Tax Deducted at Source (TDS) is the most integral part of India’s taxation system, wherein tax deduction is made along with payments and not after. TDS has to be paid in most of the transactions and individuals involved, but not all individuals are liable to deduct it.
This blog discusses some of the intricacies of TDS obligations and tries to find out who is exempt from deducting TDS under the Income Tax Act of 1961.
Understanding Tax Deducted at Source (TDS)
TDS or Tax Deducted at Source, is an income tax collected from certain payments made such as rent, salary, commission, interest, professional fees, etc. Such a person deducting TDS should himself pay the amount.
According to the Income Tax Act, if the money paid is more than the prescribed limit, then any company or person is liable to deduct the tax at the source itself. Also, the person receiving a payment has a liability to pay tax on his income.
The credits against TDS payments made will be passed on to the payee, which the payee can claim while filing his actual tax liability in his annual ITR.
The objective of TDS could be to reduce the scope for the recipient of the income from not paying tax. But for an honest taxpayer, it also brings in a few benefits.
Who is exempt from TDS deduction?
Tax Deducted at Source is a collection of income tax by the Indian government on the source of generation.
Not all individuals, entities, or transactions are subjected to deducting TDS, however. Liability to deduct TDS is subject to the type of payer and the nature of payment; statutory exemptions apply as well.
1. Individuals and HUFs Not Covered under Tax Audit
The general rule is that the individual and HUFs, in general, are not mandatorily required to withhold TDS unless their account is subject to a tax audit.
Tax audit would apply when:
- Business turnover exceeds Rs 1 crore Rs 10 crore for businesses opting for 95% digital transactions).
- Gross receipts from a profession exceed Rs 50 lakh.
An individual or HUF who does not exceed these thresholds is not liable to deduct TDS even while making rent payments or professional fees.
Illustration: A freelancer earning Rs 30 lakh annually and making rent payments for office space does not need to deduct TDS since his income does not exceed the audit threshold.
2. Payments Below Specified Threshold Limits
The Income Tax Act has specified threshold limits for different kinds of payments, below which the TDS is not obligatory. These limits are meant to reduce the compliance burden of small-value transactions. Some of the examples are-
- Interest is received on bank deposits of an amount less than Rs 10,000 annually.
- Rent payments below Rs 2,40,000 in a financial year.
- Payments made to contractors or professionals wherein the amount does not exceed Rs 30,000 per annum.
These exemptions would prevent undue imposition of TDS compliance upon the smaller, lesser transactions among various minor individuals and companies.
3. Non-Applicability for Agricultural Income
Income from agriculture falls under Section 10(1) of the Income Tax Act, which provides it with an exemption from taxes. Therefore, no deduction of TDS is mandated on payments made for agricultural produce or activities.
For instance, a company buying wheat directly from farmers does not need to deduct TDS because this income is classified as agricultural and exempt from taxation.
4. Payments to Various Government Bodies and Institutions
Payments made to some government institutions and statutory authorities are not subject to TDS. This avoids the duplication of tax transactions within government departments.
- Payments made to the President of India, state governors, or government departments.
- Payments made to statutory corporations, municipal bodies, or authorities are exempted under Section 10 of the Income Tax Act.
- Contributions were made to recognize provident funds, gratuity funds, and superannuation funds.
For instance, if a company pays its municipal taxes, then the deductor does not have any liability to pay TDS because municipal bodies fall within the said exemption.
5. Exemptions for Specific Transactions
Some types of income and transactions are exempted from TDS under specific provisions of the Income Tax Act. A few examples are-
- Dividend payments of less than Rs 5000 in a year.
- Interest payments are made to some specified government-approved financial institutions for specific schemes.
- Payments to non-residents in cases of exemptions under DTAAs.
These exemptions ensure that TDS is not deducted in cases where the income is already subject to reduced or zero tax liability under special provisions or international agreements.
For example, if a non-resident earns income that is subject to zero TDS as per an applicable DTAA, the payer is not required to deduct TDS.
6. Payments Made by Non-Taxable Entities
An organization or other entity, such as charitable trusts registered under Section 12A or exempted under Section 80G, would not be obligated to pay TDS on the relevant income.
However, this exemption only applies strictly to payments related to their charitable or non-profit activities.
Illustration: A registered NGO making payments to vendors for services used in charitable work will not be liable to deduct TDS.
7. Special Provisions for Startups and Small Businesses
Small businesses and startups with revenue below the tax audit threshold are also exempt from the TDS obligation.
These exemptions free up such organizations to move on to growth instead of getting bogged down with compliance complexities. Additionally, relaxation in taxation and TDS are also part of any government scheme designed under the Startup India initiative.
Importance of knowing TDS Exemptions
Awareness of TDS exemptions is important for both individuals and organizations. It aids in:
- Avoiding Over-Compliance- The knowledge of when TDS is not applicable helps prevent the waste of resources on unnecessary filings.
- Preventive Measures- Fines and interest can result due to incorrect deductions or failures to make deductions under Section 201 of the Income Tax Act.
- Streamlined financial management- A proper understanding of exemptions will help in effective cash flow management and compliance planning.
Conclusion
The Indian taxation system is very comprehensive, but who has to deduct TDS and under what circumstances has been clearly defined. People below the specified thresholds, payments made below exemption limits, agriculture transactions, and certain payments to government bodies and charitable institutions are exempt from deducting TDS.
It is, therefore, essential for businesses and individuals to understand these exemptions so that they do not make unnecessary efforts to ensure compliance. Although TDS ensures timely collection of taxes, exemptions are a balancing act that would benefit small businesses, government entities, and income sources exempt from tax.
Awareness of TDS rules and exemptions can enable taxpayers to handle their duties effectively, avoid penalties, and make the tax ecosystem in India more efficient.
Bibliography
The Income Tax Rules, 1962
The Income-Tax Act, 1961 (Act No. 43 of 1961)
