Income tax rules in the country keep changing from time to time for the betterment of the overall economy. Recently rules for collection and deduction of tax at source have been amended in the Finance Act 2021. Let’s take a detailed look at the changes that are made to TDS rules.
What is Tax Deducted at Source?
Tax Deducted at Source (TDS) is the collection of tax at the very source of income. That means the person who is paying you is required to deduct tax at the time of payment at a specified rate under the Income Tax Act, 1961, and remit the amount collected to the central government. The main objective of deducting the tax at source is to ensure there is no tax evasion or to reduce the tax evasion.
Existing rates of TDS
Tax is deducted at source for various categories of incomes at different rates. Some of the transactions that qualify for tax deduction are Monthly salary payout, Interest earned on fixed deposit exceeding INR 10,000, Dividend income above INR 5,000, Monthly rent above INR 50,000, Contract payments exceeding INR 30,000, Technical and professional service fee above INR 30,000, and Sale of building or land amounting above INR 50,00,000, etc. The rate of TDS on salary applicable also varies depending on the category of income. TDS on salary rate applicable on payment of accumulated provident fund balance is 10%, on interest on securities is 10%, and 1% on the sale of immovable property (on the sales consideration), etc.
New TDS rule
The New TDS rule is applicable from 1st July 2021 mandates collection and deduction of tax at source at higher rates when income tax return filing is not done by some specified persons. As per the new provisions, the person who deducts or collects tax needs to check whether the person earning the income (on which TDS is applicable) has filed the income tax return or not for the last two years. This rule is applicable when the amount of TDS is more than INR 50,000. As the new TDS rule is coming into effect from 1st July, income tax returns for the financial year 2018-19 and 2019-20 would be checked by the tax collector/deductor when the amount of TDS on salary is INR 50,000 or more.
As per the new TDS on salary rule, the rate applicable for the non-filers of the income tax returns for the last two years would be as follows
- Double the specified rate of TDS as per the applicable provisions of the Income Tax Act, 1961, or
- Double the rates in force, or
- At 5%
Change in TDS norms comes into effect with an aim to make the society more tax compliant and to reduce the evasion of tax. This will also help the businesses to keep a check on compliance. If you are tax compliant you can avoid paying a higher rate of TDS on salary applicable under the new TDS rule.
What is the impact of the new TDS rule on salary?
Salary income attracts TDS according to income tax rates applicable to the income slab. However, it is important to note that the new TDS rule excludes some of the income categories. Salary income (section 192), TDS deductible on horse racing (section 194BB), TDS applicable on the lottery (194B), and payment of provident fund balance (192A) and cash withdrawals (section 194N) is the income categories that are excluded from new TDS on salary rules. That means a new tax norm that states non-filers of the income tax return for the previous two financial years are subjected to a higher rate of tax collected at source (TCS) and tax deducted at source (TDS) is not applicable for the salary income.
CBDT (Central Board of Direct Taxes) has introduced this new tax norm to ease tax deductor’s compliance burden. ‘Compliance check for Section 206 CCA and 206AB’ is a new functionality inserted in the Income Tax Act, 1961 which is applicable to non-filers of income tax with effect from 1st July of 2021.
How does this new functionality tool work?
The tax collector or tax deductor can search with the single PAN of the collectee or deductee on the income tax portal to check if such specified deductee/collectee is subjected to the higher rate of tax collected at source (TCS) or tax deducted at source (TDS). Search result/response for the search can also be downloaded in PDF format for the reference. Bulk search with multiple PAN numbers can also be done by tax collectors or tax deductors. Search result comes in a downloadable file which can be saved for the record.
To sum up, it is important to be tax compliant as a responsible citizen of the country. File your income tax returns on time to avoid being subjected to higher rates of tax deducted at source and tax collected at source.