Understanding tax can be complicated, which is why some people get confused between Tax Deducted at Source and Income Tax. Do you also use both terms interchangeably? You need to know the difference between the two. Read further to understand these terms.
Every individual who earns income or buys a product or uses a service has to pay tax. Unfortunately, very few people are aware of the tax system in India. As a taxpayer, you must know that the money you pay as a tax is used by the Government for the nation's growth. The cost of running an economy with a population of billions is humungous. By paying taxes, you are in a way contributing to various welfare schemes, improved healthcare, quality education, among others. Income tax is a broad category, and many people think that it is the same as Tax Deducted at Source (TDS).
So, if you are a salaried individual or self-employed, you must know that there is a difference between TDS and income tax. Both of these terms serve distinct purposes. Let us get to know the difference between TDS and income tax.
- Income tax consists of direct and indirect taxes. Direct Tax is the one where you pay tax to the Government from your income and it applies to profits made by corporates. In contrast, Indirect Tax or Goods and Services Tax (GST) is levied on whatever products or services you buy, such as restaurant bills, VAT, movie tickets, etc.
- Any person who receives an amount above the threshold limit is levied with TDS. The company or a person that makes the payment is called the deductor, and the person who gets the amount is called the deductee.
- Every individual (resident or non-resident) is liable to pay income tax every year based on the tax slab rates. It represents the total tax liability. In TDS, the tax is deducted at the source by the deductor periodically in a year.
- TDS is levied on interest payments by the banks, rent payments, consultation fees, salaries, commission payments and professional fees. On the other hand, every individual is taxed differently based on his/her income under Income Tax laws. It can be income from salary, house property, business and capital gains. It consists of slab rates which are divided into four groups:
- Individuals earning up to Rs 2.5 lakh
- Individuals earning between Rs 2.5 lakh and Rs 5 lakh
- Individuals earning between Rs 5 lakh and Rs 10 lakh
- Those earning more than Rs 10 lakh
- Every individual has to mandatorily file for an Income Tax Return or ITR each year. ITR is a practice where the IT Department assesses your income and tax applicable to it. In the case of TDS, the returns are filed quarterly. You can file for TDS return if your total income in a year is less than the taxable limit.
- As per the Income Tax Act, individuals who earn an annual income of up to Rs 2.5 lakh do not have to pay taxes. For senior citizens, the income tax exemption is valid if their income-earning is up to Rs 3 lakh in a year. Similarly, TDS exemption is provided for the above earners if you provide a declaration under Section 15G/15H at the beginning of the financial year.
These are some of the major differences between TDS and Income Tax. When you start paying your taxes, make sure you give as much importance to Income Tax as to TDS in the coming financial year.