Jayachandran/Mint
Jayachandran/Mint

How to avoid paying unnecessary TDS

Tax is deducted at source on almost all incomes. But if you qualify, you don't have to pay this. Here's how

With the new financial year (FY) underway, it’s time to do the necessary planning to manage income and investments. An important task on this list is to evaluate your expected total income for this financial year, FY17. If you expect it to remain above the taxable limit, you should invest in tax-saving products according to your requirements. If your income is below taxable limits or in a lower tax slab, avoid situations in which unnecessarily tax is deducted at source (TDS) on your income.

If you follow the correct procedures, which will depend upon the nature and source of income, you can avoid paying TDS to an extent. For instance, in the case of interest income from bank deposits, one can use forms 15G and 15H, as applicable, to avoid TDS. In fact, in Budget 2016, the government has extended the provision of furnishing these forms in case of rental income as well.

Let’s take a closer look at instances where you may be unnecessarily paying TDS, and how to avoid doing this.

What is TDS?

TDS is the process of collecting tax as and when income is generated. It streamlines the process of collecting taxes for the tax department. TDS is applicable on several incomes such as salary, interest, commission, rent, brokerage, professional fees, royalty, and others. It is deducted at the prescribed rate by the tax department if permanent account number (PAN) is provided by the recipient of the income or at the rate of 20% in absence of PAN, whichever is higher. The deductor is liable to remit the collected tax into the account of the central government.

The income-tax law prescribes a threshold limit for each source of income after which TDS will apply. For instance, according to section 192 of the income-tax Act, if your salary income is less than the maximum amount not chargeable to tax (2.5 lakh for an individual, 3 lakh for senior citizens and 5 lakh for very senior citizens), no TDS should be deducted on it by the employer. Similarly, according to section 194-I of the Act, rental income up to 1.8 lakh in a year is exempt from TDS.

However, many people have more than one source of income, for example, from rent and capital gains. Take into consideration your total income from all sources to evaluate the tax liability and accordingly decide if you need to do something to avoid TDS. You can also take into account various tax deductions and exemptions available to you while calculating the tax liability. Here’s an example. A senior citizen has a total annual income of 4.5 lakh, which includes 2.5 lakh as income from pension and 2 lakh as interest income. If she invests 1.5 lakh in instruments that qualify for tax deduction under section 80C, her taxable income comes down to 3 lakh. In such a case, she does not have to pay any tax, as incomes up to 3 lakh are exempt from tax for senior citizens. To avoid TDS on her income, she must give an application.

How to avoid TDS?

Under section 197 of the Act, if the estimated total income of an individual for a financial year is less than the minimum liable to income tax, TDS won’t apply to her income. Typically, when your primary source of income is salary, you can declare your other incomes and investments and expenses that qualify for tax deductions and exemptions to the employer. Depending on what you declare, the employer deducts TDS. However, before the financial year ends, you need to provide proof related to these. Apart from this, to avoid TDS on non-salary incomes, you need to follow some steps.

The steps involve submitting certain forms. Here’s more about them.

Forms 15G and 15H: These are essentially self-declaration forms for certain types of incomes—15G is for those younger than 60 years and 15H is for senior citizens—above 60 years of age. “Where source of income is ‘interest on securities’ or dividend or interest other than ‘interest on securities’ or, income in respect of units under section 197A, self-declaration in these forms can be submitted," said Neha Malhotra, executive director, Nangia & Co.

For example, on interest of 2 lakh from fixed deposits, TDS would be 20,000 (10% of the interest). But if you submit form 15G to the bank, thus declaring that this is your only income, you will not have to pay the TDS.

The provision to use these forms has now been extended to include rental income as well, effective from 1 June 2016. For instance, if a 70-year-old woman puts her shop on rent for 25,000 a month, the tenant needs to deduct TDS as the annual rent would be more than 1.8 lakh. In such a case, the tenant will deduct 2,500 (10% of rent paid) as TDS every month, or 30,000 a year. However, if the shop’s owner has mentioned rental income as her only source of income, then the entire 3 lakh is not taxable for the year. (Those who are 61-79 years old do not have to pay tax on income up to 3 lakh). She should give Form 15H to the tenant so that TDS is not deducted on the rent.

“The procedure for furnishing these forms has been revised with effect from 1 October 2015. Now the application can either be made in paper form or electronically," said Malhotra. Though there is no time limit prescribed for filing these, “it is recommended that it should be filed in the beginning of a financial year, i.e., in April, to avoid unnecessary deduction of TDS," added Malhotra.

You may need to give forms separately for different sources of income. For instance, if you have fixed deposits in three banks, you need to give form 15G or 15H to each bank.

Form 13: In case of incomes such as commission, lottery tickets or brokerage, one needs to use form 13. This has to be given to the income tax assessing officer (AO) to get a certificate authorising the person cutting TDS to deduct tax at a lower rate or not at all as may be appropriate. The AO may issue this certificate if she is convinced that the total income of the applicant justifies lower or no taxation.

“The certificate is valid only for the year for which it is given and the recipient may furnish its copies to the person responsible for paying the income to make sure that tax is deducted at lower or nil rate, as applicable," said Malhotra.

What should you do?

“Take utmost care before furnishing forms and certificates to avoid TDS," said Amit Maheshwari, managing partner, Ashok Maheshwary & Associates. A penalty applies if the tax department finds that the assessee is deliberately avoiding TDS to evade taxes. Moreover, “there is no provision in the income-tax Act regarding withdrawal of these forms," said Malhotra.

What if you have already submitted one of these forms for lower or no TDS, but realise later in the year that your income is more than what you have evaluated? In such a case, “you should do a self-assessment of the tax liability on the extra income and pay advance tax accordingly," said Maheswari.

For long duration products, such as a fixed deposit of three years, the forms have to be submitted every financial year. This is because while you will get the final interest only on maturity, TDS will be cut on the accrued interest for each year, even if it has not been paid to you.

The forms are easily available—on the tax department’s website, www.incometaxindia.gov.in, at bank and post office branches, and also with distributors of financial products—and can be submitted electronically.

So, while planning your investments for the year, pay attention to TDS as well and avoid paying this tax if you don’t need to.

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