institutions within its jurisdiction.
Individuals and entities are required to calculate their taxable income based on prescribed rules and tax rates and pay a prescribed amount to the government within a stipulated time frame.
Taxpayers are generally required to file an annual income tax return containing accurate information about their income, deductions and tax liabilities.
Non-compliance with income tax laws can lead to legal consequences, including fines and, in serious cases, litigation.
Tax payers are responsible for self-assessment of their income and paying taxes accordingly. They have the facility to claim deductions and rebates as per the provisions of the tax laws.
Income tax applies to various sources of income, including salaries, business profits, capital gains, interest, dividends, rent and other sources.
Tax Deducted at Source (TDS)
TDS is a system of collecting income tax at the source of income itself. It is deducted by the payer (employer, customer, bank, etc.) while making specified payments like salary, interest, commission, rent, etc.
TDS is deducted as per the rates prescribed by the income tax authorities depending on the nature of payment and the status of the payer.
The TDS deducted is deposited with the government on behalf of the recipient. It acts as an advance tax payment towards the final tax liability of the recipient.
Both the deductor (payer) and the deductee (payer) have compliance obligations with respect to TDS.
The deductor is responsible for correctly deducting TDS and depositing it with the government, while the deductor can claim credit for the TDS deducted against his final tax liability.
Provides a TDS certificate to the deductor, which states the details of TDS deducted. This certificate is important for the deduction recipient while filing income tax return.
TDS is applicable on various payments exceeding the limits specified as per the Income Tax Act, such as salary, interest, rent, commission, professional fees, etc.
What is the main difference between Income Tax and TDS?
Time of Tax Collection: Income tax is paid directly to the government by the taxpayer after he earns the income, whereas TDS is deducted by the payer at the time of making the payment to the recipient.
Responsibility: Income tax payment and compliance are the responsibility of the taxpayer, while TDS deduction and deposit are the responsibilities of the deductor (payer).
Scope: Income tax applies to the total income earned during a financial year, while TDS applies only to specific types of payments in excess of specified limits.
Flexibility: Taxpayers have some flexibility in claiming deductions and exemptions while calculating income tax, while TDS is deducted at fixed rates without considering personal deductions.
Documentation: Income tax payments require filing returns and maintaining documents to support income, deductions and tax liabilities. Validating the deduction of TDS involves issuing and obtaining a TDS certificate.
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