• Notification Date: 19-02-2024
• Notification No: N/A

Understanding Taxation In India Ahead Of ITR 2024: Differentiating Between Income Tax And TDS

Income Tax and Tax Deducted at Source (TDS) are two terms that often perplex taxpayers. While they may seem similar, a profound distinction exists between the two. Let's delve into the intricacies of Income Tax and TDS to decipher their roles, mechanisms, and implications for the common taxpayer.

Income Tax is a levy imposed on an individual's or company's annual earnings during the fiscal year. Governed by the Income Tax Act of 1961, this tax encompasses various income sources such as salary, income from house property, profits from business or profession, and capital gains. It is crucial to note that any individual earning above Rs 2.5 lakhs (in the old tax regime) or Rs 3 lakhs (in the new tax regime) is obligated to pay Income Tax. Failure to do so is considered tax evasion, punishable under the law.

On the other hand, Tax Deducted at Source (TDS) operates as a preemptive measure to curb tax evasion. This system mandates individuals or organizations making specified payments-such as salary, interest, rent, or professional fees-to deduct a predetermined tax percentage before disbursing the payment. This deducted amount is then promptly remitted to the government. TDS simplifies the tax collection process and acts as a shield against potential evasion.

Breaking Down Income Tax and TDS Components:

Income Tax Return (ITR):

Individuals with an annual income exceeding Rs 2.5 lakhs (in the old tax regime) or Rs 3 lakhs (in the new tax regime) are required to file Income Tax Returns. For senior citizens aged between 60 and 80 years,the limit is Rs 3 Lakhs. Senior citizens above 80 years have a higher threshold of Rs 5 Lakhs.

Tax Deducted at Source (TDS):

TDS is deducted from various income sources throughout the year, including salary, investments, rent, contest winnings, lotteries, gambling proceeds, prize money, and professional fees.

Payments related to the National Savings Scheme and other sources are also subject to TDS. 

Major Differences Between TDS and Income Tax: 
Collection Mechanism: 
TDS is deducted periodically at the source of income by the payer (employer or financial institution) and promptly remitted to the government. Income Tax, in contrast, is paid by the taxpayer at the conclusion of the financial year after calculating the tax liability.
 

Tax Rate Determination:
TDS tax rates are predetermined by the government based on the nature of the payment, with no intervention from the payer. Income Tax rates, on the other hand, are determined by income slabs outlined in the Tax Laws. 

Applicability: 
TDS is applicable to specific payments like salary, interest, rent, professional fees, etc. Income Tax, however, is levied on the total annual income, encompassing salary, capital gains, and other sources. Understanding the distinction between Income Tax and TDS is crucial for every taxpayer. Income Tax necessitates a proactive approach, requiring individuals to compute their tax liability and fulfil their obligations at the end of the financial year. On the flip side, TDS operates as a safeguard mechanism, ensuring that tax deductions are made at the source, leaving less room for evasion. While Income Tax and TDS serve different purposes, they both contribute to the overall revenue collection and governance of the country. It is imperative for taxpayers to stay informed about these nuances to fulfil their responsibilities and avoid legal repercussions.