Caution teaches us to never count our chickens before they are hatched. When it comes to income tax, you shouldn't be too sure even after they've been hatched because the taxman is quite likely to walk away with some.
Whenever you invest your hard-earned money or make a profit, don't assume that you will be entitled to receive the full amount or returns. The taxman is waiting to snip away at your earnings, and to make sure you don't turn into an evader, knowingly or unknowingly, the tax will be cut at source, even before you get the money.
The tax deducted at source, or TDS, as it is more commonly known, is applicable on earnings from various financial instruments, which range from the interest earned from bank accounts to rental income. Here's a guide to help you know when TDS is applicable.
When is tax deducted at source?
There is no uniform rate for TDS. The amount of tax deducted depends on the source of earnings. So, it can range from 1% for sale proceeds from selling a house, to 30% for winnings from a horse race. Here's a look at how much TDS is cut from your earnings.
This is probably your first brush with TDS. At the beginning of the financial year, or when you join a new organisation, your employer will ask you to fill an investment declaration form. This will include the maximum tax deductions allowed under Sections 80C, 80D and other tax-saving instruments. If, despite all these deductions, your salary is above the exemption limit, TDS will be cut from it every month.
Money won in a lottery, puzzle competition, reality show or a horse race is subject to the highest TDS rate of 30%. "If you win Rs 50 lakh in a game show, you will only be able to take home 70% of your winnings or Rs 35 lakh," says Homi Mistry, partner at Deloitte Haskins & Sells. The TDS is applicable even on non-cash winnings. So, if you have won a car worth Rs 10 lakh, you will only be able to claim it after you pay Rs 3 lakh as tax.
Two years ago, 37-year-old Arun Tilwankar, who runs a pharmacy in Hyderabad, opened a bank fixed deposit with Rs4 lakh. His aim was to build a corpus that he could use to overhaul his shop's software system. To his surprise, the maturity value that he received this year was less than that he had expected. Tilwankar's mistake was that he did not take into account the TDS that is applicable on interest earned from bank fixed deposits and savings accounts.
If the interest you have earned from your bank FD is above Rs10,000, you will receive it after the bank deducts tax. This exemption limit also applies to interest earned from a bank savings account. Don't think you can outsmart the taxman by opening accounts or FDs in different branches.
"Customers tend to avoid TDS by splitting fixed deposits at various branches, but they cannot avoid paying taxes. The TDS process in banks is centralised as we have core banking in place. A uniform ID is given to the customers based on their PAN numbers, which helps us track the total interest they earn from various fixed deposits across branches," says S Govindan, general manager, personal banking, Union Bank of India .
Whether it is rental income or the money that you get after selling a house, you will receive the final amount only after tax is deducted. However, you can avail of exemptions in both cases. If the rent you receive is less than Rs1.8 lakh a year, no tax is deducted at source. Beyond this limit, 10% of the income is cut as TDS. However, the advance deposit paid by the tenant is not taken into account for this limit.
It's possible that there is more than one owner of the flat and that all of them share the rental income. The benefit of the exemption limit will depend on the type of ownership, whether it is joint or co-owned. "In case of co-owners, where the specific share of the property has been decided, the limit of Rs 1.8 lakh can be claimed separately by each owner.
However, joint owners, who don't have a clear demarcation of share in the property, can't claim this exemption separately," says Suresh Surana, co-founder and director at RSM Astute Consultants, an accounting and auditing firm.
If you are selling a property, the tax will be deducted at the rate of 1% if the deal is above Rs 20 lakh in a rural area, while in urban areas, the limit is Rs50 lakh. This will be applicable from October this year.
Superannuation fund and debentures
If you withdraw money from a superannuation fund, it is added to your income, and if your total income is above the taxable limit, TDS will be applicable on the amount withdrawn. "However, this does not apply if the money is received when the beneficiary retires or in case of his death," says Mistry. In the case of debentures, interest income up to Rs 2,500 is exempt from tax deduction. From July, this limit will be enhanced to Rs 5,000 and the interest earned above this limit will be subject to TDS at 10%.