Confused about TDS and Income Tax? You’re not alone! When dealing with taxes in India, these two common terms often create confusion. While both are related to your income and taxation, they are not the same. Think of TDS as a sneak peek of your Income Tax, deducted upfront when you receive certain payments. Income Tax, on the other hand, is the final tax you owe on all your earnings for the year. Understanding how they differ is key to managing your taxes smoothly. Here’s a breakdown of their key differences:
1) Meaning
TDS (Tax Deducted at Source): It is a mechanism where tax is deducted at the time of earning income. For example, your employer deducts TDS from your salary before crediting it to your account.
Income Tax: It is the total tax liability calculated on your total taxable income for the financial year. This includes income from all sources (salary, business, interest, etc.).
2) Who pays it?
Tax Deducted at Source is deducted and deposited by the payer (e.g., employer, bank, tenant) on your behalf.
Income Tax is paid directly by the taxpayer (you) either through self-assessment tax or advance tax.
3) Timing
TDS is collected periodically throughout the year at the time of payment (monthly salary, interest payments, etc.).
Income Tax is paid at the end of the financial year, during tax filing, after adjusting for TDS and other tax credits.
4) Purpose
TDS ensures regular flow of revenue to the government and reduces chances of tax evasion.
Income Tax fulfills the final tax liability for the year, after accounting for all deductions, exemptions, and TDS.
5) Refund Scenario
If more TDS is deducted than your actual tax liability, you can claim a refund when filing your ITR.
Income Tax: If TDS is less than your actual liability, you must pay the balance as self-assessment tax.
6) Rates
TDS rates are fixed by the government based on the nature of the payment.
Income Tax rates are based on income tax slabs defined by the government, which vary depending on the individual’s income level and age.
7) Relevance to ITR
The TDS deducted is reflected in Form 26AS and can be claimed as a credit against the individual’s final income tax liability when filing the Income Tax Return. If the TDS amount exceeds the total tax liability, a refund can be claimed.
Filing an Income Tax Return (ITR) is mandatory for individuals whose income exceeds a certain threshold. The ITR provides a detailed account of the individual’s income, deductions, and tax liability. The TDS already deducted is adjusted against this final liability.
Here’s a table summarising the key differences
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