Basic Key Differences Between TDS and Income Tax

Income Tax and TDS are both terms that are commonly used phrases among Indian taxpayers, notwithstanding their distinct variances. While they may appear identical, they have distinct functions. Income tax is deducted from the payer's total profit or annual return, whereas TDS is deducted from the payer's sources of income depending on the expected tax due. Furthermore, each tax has a distinct collection mechanism.

What Does Income Tax Entail?

Income tax is levied on the whole yearly income earned by individuals or businesses throughout the fiscal year. The Income Tax Act of 1961 governs the methods for calculating, assessing, and collecting taxes. It applies to a variety of income sources, such as wages, property income, professional or business revenues, and capital gains. Individuals earning more than Rs. 2.5 lakhs (under the old tax regime) or ₹3 lakhs (under the new tax regime) are required to pay income tax. Failure to do so is considered tax evasion and penalised by law.

What Does TDS Refer To?

Tax Deducted at Source (TDS) is the tax withdrawn from the source of income and paid directly to the government. This system requires persons or organisations making particular payments, such as salaries, interest, rent, or professional fees, to deduct a certain proportion of tax before disbursing the funds. TDS is essential for reducing tax evasion and expediting the tax collection process.

Below is a detailed breakdown of both Income Tax and TDS components:

Elements of Income Tax Filing for Individuals

• Individuals with annual income exceeding Rs. 2.5 lakhs (under the old tax regime)/ ₹3 lakhs (under the new tax regime)
• For senior citizens aged between 60 and 80 years old, the threshold is Rs. 3 lakhs.
• For senior citizens aged 80 years and above, the threshold is Rs. 5 lakhs.

Elements of Tax Deducted at Source (TDS) for Individuals

• Payment of Salary
• Income from Investments and Rent
• Insurance Commission Income
• Contractor payments and other professional fees
• Disbursements linked to the National Savings Scheme & various other sources.

Key Contrasts Between Income Tax and TDS

• TDS is deducted regularly from the source of income throughout the year. In contrast, the taxpayer pays Income Tax at the end of the fiscal year.
• TDS is deducted by the payer (such as an employer or financial institution) and transmitted to the government, whereas income tax is paid directly by the person after determining their tax liability.
• The TDS tax rate is decided by the type of payment, as stipulated by the government, with no input from the payer. In contrast, the Income Tax rate is decided by income slabs as defined in the Tax Laws.
• TDS is levied on payments such as salary, interest, rent, and professional fees, whereas Income Tax is levied on all annual income, including wages and capital gains.