TDS, TCS reduced by 25%. Here is how it will work in 7 FAQs
The Central Board of Income Tax on Wednesday ordered a 25% reduction in the rate of income tax deducted at source (TDS) and tax collection at source (TCS) from 14 May to 31 March to provide more money in the hands of taxpayers.
This concession is applicable for 23 specified payments where TDS is levied at rates ranging between 20% and 1% and 11 payments where TCS is applicable.
What does this mean
According to the income tax department, if somebody hires a professional P who is to receive Rs 1 Crore as fee, then a TDS of Rs. 10 lakh is required to be deducted at the existing rate of 10% before payment is made to P. As a result, P would have received Rs 90 lakh only.
But since the TDS rates have been reduced from 10% to 7.5%, P will receive Rs 92.5 lakh. Thus, P will get an extra money of Rs 2.5 lakh due to lower TDS rate.
What other payments are covered?
This reduced rate of TDS will apply to the specified list of payments including dividend, payment to contractors and sub-contractors, insurance commission, brokerage, rent for machinery and immovable property and professional fee. Here is the comprehensive table of existing and new reduced rates issued by the Income Tax department.
Will the bank also pass on this TDS benefit to customers?
Yes. According to the income tax department, if someone A is to receive bank interest of Rs 20,000, then at the existing rate of 10% the bank would have deducted TDS of Rs 2,000. Since the new rate of TDS would be 7.5%, the bank will be required to deduct only Rs 1,500. So person A will get an extra liquidity of Rs. 500.
What about payments that have already been made?
This relaxation only applies to payment made between 14 May 2020 and 31 March 2021. So this will not cover payments made before 14 May 2020.
Does this reduce my income tax liability?
Not really. The individual shall eventually have to pay the tax at the applicable rate, depending on the income. Those who are liable for advance tax will have to make the payment every quarter. Others will have to pay when filing income tax returns.
That means it only defers my tax liability?
Yes. But for landlords and professionals such as chartered accountants, architects, doctors, lawyers, engineers, freelancers and consultants, this reduction would practically increase the money in hand by 2.5%. Like if a person has rented out a house for Rs 1 lakh, the tenant is required to deduct 10% of the rent as TDS and the landlord would get Rs 90,000 in hand. Now, the tenant would be required to deduct only Rs 7,500 and hand over the remaining Rs 92,500.
Will an individual get this concession even if he or she doesn’t present a PAN or Aadhaar number?
No. There shall be no reduction in rates of TDS or TCS for those who do not furnish PAN/Aadhaar.
So if the tax is required to be deducted at 20% due to non-furnishing of PAN or Aadhaar, it shall be deducted at the rate of 20% and not at the rate of 15%.