Income Tax Vs TDS: Know Major Differences Between The Two Taxation Systems

Income Tax Vs TDS: Know Major Differences Between The Two Taxation Systems

Income Tax is basically a tax that the government charges directly on an individual's income whereas TDS is a mechanism by which the government collects taxes right at the beginning, directly from the income source.

Oliviya KunjumonUpdated: Friday, February 16, 2024, 06:50 PM IST
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Income Tax Vs TDS | Image Source: Wikipedia (Representative)

In a bid to unravel the complexities surrounding financial jargons, it is essential to distinguish between two key elements of the taxation system: Income Tax and Tax Deducted at Source (TDS). While both factors heavily impact revenue generation, their characteristics and implementation vary greatly.

Income Tax: Personal Taxation

Income Tax is a common term in personal finance, and it is basically a tax that the government charges directly on an individual's income. This tax is imposed on various sources of income, including salaries, business profits, capital gains, and other forms of revenue. The responsibility of computing and paying income tax rests squarely on the taxpayer, who must adhere to the prevailing tax slabs and rules established by the government.

TDS: A System of Withholding Tax

In contrast, Tax Deducted at Source (TDS) is like a way the government collects taxes right at the beginning, directly from the income source. Essentially, it is a form of withholding tax wherein a portion of the payment is deducted by the payer and remitted to the government on behalf of the payee. TDS is applicable to a myriad of transactions, such as salaries, interest, rent, and consultancy fees. TDS helps the government have a continuous flow of money, making it harder for people to avoid paying their taxes.

Income Tax Return (ITR) is mandatory for individuals whose annual income exceeds Rs 2.5 Lakhs under the old tax regime or Rs 3 Lakhs under the new tax regime. For senior citizens aged between 60 and 80 years, the limit is Rs 3 Lakhs, while those aged 80 and above have a limit of Rs 5 Lakhs.

On the other hand, TDS is a process where a portion of your income is deducted at the source itself. This happens in various situations, including salary payments, earnings from investments and rent, income from winning contests, lotteries, gambling, prize money, riddles, and similar activities. TDS is applied to commissions received from insurance, payments made to contractors, brokerage, commission, and fees for professional services. Moreover, TDS is also levied on payments linked to the National Savings Scheme and diverse income sources.

Understanding these thresholds for income tax return filing and the diverse scenarios where TDS is applicable is crucial for individuals to ensure compliance with tax regulations and avoid penalties.

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