What is TDS and why it is deducted?

What is TDS and why it is deducted?

TDS stands for Tax Deducted at Source. It is a mechanism implemented by tax authorities in many countries to collect income tax at the source of income itself. Under TDS, a certain percentage of payment is deducted by the payer (referred to as the “deductor”) and remitted to the government as tax on behalf of the recipient (referred to as the “deductee”).

TDS is deducted to ensure a steady and regular collection of tax throughout the financial year, rather than relying solely on the deduction at the time of filing the annual tax return. It helps in preventing tax evasion, ensuring a steady revenue stream for the government, and reducing the burden on taxpayers.

TDS is typically applicable on various types of payments, including salaries, interest, professional fees, rent, commission, dividends, and more. The rates at which TDS is deducted vary depending on the nature of payment and the applicable tax laws. The deductor is responsible for deducting TDS, issuing TDS certificates (Form 16 or Form 16A), and depositing the deducted amount with the tax authorities.

The deductee, on the other hand, can claim credit for the TDS deducted while filing their tax return, which reduces their overall tax liability.

It is important for both deductors and deductees to comply with TDS regulations to avoid penalties and ensure accurate tax reporting and payment.

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