Confused between Income Tax and TDS? Know the Differences!

While almost all of us know about income tax, some may not be familiar with the term TDS or the tax deducted at the source. Interestingly, many people use these terms interchangeably without realising the difference. Though it is easy to get confused, it is essential to know the difference between the two to manage your income and payable taxes better. The knowledge will come in handy while filing your income tax returns.

What is Income Tax?

This is the tax levied on the personal income of an individual; the rate and final amount of which depend on the income. There are several slabs, each with a different rate of tax. The tax money is deducted from the gross income of the individual. Every taxpayer is eligible for certain exemptions and deductions based on financial commitments such as premiums on health and life insurance, children’s education, donations to certain charitable causes and the interest paid on loan against property. The taxable income is arrived at after making these deductions and the tax is levied at the end of the financial year.

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What is TDS?

TDS is tax deducted at source—that is, a certain amount is deducted from the monthly salary at the source (by the employer) on the assumption that the employee has a taxable income. TDS is also deducted by banks and financial institutions on interest earned periodically. This helps the government to collect taxes swiftly and efficiently. This amount can also be included in the deductions while calculating the final taxable income.

TDS and Income Tax Difference

• Though both are terms used for tax on your income, there are a few differences. Income tax is paid on the annual income with tax being calculated for that specific financial year. TDS is deducted at the time of payment of salary (or on interest on investments) either monthly or quarterly.
   
• Income tax is paid directly by the taxpayer after determining the annual liability owed. TDS is indirect as the tax liability is determined and TDS payment is made by a third party—either an employer or a financial institution—to the government.
   
• Income tax is levied on the comprehensive income earned by the tax assessed in a financial year. Tax is deducted at source only from certain individuals who make specific payments.
   
• Income tax is levied on individuals for the income that they have already earned, as per the slabs into which their income falls, within a specific financial year. TDS, on the other hand, means that the individual pays tax regardless of whether the income falls into the taxable category or not and before they receive the income in hand. This concept was introduced to minimise tax evasion by salaried individuals.
   
• Income tax paid is the complete tax contribution owed by the individual but TDS is only a partial tax contribution.
   
• TDS is also levied on transactions such as payments made to contractors over Rs one lakh, rent paid on movable or immovable property above Rs 2.4 lakh, purchase of immovable property over Rs 25 lakh and prize winnings above Rs 10,000. The TDS rates for all of these vary from 1% to 30%. 

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Importance of Filing ITR 

It is mandatory for everyone earning an income to file their returns, even if their income is not taxable or if their tax gets deducted at the source. There is a connection between TDS and income tax return. In the case of tax deduction at source when the total annual income of the individual is not taxable; or, the tax deducted is more than what the individual owes as tax, then you can file for an income tax refund.

Although income tax and TDS are both connected to an individual’s income, they are calculated and settled differently. TDS represents only a part of the income tax an individual is liable to pay to the government at the end of the financial year. So, the next time someone mentions income tax and TDS interchangeably, the onus is on you to correct them.