Simply Put: TDS vs Total Tax Liability

Vishal Balabhadruni |BL Research Bureau | Updated on: Jul 23, 2022

TDS doesn’t mean all that you are obliged to pay has been paid 

Two friends meet at a bowling alley and the following conversation regarding Income tax happens

Abhay: Hey Vasu did you file your IT returns? The July 31 due date is fast approaching.

Vasu: I have not filed it yet, but I do not understand the fuss around it. My employer deducts TDS and deposits it with the government so how does it matter if I file return or not, the purpose is served right?

Abhay: Deduction of TDS does not absolve you from the responsibility of filing income tax returns.

Vasu: Why not? The tax is paid from my end.

Abhay: For starters, IT return is a statement where you declare all the income earned in the year and calculate the tax liability on it and ensure that it is paid to the authority. Second, I have got a feeling that you do not know the difference between Tax Deducted at Source (TDS) and the total income tax liability, am I right?

Vasu: Is there a difference? If TDS is not Income tax, then why is it deducted from our receivables?

Abhay: Tax deducted at source, as the name suggests, is a deduction made by the employer/payer/customer on specific amount paid to you. Few examples can be TDS on salary for the employees whose income is higher than the exemption limit. Banks and financial institutions also deduct TDS (at the rate of 10 per cent) on interest due to the depositor if the interest exceeds ₹40,000. Tenants also need to deduct TDS at 10 per cent if they are paying annual rent worth more than ₹2.4 lakh. Income tax, on the other hand, is the tax liability on the total income of the assessee earned in the year. 

Vasu: Ok. But can you clearly explain the difference between TDS and income tax?

Abhay: Income tax rate applicable will based on what slab your income falls in, which can go much higher than the 10 per cent TDS that is deducted on your salary or interest income.

So TDS does not amount to tax deducted on total income. Deductions at prescribed rates are made while paying the sum to the assessee. Therefore, the taxpayer must calculate the total income tax liability and check whether TDS is less than, more than or same as the tax liability calculated. In case it is equal then filing return will be sufficient. If the TDS is less than the tax liability, then additional amount must be paid.

Vasu: What if TDS deducted is more than our actual tax liability and what are the other benefits of filing returns?

Abhay: In that case, taxpayer can claim refund which is possible only by filing the returns. Filing returns has quite a few benefits it is required for loan application, it is required by many embassies in case one applies for visa. Filing returns also help you to carry forward losses from business or profession to set off next year.

Vasu: Great.. I will file my returns and ensure I am compliant.

Abhay: Good, now that I have saved you from being non-compliant, our dinner is on you.

Published on July 23, 2022
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