New to tax terms? Know the difference between income tax and TDS

Income Tax vs TDS: Are you new to the concepts of income tax and tax deducted at source (TDS)? While they may seem alike, experts emphasise differences in their application and mechanisms.

What exactly is income tax, and how does it work?

Income Tax pertains to the tax levied on an individual's or entity's annual income as per the provisions of the Income Tax Act of 1961. This tax is calculated based on various sources of income, such as salary, property income, business profits, and capital gains. Essentially, it is the tax paid by taxpayers on their overall earnings, with a threshold for liability set at Rs. 2.5 lakhs (under the old regime) or Rs. 3 lakhs (under the new regime). Failure to comply with income tax obligations can result in penalties under the law.

What is TDS and how does it function?

In contrast, TDS involves the deduction of tax at the source of income before payment is made to the recipient. This system is designed to ensure that tax is collected throughout the year from various income sources like salaries, interest, rent, and professional fees. By deducting a predetermined percentage at the source, TDS aims to prevent tax evasion and streamline the collection process by directly remitting the deducted amount to the government.

Key differences in income tax and TDS

Income Tax Return (ITR) filing is obligatory for individuals whose annual income surpasses Rs 2.5 lakh under the old tax regime or Rs 3 lakh under the new tax regime. However, senior citizens aged between 60 and 80 years must file if their income exceeds Rs 3 lakh, while those aged above 80 years are required to file if their income exceeds Rs 5 lakh.

Tax Deducted at Source (TDS) is applicable across various financial transactions as mandated by tax regulations. This includes salary payments, earnings from investments and rent, proceeds from winning contests, lotteries, gambling, prize money, riddles, and similar activities. Additionally, TDS is deducted from commissions earned from insurance, payments made to contractors, brokerage, commissions, and other professional fees. Payments related to the National Savings Scheme and various other sources are also subject to TDS deductions.