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How to get the basics on TDS right
January, 17th 2007

Most individuals are concerned about the extent of tax that has to be paid on income earned. This tax has to be paid at either of the two stages that are outlined under the Income-Tax Act. The first stage is at the time of payment, when a part of the amount is deducted at source and hence, the receiver gets only the net amount.

The second stage depends upon the receiver of income who decides to pay either an advance tax or a self-assessment tax and this completes the tax payment requirements. There is a tax deducted at source (TDS) provision for income received by professionals. Lets examine how this operates.

Income from profession

When professionals receive income from several sources, tax is deducted at source on the amount received. Several conditions have to be fulfiled for the tax to be deducted. The first point to note is the type of entities or individuals who have to undertake the required TDS. This takes place only when fees for professional services are paid to a resident.

The main question at this stage is about who has to deduct the tax. This depends upon who is the payer of the required amount. In this case, individuals and Hindu Undivided Families (HUFs) do not have to deduct tax at source for professional fees if their books are not required to be audited under the provisions of law. Hence, someone who has no professional income above Rs 10 lakh does not have to deduct tax at source when paying professional fees.

Another distinction has to be made when payment is made by an individual or an HUF when their books are audited. If the payment by such a person is for personal purposes, there is no TDS; the deduction occurs only when the payment is not for personal purposes. Other entities or persons deduct the necessary tax.

Payment details

There are two angles to TDS. First concerns the accounting for the tax deducted and the payment for this to the government. Second relates to the role played by the receiver of money after deduction of tax. The amount received is a net figure, but in various tax calculations, the gross income has to be considered and then accounted for TDS. The deduction of tax in such a situation is made at 5% plus surcharge and cess, and this is the figure to be used for various calculations. By checking this figure, the receiver can find out whether the deduction has been made or not.
The limit

The key point here is to determine the limit above which the actual deduction takes place. The annual limit for deduction is Rs 20,000 in terms of fees for professional payment. This is not a one-time payment limit, but is a limit for the sum of all payments received during the year.

Thus, if there are payments for professional work amounting to Rs 10,000 and Rs 5,000 on two occasions during a year, there is no need for TDS on the payments. However, if there are payments of Rs 10,000 and Rs 15,000 during the year, then TDS will come into the picture because the total payment exceeds Rs 20,000.

The composition of the amount eligible for deduction includes the amount of fees for professional services and not reimbursement of expenses. Hence, there has to be a clear distinction between the fees and the expenses reimbursed, else TDS will be incurred on the entire amount.

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