How is Tax Deducted At Source For An Income?

A tax that is payable to the Government is deducted by the person who is making the payment, before transferring the money. The tax deducted at the source can be claimed as a refund if the person whose tax has been deducted is not eligible to pay tax. The provisions of the Income Tax Act 1961 is applicable to TDS.

Definition of Tax Deducted At Source

The Tax Deducted at Source, popularly abbreviated as TDS is the procedure of collecting the tax from the source of income. Under the procedure of deducting the TDS, the person liable to deduct the tax is known as a deductor and the deduction should be made in a specified way.

TDS or Tax Deducted at Source is income tax deducted from the money paid at the time of making designated amounts such as rent, work, professional fees, wages, interest etc. by the deductors making such payments.

Generally, the person receiving income is liable to pay income tax, but it is the policy implemented by the government the provision of TDS makes sure that income tax is deducted before the payments being made by the assessee.

What is the procedure to deduct a TDS?

When a TDS is deducted from the income, it follows the provisions under the Income Tax Act 1961:

● Sec. 194A:

As per the provision of Sec. 194A, when the assessee is unaware of the identity of the lender and other details regarding such lender, it shall not get tax-deductible under the section. In such a situation the assessee can not be compelled to deduct tax under any provision.

Due to uniformity in all the expressions under Sec. 194A, the Legislature used the word within limitations. As per the provision, the corporations established by the Central, State or Provincial Act are entitled to get exemption from tax under the said section. It is also exempted in case of any interest other than interest on securities.

If the assessee is a co-operative society which has been formed for the welfare of the employees, and the assessee was involved in a banking business through the co-operative society; as per the amendment in 2015 to Sec. 194A, the assessee is not supposed to deduct tax at source from the time payment of interest on time deposits.

When the interest was charged, for the actual period of delay, it means from the date on which tax was deducted and till date on which tax was deposited, if there has been a gap of more than one month; as per the provision of Sec. 194A.

The provision under Sec. 194A of the Act is strict liability. There is no exemption is available in respect of any interest paid to the sister concerns. When there is a lease agreement between the assessee and the lessor, and the assessee has paid the amount payable as considerable, no matter even if it is a lump sum one, is eligible to tax deduction.

If the interest paid to the banks which are situated in India, not in any foreign country, and the payments of such interests are paid in Indian currency, not in any foreign currency; then such payment of interest is exempted from the provision of tax deducted at source as per the provision of Sec. 194A. The primary agricultural credit societies shall be entitled to tax benefits. The sum accrued as interest credited or paid in respect of the deposits shall be eligible to get a tax deduction at source.

● Sec. 194C(1):

As per Sec. 194C(1) of the Act, any person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract between the contractor and the specified person is required at the time of credit of such sum in the account of the contractor or at the time of payment to deduct tax at a specified rate. Therefore, it is clear that the payment must be made to a contractee by the contractor, and in the case of the government license fee, it is vice versa which does not make such payment liable to get tax deducted at source.

When there is an agreement between the company and the assessee that the freight payment would be made by the company and the tax deduction at source would be made by the company, following the provision of Sec. 194C, the tax shall be deducted at source on the event of payment is made.

The outsourced works, which are non-technical in nature, fall under the definition of the 'works contract'. Therefore, payments made for such works are eligible to get tax deducted at source following the provision of Sec. 194C.

When the assessee and company has an agreement with a carrier or transportation company for providing trucks for carrying the products so manufactured, it is in the nature of a 'works contract'. Thus, it is liable to get tax deducted at source under Sec. 194C.

The service by a transport company to take the manufactured products from one place to another does not require any technical skill. It basically falls under the definition of 'works contract' which is taxable under the provision of Sec. 194C.

The payments made by the assessee for programme software purchase, equipment hire charge, and other production-related expenses excluding dubbing and processing charges, are included under the 'works contract' under the provision of Sec. 194C. If the assessee did not involve any contractor, directly involved the casual labours, and there is no specific contract between the assessee and the specified persons for carrying out any work, as it says in Sec. 194C, it shall not be taxable under the provision of the Act.

For a payment to be eligible for tax deducted at source, it is necessary to be made for carrying out 'any work'. Any kind of work which has been carried out in pursuance of a contract between the contractor and the person concerned shall be liable to get tax deducted at source under the provision of Sec. 194C of Income Tax Act 1961.

● Sec, 194I

The assessee company paying off the lease premium is in the nature of advance rent paid. The lease deed gives the assessee permission to sell and mortgage, assign, sublet or part with possession of premises. The lease payment made was for the acquisition of rights in land and not for merely the use of land. Thus, the payment is eligible to get tax deducted under Sec. 194-I of the Act.

The payment received in sub-let of property is in nature of 'rent'. In a sublet, the person is taking a particular space for a purpose of using it for a business or residential purpose. Therefore, such payment received shall get tax deducted following the provision of Sec. 194-I of the Act.

When the assessee company entered into the contract with the carrier for providing trucks for transportation of products, it is not in the nature of 'rent', rather it is a 'works contract'. Therefore, the tax is to be deducted under Sec. 194C, not under Sec. 194-I of the Act.

For the application of the provision of Sec. 194-I of the Act, the payment should be in nature of rent for the use of land of building and mere incidental or insignificant use of the same while providing other facilities and services. In the passenger service fee, none of the stated factors is applicable. Thus, tax shall not be eligible to get deducted under Sec. 194-I of the Act.

The basic rule followed by the income tax laws in India is that the tax shall be levied only on the income. When there is no element of profit, then in such case, no question of deducting tax under the provision of Sec. 194-I of the Act.

The licensee fee paid to the Airport Authority of India in terms of an agreement for the purpose of operating an executive lounge to all operating airlines. Payment for use of space was inseparable from payment of royalty for the right to operate the lounge. The payment falls within the definition of 'rent' under the provision of Sec. 194-I of the Act.

The assessee is the owner of the property by nature but is not the absolute owner. His ownership is limited to a percentage of the right in the property. The assessee collects the rent payable with respect to the property in its entirety and thereafter has passed on the rent including the amount deducted on account of the tax to the other co-owners. Therefore, such tax shall be eligible to get deducted under the provision of Sec. 194-I of the Act.

● Sec. 194J

Section 194J states that any person who is paying fees to any resident person for specified services, then TDS is required to be deducted u/s 194.

The phenomenon of tax deducted at source is totally on income. If any payment does not constitute an income, will not attract the tax deducted at source. For example, an employee has provided certain technical services for the company, for which he had to travel to another country. The travel and lodging expenses of the person were reimbursed by the company. There will be no tax deducted at source on this payment received, as it is not a part of his income.

In several cases where such a situation occurred, the court followed this principle to pass its order, where no income is embedded.

It often raises confusion, as there is a contract to perform work, thus the type of relation prevails can be considered as 'works contract' as per Sec. 194C; but on the other hand, it involves certain technical skills too, which brings the service under the purview of Sec. 194J. The law decided to give priority to the type of skill required to perform the work for which the contract is made.

Thus, technical skills being involved in performing the work, the tax deducted for such work, follows the principle of Sec. 194J, as technical service fees. The Courts opined that the nature of the work must get more importance. Thus any work which involves technical skills, even if the agreements are in nature of 'works contract' shall follow the principle of Sec. 194J to deduct tax at the source.

Basically managerial and consultancy services are such performances which involve handling the requirements and needs of the consumers along with the technical services which are to be provided.

Here the law has categorized the managerial and consultancy service as part of technical service because even if such service involves providing service only to the special need of the customers, such persons providing the consultancy services need to possess technical knowledge and skills, then only they can provide proper service as required to make a customer satisfied.

Thus, such a kind of service involves enough technical skills, which makes such services eligible to deduct tax at source under Sec. 194J.

What is TDS return?

If an assessee pays more tax than the eligible or applicable tax, can claim a tax refund. The taxpayer can file for the TDS return along with the annual income tax return, and the refund shall be credited to the registered bank account.