Income-Tax vs Tax Deducted at Source: Know the Difference

Income tax and Tax Deducted at Source (TDS) are two terms that have quite a difference among them.  

While income tax is deducted from the taxpayer’s overall profit or annual return, TDS relates to the tax deducted from the taxpayer’s sources of income depending on the expected tax liability. In addition, both taxes tend to have different mechanisms related to the collection process.

Income-tax decoded: This is a tax levied on the annual income that an individual or company earns during a particular financial year. The Income-Tax Act (ITA), 1961, governs this, which outlines the guidelines for tax calculation, assessment, and collection.

It is applicable to income sources such as salary, income from house property, profits from profession or business, and capital gains, etc. Any individual earning more than Rs 2.5 lakh under the old tax regime or  Rs 3 lakh under the new tax regime has to pay the income tax. In case an individual tries to avoid paying income tax,  it is considered tax evasion that is punishable under the law.

TDS demystified: This is tax deducted from the taxpayer’s source of income and is directly remitted to the government. In TDS, individuals or organisations making specified payments, such as salary, interest, rent, or professional fees, must deduct a certain tax percentage before making the payment. It is essential in preventing tax evasion. Besides,  it simplifies the tax collection process, too.

Income-Tax vs TDS:

Income-Tax Return (ITR): 

• Any individual having annual income exceeding Rs 2.5 lakh in the (old tax regime or Rs 3 lakh under the new tax regime
• In the case of senior citizens who are over 60 years old and less than 80 years old, the threshold is Rs 3 lakh
• In the case of senior citizens whose age is more than 80 years, the threshold is Rs 5 lakh

Tax Deducted at Source (TDS): 

• Salary payment
• Earnings from investments and rent
• Money obtained from winning contests, lotteries, gambling, prizes, riddles, and similar such miscellaneous activities
• Commissions earned from insurance
• Payment to contractors, brokerage, commission and other such professional fees
• Payments related to the National Savings Scheme (NSC) and other miscellaneous sources

Income-Tax and TDS: Key differences 

A taxpayer pays the income tax at the end of the financial year. Typically, TDS is deducted periodically throughout the year at the source of the income.  TDS is deducted by the taxpayer, who could be an employer or financial institution and is remitted to the government. The taxpayer directly pays income tax after calculating their respective tax liability.

TDS tax rate is based on the nature of payment specified by the government with no intervention of the taxpayer. The income tax rate is based on income slabs specified in the Tax Laws.

TDS applies to payments such as salary, interest, rent, and professional fees, to list a few. Income tax is levied on the total annual income, this includes salary, capital gains, etc.