Tuesday 5 November 2013

Link between TDS and actually saving tax on investments

Arnav Pandya There is often a lot of confusion in the minds of the investor about savings of tax and the way to go about it. One area where this leads to a lot of problems is that of Tax Deducted at Source (TDS) and it needs to be clarified so that the individual does not end up being a defaulter on the final amount of tax that he has to actually pay. Here is a closer look at the nature of the tax deducted at source and its link to the actual taxation.


Tax deducted at source The TDS represents the amount that is actually deducted by the person making a payment to someone else and then making the net payment. The amount that is deducted is paid to the government as the tax. For example take a situation where there is a fixed deposit kept with a bank.

If the bank pays an interest of say Rs 20,000 then it would have to deduct tax on the payment and assuming that 10 percent is deducted (without considering cess for ease of understanding) then the bank will pay the net interest of Rs 18,000 to the individual. The Rs 2,000 that it has deducted from this figure will be deposited with the government against the name of the depositor so it will reflect as it the person has paid the required amount of tax on the earnings made. Conditions


There are certain conditions that need to be fulfilled for the TDS to come into action so for example the base would start with the fact that the income crosses a certain limit. This is done to ensure that the TDS is done only for certain items where the income is high. Continuing with the previous example, the limit for enacting TDS in fixed deposits is Rs 10,000 per bank per branch. Hence, the bank will deduct the figure only when the income of the individual has crossed this figure. Often individuals undertake a lot of effort to ensure that they fall outside the TDS net but in effect this is a pointless exercise unless the person has a zero rate of tax to be paid.


Actual liability The reason why trying to save oneself from TDS is pointless is due to the fact that this does not alter the actual nature of taxation on the individual. This means that the actual taxability of the income of the individual is a separate matter and has no link with the TDS so saving some amounts on TDS will not reduce the overall tax liability for the individual.

The only exception is where the final rate of tax is zero so saving TDS will not have any net impact. The final tax liability remains and the TDS has to be seen as a means of fulfilling the total tax liability. In the case of the fixed deposits the income earned from the deposit is taxed right from the first rupee. The rate applicable for the tax would be the rate under which the income will fall for the individual. So if the person is already in the 30 per cent slab then the added income from the fixed deposit will be taxed at that particular rate.


The good thing in the case of the total tax liability and the TDS is that the latter is counted as part of the tax paid. When the final calculation is made, it is only the net figure that remains to be paid. The individual thus has to be very careful when they look at the position and they must ensure that their total tax obligation is met. Not suffering any TDS does not mean that the actual liability goes away as this will remain till it is fulfilled.





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