TDS and Financial Planning: How TDS impacts your investments and taxes

TDS is an initiative by the Income Tax Department that involves collecting taxes from the source of income. It is applicable to a wide range of income categories- from FDs and vendor payments to salary payments. 

Under this mechanism, the payer is liable to deposit a portion of the amount payable as tax with the central government. The motive behind this is to collect taxes on time and prevent tax evasion.

Hence, understanding TDS becomes quite important for businesses and individuals when looking to save tax. Additionally, the concept of TDS becomes important for investors as it affects the return on investment, especially on SIPs and EMIs.

This article delves deep into the full form of TDS, its definition, and how efficiently individuals can manage their TDS liabilities.

What is TDS?

The full form of TDS is Tax Deducted at Source. It is a system wherein a person can pay advance tax to avoid accumulating taxes at the end of the financial year. In layman’s terms, instead of making a direct payment, TDS is a way of paying taxes through one’s monthly income, which is deducted by the employer or the source of income.

Such a system provides a way of collecting taxes, which is useful in decreasing tax evasion and also helps individuals and businesses manage their annual taxes as they earn.

TDS is deducted from the payments such as interest payments by banks, salaries, rent payments, commission payments, professional fees and consultation fees.

Please note that individuals do not need to deduct TDS while paying rent or fees to professionals like doctors and lawyers.

The source or employer who deducts taxes should:

• Update the Tax Deduction Account Number of employees and deduct the applicable taxes according to the prescribed rate.
• Deposit the taxes with the Government and file returns within the specified due date.
• Grant a TDS certificate to the employee/earner as proof of tax paid for the particular assessment year.

Applicability of TDS and TDS Rates

TDS applies to about 20-25 types of income that are transacted; some of the most significant ones are presented in a tabular form:

Income Tax Act (Section)	TDS Applicability	Details	Rate%
Section 192	From Individual Salaries	The employer deducts TDS from an employee’s salary, depending upon one’s income tax slab.	No specific percentage is set for such deductions, as the tax rate depends on the salary earned. For instance, a person earning below ₹2.5 lakhs per year has no TDS, while a person earning above ₹10 lakhs would fall into a higher slab.
Sec 194 A	Interest Income	Banks and other financial institutions shall deduct TDS on interest on fixed deposits.	10% Note: If the interest earned on FD in one financial year exceeds ₹40,000, banks deduct 10% of TDS.
Sec 194	Dividend Earned	Paid to shareholders and TDS is deducted if it crosses the limit.	10% Note: A company can deduct 10% of TDS of dividends paid to the shareholders if the amount exceeds ₹5,000 in a financial year.
Sec 194 I	Rent Earned	TDS is deducted from rents for both residential and commercial properties.	For resdential property, 10% in case rental payments exceed ₹ 2.4 lakh per annum as per section 194I of the ITA For commercial spaces, 2% from plant, machinery, or equipment and 10% from furniture or fixtures, land and buildings
Sec 194 J	Payment of Professional Fees	In the case of freelancers and consultants	10% if a professional exceeds ₹30,000 in a financial year
Sec 194H	Commission Payments	Any form of brokerage or commission earned	5% TDS levies on sales over ₹50 lakhs under section 194IA

TDS Due Dates and Compliance

The government has fixed dates for TDS payment and return filing. Some important due dates are:

Transactions	Due Dates
TDS on all payments, excluding salaries	Quarter 1: 31st July  Quarter 2: 31st October  Quarter 3: 31st January  Quarter 4: 31st May
TDS on salary	Quarter 1: 31st July  Quarter 2: 31st October  Quarter 3: 31st January  Quarter 4: 31st May
TDS on all payments made to NRIs (excluding salaries)	Quarter 1: 31st July  Quarter 2: 31st October  Quarter 3: 31st January  Quarter 4: 31st May
TDS on sale of property	30 days from the end of the month when TDS is deducted
TDS on rent	30 days from the end of the month when TDS is deducted

How TDS Affects SIPs, EMIs, and Other Financial Products

Here is how TDS affects some of the most popular investment options and financial products:

1. TDS and Systematic Investment Plans (SIPs)

Based on the income, TDS applies as follows:

• If the dividends earned on dividend plans exceed ₹5,000 in a financial year, 10% TDS is deducted.
• TDS is not directly deducted from the capital gains made from the sale of mutual fund units. However, capital gains at redemption are subject to capital gains tax.
• Equity-oriented mutual funds have capital gains. They are short-term capital gains (STCG) if the tenure is less than 12 months and long-term capital gains (LTCG) if it is more than 12 months. STCG is taxed at 15%, and LTCG is taxed at 10% if the gain exceeds ₹ 1 lakh.
• Short-term gains on debt mutual funds are tax-deductible according to an individual’s income tax slab. The long-term capital gain is calculated at 20%.

2. TDS and Fixed Deposits

Fixed deposits are among the most secure investment instruments in India, as they ensure guaranteed returns. TDS is calculated based on net returns from fixed deposits.

For all those who receive interest on FDs, banks or financial institutions will deduct TDS at 10% once it exceeds the limit of ₹40,000 in one financial year. For senior citizens, this amount is ₹50,000. However, if individuals have not provided their PAN to the bank, then TDS will be deducted at 20%.

3. Form 15G/15H for Non-deduction of TDS

If your total income is below the taxable limit, you can forward Form 15G [for below 60 years] or Form 15H [for senior citizens]. This will ensure that TDS on your interest income is not deducted from your account.

Note: This applies only when the interest income is the only source of income and is below the taxable limit.

4. TDS on Equated Monthly Instalments (EMIs)

EMIs are the monthly repayments borrowers make towards the repayment of a loan. TDS may also apply to the interest component of the loan in certain cases:

TDS on Loan Repayment to NRI: For example, if one pays interest on a loan to an NRI lender, the TDS would apply to the interest part of the EMI.

How to Minimise TDS on Investments

Some ways to reduce TDS on investments and make the process of taxation efficient are as follows:

1. Provide PAN details to financial institutions. If the income is below the taxation limit, individuals must submit Form 15G or 15H to avoid TDS.
2. A splitting of investments across banks or other different financial institutions will also help to avoid TDS on FDs.
3. Investors are encouraged to keep a check on Form 26AS for all TDS deductions to ensure they have been deposited with the government.
4. A tax exemption is provided under Sec 80C of the I-T Act on ELSS investments made via SIPs.

Relevance of TDS in Personal Financial Management

Here are reasons why TDS is important in personal financial management:

1. The most important purpose that TDS helps in is the timely collection of taxes at the source of the income. Moreover, it reduces the tax burden of individuals and motivates them to keep a check on their financial reports. Thus, it is advantageous for both the government and the taxpayer.
2. Cash-flow management perhaps plays a paramount role in financial planning for salaried individuals, business owners, and investors alike. In TDS, the taxpayer can have an idea about their present tax obligation. Such clarity of deductions allows one to plan one’s monthly or quarterly finances better.
3. TDS avoids tax evasion by collecting tax at the source itself.
4. TDS deductions make filing taxes yearly quite easy. They keep a neat record of the amount of taxes one has already paid during the financial year. The details of TDS deductions are reflected in Form 26AS, the Consolidated Tax Statement showing all the TDS deducted from income and deposited with the government.
5. Under many circumstances, individual ends up paying more TDS compared to their actual liability. In such cases, TDS has an effective mechanism for income tax refunds.
6. Penalties and interest, even legal repercussions may be attracted in case of non-compliance with TDS laws.
7. TDS is also educational as it includes various sources of income that are liable to be taxed. This motivates taxpayers to keep their books of accounts up to date.

Conclusion

TDS serves as one of the strongest pillars of the Indian taxation system by ensuring timely collection and minimising leakage through evasion. Most income-generating streams, such as salary, interest, dividends, professional fees, etc., attract the levy of TDS.

Therefore, it would be pivotal for any investor to understand the function that TDS plays in financial products, including SIPs, fixed deposits, and EMIs, to plan taxes and manage portfolios successfully.