Does a TDS rate cut reduce your income tax liability?

The economic stimulus package announced by the government reduces the TDS and TCS rates by 25%, leaving more liquidity in the hands of taxpayers. The revised rates of TDS and TCS will apply from 14 May 2020 until 31 March 2021. The tax deductors and collectors carrying on transactions from 14 May 2020 until 31 March 2021 should accordingly deduct or collect tax at the lower rates notified.

Please note that the relief from the reduction in TDS and TCS rates is not for salaried and for payments made to non-residents.

The government seeks to provide relief through lower rates of tax deducted at source (TDS) and tax collected at source (TCS). Payments such as professional fees, interest, contractual payments, dividend, rent, commission, brokerage and other payments made to residents are entitled to the benefit of reduced TDS rates. Similarly, transactions such as the sale of tendu leaves, scrap, and purchase of motor vehicle above Rs 10 lakh are entitled to the benefit of lower TCS rates.

The government estimates Rs 50,000 crore liquidity infusion in the hands of taxpayers through the relief. A taxpayer’s tax liability is not dependent on the rate of the TDS or TCS. A taxpayer needs to estimate their tax liability for the FY 2020-21 after claiming credit for the TDS or TCS. A reduced rate of TDS or TCS only increases the tax liability in the hands of the taxpayer. In such cases, the net tax liability needs to be discharged by payment of advance tax. 

A liability to pay advance tax arises when the net tax liability exceeds Rs 10,000. The advance tax payments are due in four instalments during the year. In a case where you are liable to pay advance tax, failure to pay the instalments leads to penal interest liabilities.

Also Read: Finance Minister Announces 25% Rate Reduction on TDS and TCS

The benefit of the reduction in rates will flow to taxpayers who claim refunds of the TDS or TCS while filing their return of income. In such cases, the money blocked in TDS or TCS reduces easing liquidity for such taxpayers.

There is no lower tax benefit to taxpayers who fail to furnish their PAN or Aadhaar. In such cases, the tax rate continues at 20% and does not reduce to 15%. Similarly, in the case of TCS, the higher rate of tax will apply without any benefit.

Separately, for the FY 2019-20 (AY 2020-21), the Government has also deferred the due date for filing income tax returns to 30 November 2020. The deferment eases tax compliance and defers the tax outgo required at the time of filing tax returns.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in