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TDS and Income Tax: What’s the Difference?

While almost everyone is aware of income tax, others may be unaware of the phrase TDS, or tax deducted at source. Surprisingly, many individuals confuse these terms and use them interchangeably without realizing it. Though it is easy to become confused, it is critical to understand the differences between the two in order to better manage your income and taxes due. When it comes to filing your income tax taxes, this knowledge will come in handy.

Also Read: Income Tax Return Filing

What is the definition of income tax?

This is a tax charged on an individual’s personal income, the rate and amount of which are determined by the income. There are various distinct tax slabs, each with a different tax rate. The tax money is withheld from the individual’s gross income. Certain exemptions and deductions are available to all taxpayers depending on financial commitments such as health and life insurance premiums, children’s education, charity donations. And interest paid on a loan against property. After these deductions, the taxable income is calculated, and the tax is assessed at the conclusion of the fiscal year.

What exactly is TDS?

TDS stands for tax deducted at source, which means that on the assumption that the employee has taxable income. A particular amount is deducted from the monthly salary at the source (by the employer). Banks and financial organizations deduct TDS on interest collected on a regular basis. This aids the government in collecting taxes in a timely and efficient manner. This amount can also be deducted from the total taxable income when computing deductions.

Difference between TDS and Income Tax

  • Though both phrases refer to income taxes, there are a few distinctions. Income tax is determined for the specific financial year and is paid on the annual income. TDS is deducted either monthly or quarterly when a salary (or interest on an investment) is paid.
  • After computing the annual liability owed, the taxpayer pays income tax directly. TDS is indirect since the tax due is calculated and paid to the government by a third party—either an employer or a financial institution.
  • Income tax is levied on the total income earned by the tax assessee over the course of a fiscal year. Only select persons who make particular payments have their taxes deducted at source.
  • Individuals are taxed on the money they have already earned. According to the slabs into which their earnings fall, during the course of a financial year. TDS, on the other hand, indicates that the individual pays tax regardless of whether the income is taxable or not. And before receiving the money in their hands. This concept was created to reduce tax cheating by paid workers.
  • TDS is only a fraction of the tax bill, whereas income tax is the full amount of the tax bill owing by the individual.
  • TDS is also applied to payments made to contractors in excess of Rs 10,000, rent paid on mobile or immovable property in excess of Rs 2.4 lakh, purchase of immovable property in excess of Rs 25 lakh. And prize winnings in excess of Rs 10,000. TDS levels for all of these range from 1% to 30%.

The Importance of ITR Filing

Everyone who makes money is expected to file returns, even if their income is not taxable or if their tax is deducted at source. There is a link between TDS and filing an income tax return. When an individual’s total annual income is not taxable, or the tax deducted is greater than what the individual owes in tax. The individual can file for an income tax refund.

Despite the fact that both income tax and TDS are dependent on a person’s wages, they are computed and paid in different ways. TDS is simply a portion of the income tax that a person must pay to the government at the conclusion of the fiscal year. So, if someone uses the terms income tax and TDS interchangeably again, it’s up to you to correct them.

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