When and how much tax is deducted at source?

Caution teaches us to never count our chickens before they are hatched. When it comes to income tax, you shouldn't be too sure even after they've been hatched because the taxman is quite likely to walk away with some.Whenever you invest your hard-earned money or make a profit, don't assume that you will be entitled to receive the full amount or returns. The taxman is waiting to snip away at your earnings, and to make sure you don't turn into an evader, knowingly or unknowingly, the tax will be cut at source, even before you get the money.

The tax deducted at source, or TDS, as it is more commonly known, is applicable on earnings from various financial instruments, which range from the interest earned from bank accounts to rental income. Here's a guide to help you know when TDS is applicable.

When is tax deducted at source?

There is no uniform rate for TDS. The amount of tax deducted depends on the source of earnings. So, it can range from 1% for sale proceeds from selling a house, to 30% for winnings from a horse race. Here's a look at how much TDS is cut from your earnings.

Salary

This is probably your first brush with TDS. At the beginning of the financial year, or when you join a new organisation, your employer will ask you to fill an investment declaration form. This will include the maximum tax deductions allowed under Sections 80C, 80D and other tax-saving instruments. If, despite all these deductions, your salary is above the exemption limit, TDS will be cut from it every month.

Lottery winnings
Money won in a lottery, puzzle competition, reality show or a horse race is subject to the highest TDS rate of 30%. "If you win Rs 50 lakh in a game show, you will only be able to take home 70% of your winnings or Rs 35 lakh," says Homi Mistry, partner at Deloitte Haskins & Sells. The TDS is applicable even on non-cash winnings. So, if you have won a car worth Rs 10 lakh, you will only be able to claim it after you pay Rs 3 lakh as tax.

Bank accounts
Two years ago, 37-year-old Arun Tilwankar, who runs a pharmacy in Hyderabad, opened a bank fixed deposit with Rs4 lakh. His aim was to build a corpus that he could use to overhaul his shop's software system. To his surprise, the maturity value that he received this year was less than that he had expected. Tilwankar's mistake was that he did not take into account the TDS that is applicable on interest earned from bank fixed deposits and savings accounts.

If the interest you have earned from your bank FD is above Rs10,000, you will receive it after the bank deducts tax. This exemption limit also applies to interest earned from a bank savings account. Don't think you can outsmart the taxman by opening accounts or FDs in different branches.
"Customers tend to avoid TDS by splitting fixed deposits at various branches, but they cannot avoid paying taxes. The TDS process in banks is centralised as we have core banking in place. A uniform ID is given to the customers based on their PAN numbers, which helps us track the total interest they earn from various fixed deposits across branches," says S Govindan, general manager, personal banking, Union Bank of India.

 

Property

Whether it is rental income or the money that you get after selling a house, you will receive the final amount only after tax is deducted. However, you can avail of exemptions in both cases. If the rent you receive is less than Rs1.8 lakh a year, no tax is deducted at source. Beyond this limit, 10% of the income is cut as TDS. However, the advance deposit paid by the tenant is not taken into account for this limit.

It's possible that there is more than one owner of the flat and that all of them share the rental income. The benefit of the exemption limit will depend on the type of ownership, whether it is joint or co-owned. "In case of co-owners, where the specific share of the property has been decided, the limit of Rs 1.8 lakh can be claimed separately by each owner.

However, joint owners, who don't have a clear demarcation of share in the property, can't claim this exemption separately," says Suresh Surana, co-founder and director at RSM Astute Consultants, an accounting and auditing firm.

If you are selling a property, the tax will be deducted at the rate of 1% if the deal is above Rs 20 lakh in a rural area, while in urban areas, the limit is Rs50 lakh. This will be applicable from October this year.

Superannuation fund and debentures
If you withdraw money from a superannuation fund, it is added to your income, and if your total income is above the taxable limit, TDS will be applicable on the amount withdrawn. "However, this does not apply if the money is received when the beneficiary retires or in case of his death," says Mistry. In the case of debentures, interest income up to Rs 2,500 is exempt from tax deduction. From July, this limit will be enhanced to Rs 5,000 and the interest earned above this limit will be subject to TDS at 10%.

Gold and silver
To keep a check on the circulation of black money, the finance minister recently announced in budget 2012 that from July onwards, cash used to buy bullion worth more than Rs 2 lakh will have to pay taxes upfront. Adds Mistry: "If you buy gold or silver exceeding Rs 2 lakh, the seller will collect 1% tax from you at the time of purchase."

How to save on TDS
You can take advantage of some provisions in the Income Tax Act, which will help you reduce your tax liability. For instance, no TDS is applicable on the interest earned from a recurring deposit. So, if you want to build a corpus and can invest monthly, open a recurring deposit rather than an FD. However, once you receive the maturity amount, it will be added to your income and you will have to pay tax on it.

If your income is below the taxable limit, but the interest earned from your deposits is above Rs 10,000, you can request your bank not to cut tax. "For this purpose, you can submit form 15 G and 15 H (for senior citizens) to the bank at the beginning of the financial year," says Govindan. You can ask for this form when you open an FD at a bank.

What to watch out for
"It is a myth that if TDS has been paid, you needn't take that income into account. TDS should be considered as an advance tax payment. When you file your return, you have to calculate the total income and the tax bracket you fall under, to determine the balance tax to be paid. So if you consider TDS for rental income, it doesn't mean that you exclude this income from your return. If your income is taxable, you will have to pay the differential tax," says Surana.

Also, don't think you can avoid paying taxes by not declaring your permanent account number (PAN). If you fail to do so or mention it incorrectly, the TDS rates in case of bank deposits will be applicable at a higher rate of 20%. Also, do not misuse the form 15 G/H facility or you will be penalised.

Keep track of the TDS that you have paid through Form 26AS. All the taxes that are cut on your behalf by a bank, an individual or an organisation are listed in this form, which is also called the annual tax statement. Ensure that there is no mistake in the TDS amount or any missing taxes, otherwise it would be considered unpaid by the income tax authorities.