Understanding the Contrast Between Income Tax and Tax Deducted at Source

Income tax and Tax Deducted at Source (TDS) are two terms that hold significant differences in their meaning and application. Income tax pertains to the tax deducted from an individual or company’s overall profit or annual earnings within a specific financial year. Governed by the Income-Tax Act (ITA), 1961, this tax is calculated, assessed, and collected based on guidelines outlined in the law. It encompasses various income sources such as salary, income from property, business profits, and capital gains. Individuals earning above Rs 2.5 lakh (under the old tax regime) or Rs 3 lakh (under the new tax regime) are liable to pay income tax. Attempting to evade paying income tax is considered tax evasion and is punishable by law. On the other hand, TDS refers to the tax deducted directly from the taxpayer’s income sources and remitted to the government. It is a mechanism wherein individuals or entities making specific payments, like salary, interest, rent, or professional fees, are required to deduct a predetermined percentage of tax before making the payment. This serves the dual purpose of preventing tax evasion and streamlining the tax collection process.

Income Tax vs. TDS:

Income Tax Return (ITR):

Individuals with an annual income exceeding Rs 2.5 lakh (under the old tax regime) or Rs 3 lakh (under the new tax regime) are required to file Income Tax Returns. For senior citizens aged between 60 and 80 years, the threshold is Rs 3 lakh, while for those above 80 years, it is Rs 5 lakh.

Tax Deducted at Source (TDS):

Applicable to various payments such as salary, investment earnings, rent, lottery winnings, commissions, and professional fees. Also applicable to payments related to the National Savings Scheme (NSC) and other miscellaneous sources.

Key Differences Between Income Tax and TDS:

Timing of Payment:

Income tax is paid by the taxpayer at the end of the financial year, while TDS is deducted periodically throughout the year at the source of income.

Deduction Process:

TDS is deducted by the payer, such as an employer or financial institution, and remitted to the government. In contrast, the taxpayer directly pays income tax after calculating their tax liability.

Tax Rate Determination:

TDS tax rates are predetermined based on the nature of payment specified by the government, without any intervention from the taxpayer. Conversely, income tax rates are based on income slabs specified in the Tax Laws.

Applicability:

TDS applies to specific payments made by individuals or entities, as mandated by the government. On the other hand, income tax is levied on the total annual income of the taxpayer, including salary, capital gains, etc. In essence, while income tax and TDS both pertain to taxation, they differ significantly in their collection mechanisms, timing, and applicability. Understanding these differences is crucial for taxpayers to fulfill their tax obligations effectively and comply with the relevant tax laws.

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