LAW OF TAXATION

RESEARCH PAPER
TDS: Tax Deducted at Source
INCOME TAX ACT, 1961

Submitted to:
Prof. Rakshith Sridhar Sir

Submitted by:
J. Sai Aditya Susarma
4th year BA LLB – A Sec
42320231044
 Abstract
Income tax is a direct tax levied by the government on individuals, businesses, and other
entities based on their income or profits. It serves as a primary source of revenue for the
government to fund various public services and infrastructure. The Income Tax Act, of 1961,
is the primary legislation governing the assessment, collection, and administration of income
tax in India. It provides a comprehensive framework outlining the various provisions, rules,
and regulations related to income tax. Tax Deducted at Source (TDS) is a mechanism
prescribed under the Income Tax Act, requiring the deduction of tax at the source itself from
specified payments such as salaries, interest, rent, and payments to contractors. TDS aims to
ensure the collection of taxes throughout the year, preventing tax evasion and promoting
compliance with tax laws. It obliges the payer to deduct a certain percentage of tax before
paying the payee and depositing it with the government.

Research Questions
1) What are the key differences in the applicability and rates of tax deduction between
Section 194C (payments to contractors/sub-contractors) and Section 194A (interest
other than "Interest on securities")?
2) How do Sections 194C and 194A classify different types of payees and determine tax
deduction obligations accordingly?
3) What are the recent amendments, judicial interpretations, and regulatory
developments impacting tax deduction under Sections 194C and 194A, and how do
they affect taxpayers?
 INTRODUCTION
Income tax constitutes a fundamental element of a nation's taxation framework, requiring
individuals, businesses, and other entities to remit taxes on their earnings within a specified
timeframe. Governed by the Income Tax Act, this levy encompasses various income sources,
including salaries, business profits, interest, dividends, capital gains, and other forms of
revenue.

The Income Tax Act serves as the legislative cornerstone guiding the assessment, collection,
and oversight of income tax obligations within a country. It delineates the responsibilities,
rights, and duties of taxpayers, alongside outlining procedures for tax administration by
governmental authorities. Typically, this Act encompasses provisions concerning taxable
income computation, tax rate determination, exemptions, deductions, tax return filing
protocols, and the enforcement of tax statutes.

Deductions denote specific expenses, investments, or allowances permitted under the Income
Tax Act, which taxpayers can claim to diminish their taxable income, thus reducing their
overall tax burden. These deductions function as incentives to encourage behaviours such as
savings, investments in designated instruments like insurance policies and retirement plans,
and contributions to charitable causes.

Tax Deducted at Source (TDS) represents a mechanism wielded by tax authorities to directly
withhold taxes from the source of income. Under this system, certain designated entities or
individuals are mandated to deduct taxes at predetermined rates from payments disbursed to
others. The deducted tax amount is then remitted to the government on behalf of the recipient.
TDS regulations encompass various income streams, including salaries, interest earnings,
dividends, rental income, commissions, and payments to contractors.

In essence, income tax, overseen by the Income Tax Act, constitutes a compulsory imposition
by governments on earnings. Deductions under the Act afford taxpayers avenues to curtail
taxable income, while TDS ensures timely tax collection by deducting levies at the source of
income. Understanding these concepts is pivotal for taxpayers to adhere to tax regulations
effectively and strategize tax planning endeavours.
 Tax Deduction at Source (TDS)
Tax Deduction at Source (TDS) is a mechanism used by governments to collect taxes directly
from the source of income itself. It is a means of ensuring that taxes are collected in a timely
manner and helps in preventing tax evasion. Under the TDS system, certain individuals or
entities making payments to others are required to deduct tax at specified rates from the
payments made. The deducted tax amount is then remitted to the government on behalf of the
payee.

TDS is applicable to various types of income such as salaries, interest, dividends, rent,
commission, professional fees, and payments to contractors, among others. The rates at which
TDS is deducted vary depending on the nature of the payment and the provisions of the
Income Tax Act.

TDS is typically deducted by employers from the salaries of employees, by banks from
interest earned on fixed deposits, by companies from payments made to vendors or
contractors, and by individuals from payments made for professional services or rent.

TDS serves as an effective tool for the government to ensure tax compliance and to facilitate
the smooth collection of taxes. It also helps in the efficient administration of the tax system
by distributing the responsibility of tax collection among various stakeholders. Additionally,
TDS provides transparency in the taxation process and helps in preventing tax evasion by
ensuring that taxes are deducted at the time of income accrual.

When should TDS be deducted and by whom?

Any person making specified payments mentioned under the Income Tax Act is required to
deduct TDS at the time of making such specified payment. But no TDS has to be deducted if
the person making the payment is an individual or HUF whose books are not required to be
audited.

However, in case of rent payments made by individuals and HUF exceeding Rs 50,000 per
month, are required to deduct TDS @ 5% even if the individual or HUF is not liable for a tax
audit. Also, such Individuals and HUF liable to deduct TDS @ 5% need not apply for
TAN. Your employer deducts TDS at the income tax slab rates applicable. Banks deduct TDS
@10%. Or they may deduct @ 20% if they do not have your PAN information.
For most payments rates of TDS are set in the Income Tax Act and TDS is deducted by the
payer basis of these specified rates. If you submit investment proofs (for claiming deductions)
to your employer and your total taxable income is below the taxable limit – you do not have
to pay any tax. And therefore no TDS should be deducted from your income.

Tax Deducted at Source (TDS) should be deducted by certain individuals or entities specified
under the provisions of the Income Tax Act, 1961, at the time of making specified payments
to recipients. The obligation to deduct TDS arises in various situations, and different parties
are responsible for deducting TDS depending on the nature of the payment. Here's a
breakdown:

1) Employers: Employers are required to deduct TDS from the salaries or wages paid to
employees. TDS on salary is deducted at the time of payment and is based on the
applicable income tax slab rates, taking into account exemptions and deductions
available to the employee.
2) Banks and Financial Institutions: Banks and financial institutions are responsible for
deducting TDS from interest payments made to depositors. TDS on interest income is
deducted at the time of credit or payment, whichever is earlier. This applies to interest
earned on fixed deposits, savings accounts, recurring deposits, and other financial
instruments.
3) Payers of Rent: Individuals or entities making rental payments are required to deduct
TDS if the annual rent exceeds a specified threshold. The TDS rate for rent payments
is usually 10%, and it is deducted at the time of payment or credit, whichever is
earlier.
4) Payers of Commission, Brokerage, or Professional Fees: Individuals or entities
making payments for commission, brokerage, professional, or technical services are
responsible for deducting TDS. The deduction is made at the time of credit or
payment, whichever is earlier, and the TDS rates vary depending on the nature of the
payment.
5) Payers of Royalties, Copyrights, or Intellectual Property Rights: Individuals or entities
making payments for the use of intellectual property rights such as royalties,
copyrights, patents, or trademarks are required to deduct TDS. The deduction is made
at the time of credit or payment, and the TDS rates differ based on the nature of the
payment and the residency status of the recipient.
TDS should be deducted by employers, banks, financial institutions, renters, payers of
commission or professional fees, and payers of royalties or intellectual property rights at the
time of making specified payments to recipients, as per the provisions of the Income Tax Act,
1961.

Section 194A
Section 194A of the Income Tax Act outlines the provisions for Tax Deducted at Source
(TDS) on interest payments, which are vital components of the banking sector, investment
market, and the savings of Indian citizens. Understanding this section is essential for
individuals and entities involved in interest-related transactions.

Key Highlights:

 Applicability: Section 194A applies to interest payments on fixed deposits, recurring

deposits, loans, and advances, whether secured or unsecured. While interest on
securities is also subject to TDS, it falls under Section 193 of the Income Tax Act.
 Residency Requirement: This section is applicable only to Indian residents. Non-
Resident Indians (NRIs) and payments made to them are governed by Section 195 of
the Income Tax Act.
 Threshold for Tax Liability: Taxpayers whose incomes fall below the taxable slab can
submit Form 15G (for individuals under 60 years and Hindu Undivided Families) or
Form 15H (for individuals turning 60 during the financial year or already 60) to the
payer to declare their non-taxable status and avoid TDS.

Who Deducts TDS under Section 194A:

 Individuals and HUFs: Those whose sales, gross receipts, or turnover exceed
specified thresholds are liable to deduct TDS. However, this provision does not apply
to other individuals and HUFs.
 Other Assessees: Partnerships, companies, associations of persons (AOPs), and bodies
of individuals (BOIs) are responsible for TDS deduction, subject to certain conditions.

When TDS is Deducted:

TDS is deducted at the time of interest payment or credit, whichever occurs first. If interest is
credited to accounts like Interest Payable Accounts or Suspense Accounts, it is deemed
credited to the payee's account.

Rates of TDS Deduction:

- For recipients with PAN card: 10%

- For recipients without PAN card: 20%

The TDS deduction threshold is Rs. 5,000 for entities other than banks. For banks,
cooperative societies, or post offices providing interest, the threshold is Rs. 40,000 (Rs.
50,000 for resident senior citizens).

Time Limit for Deposit:

TDS collected in March is deposited by April 30th, and for other months, it's deposited by the
7th of the following month.

Exemptions from TDS under Section 194A:

Various conditions exempt certain entities from TDS deduction under Section 194A, such as
specific banking institutions, low-interest amounts, and certain government schemes.

Understanding the provisions of Section 194A is crucial for ensuring compliance with TDS
regulations on interest income. It helps in managing tax obligations efficiently while
contributing to a transparent and accountable tax system.

Section 194C
Section 194C of the Income Tax Act addresses Tax Deducted at Source (TDS) on payments
made to contractors or subcontractors, playing a pivotal role in regulating business
transactions and contractual engagements. Familiarizing oneself with this section is essential
for businesses, contractors, and subcontractors involved in various contractual arrangements.

Key Highlights:

 Scope: Section 194C applies to payments made for carrying out any work or
providing services under a contract, including civil contracts, supply contracts, and
works contracts. It encompasses a wide range of contractual relationships crucial for
business operations.
 Classification of Contractors: This section distinguishes between different types of
contractors and subcontractors, imposing tax deduction obligations accordingly.
Understanding these classifications is essential for compliance and accurate tax
treatment.
  Applicability to Residents: Section 194C primarily applies to resident contractors and
subcontractors, outlining their tax deduction obligations in contractual transactions.
Non-residents are subject to different provisions under Section 195 of the Income Tax
Act.

Who Deducts TDS under Section 194C:

 Principal Contractors: Entities engaging contractors or subcontractors for work or

services are responsible for deducting TDS under Section 194C. This includes
individuals, businesses, partnerships, companies, and other entities entering into
contractual agreements.
 Threshold for TDS: TDS under Section 194C is applicable when the aggregate of
payments to a contractor or subcontractor exceeds specified thresholds during a
financial year. Understanding these thresholds is crucial for determining TDS
obligations.

When TDS is Deducted:

TDS under Section 194C is deducted at the time of payment to the contractor or
subcontractor or when the payment is credited to their account, whichever occurs earlier.
Compliance with this timing requirement ensures adherence to tax regulations and timely tax
collection.

Rates of TDS Deduction:

The TDS rate under Section 194C varies based on the nature of the contract and the status of
the payee. The current TDS rates prescribed by the government are applied to ensure accurate
tax deduction in contractual transactions.

Time Limit for Deposit:

TDS collected under Section 194C is deposited within the specified timeframes outlined by
tax authorities. Adhering to these deposit deadlines ensures timely remittance of tax deducted
at source, avoiding penalties and compliance issues.

Exemptions and Conditions:

Certain exemptions and conditions may apply under Section 194C, impacting the
applicability of TDS deduction. Understanding these exemptions and conditions is essential
for businesses and contractors to navigate tax obligations effectively.
Section 194C of the Income Tax Act governs TDS on payments to contractors and
subcontractors, playing a crucial role in tax administration and compliance. Awareness of its
provisions, including TDS rates, thresholds, and timing requirements, is vital for businesses
and contractors to ensure accurate tax deductions and adherence to regulatory requirements.

TDS Rate Charts

Below are the general TDS (Tax Deducted at Source) rate charts for different types of
payments under Sections 194C and 194A of the Income Tax Act:

TDS Rate Chart for Section 194C (Payments to Contractors/Sub-

contractors):

Payments to Individual or HUF Contractors/Sub-contractors:

 For contracts related to advertising, professional services, technical services, etc.:

1%
 For contracts related to transport businesses (where the contractor owns less than 10
goods carriages): 2%
 For contracts related to transport businesses (where the contractor owns more than
10 goods carriages): 1%

Payments to Other than Individual or HUF Contractors/Sub-contractors:

 For contracts related to advertising, professional services, technical services, etc.: 2%

 For contracts related to transport businesses: 2%

TDS Rate Chart for Section 194A (Interest other than "Interest on
securities"):

Interest Paid to Resident Individuals/Entities:

 If PAN is furnished by the recipient: 10%

 If PAN is not furnished by the recipient: 20%
Interest Paid to Non-Resident Individuals/Entities:

As per the provisions of Section 195 of the Income Tax Act, TDS rates may vary depending
on the nature of income, treaty provisions, and other factors.

Note:

 The above rates are general rates and may vary based on specific circumstances,
exemptions, and provisions of the Income Tax Act.
 It's essential for taxpayers to consult with tax professionals or refer to the latest
official notifications and guidelines from tax authorities for accurate and updated TDS
rates applicable to their transactions.

TDS Rate Charts for FY 2023-24

Section Deductee Nature of Transaction Threshold limit TDS

Rate
Senior Citizens-
Interest from other than interest from
50,000
194A Resident securities (from deposits with banks/post 10%
office/co-operative society)
Others- 40,000
Interest from other than interest on
securities u/s 193 and interest from
194A Resident 5,000 10%
banks/post office/co-operative society.
E.g., interest from friends and relatives
Single transaction-
30,000
194C Resident Payment to contractor/sub-contractor:- Aggregate
transactions-
1,00,000
a) Individuals/HUFs 1%
b) Other Than Individual/ HU 2%
 Case Laws

Smt. Hansaguri Prafulchandra Ladhani vs The Oriental Insurance

Company Ltd. 4 October, 2006

Facts:

 The application pertains to the interpretation of Section 194A(3)(ix) of the Income-tax

Act, 1961 concerning the deduction of income tax at source on the interest received
by claimants as compensation from the Motor Accident Claims Tribunal.
 The heirs of deceased Prafulchandra Narbheram Ladhani filed a Motor Accident
Claim Petition seeking compensation of Rs. 20 lakhs due to his death in a motor
vehicle accident.
 The Tribunal awarded compensation of Rs. 11,78,000/- to the claimants along with
interest at 9% per annum from the date of filing the petition. The compensation was to
be divided among the widow and five children of the deceased.
 The Insurance Company, appealing against the award, deposited Rs. 25,27,812/- with
the Tribunal after deducting TDS (Tax Deducted at Source) of Rs. 1,70,279/-.

Arguments:

 The claimants argued that TDS should not have been deducted as the compensation
awarded is not taxable income.
 They proposed an apportionment of the compensation among the claimants and
requested a refund of the excess TDS deducted.
 The Insurance Company justified the TDS deduction as per Section 194A of the
Income-tax Act, stating it was in compliance with statutory obligations.
 The Commissioner of Income-tax supported the TDS deduction, citing the provisions
of Section 194A.

Judgement:

 The Court acknowledged that compensation under the Motor Vehicles Act is not
taxable income.
 It directed the apportionment of interest accrued from the date of filing the claim
petition until the date of deposit among the claimants.
  The Court instructed the Insurance Company to furnish detailed statements of interest
amounts for each claimant, allowing them to apply for refunds of excess TDS
deducted.
 It ordered the Tribunal to facilitate the apportionment of interest among claimants and
permitted withdrawals of amounts deposited without producing tax liability
certificates.
 The Court granted leave for a separate application for disbursement of amounts.

Conclusion:

The judgement clarifies the applicability of TDS on interest received as compensation and
provides a framework for its deduction, apportionment, and refund, ensuring fair treatment of
claimants and compliance with tax regulations.

M/S Palam Gas Service vs Commissioner Of Income Tax. 3 May, 2017

Facts:

The case revolves around the interpretation of Section 40(a)(ia) of the Income Tax Act, 1961
(referred to as the 'Act'), which deals with the disallowance of certain payments if tax has not
been deducted at source. The appellant, engaged in the business of purchasing and selling
LPG cylinders, made payments to contractors for transportation services. However, the
appellant failed to deduct tax at source from these payments as required by Section 194C of
the Act. Consequently, the Income Tax Department disallowed these expenses under Section
40(a)(ia) of the Act.

The appellant contended that Section 40(a)(ia) should not be applied as the payments were
already made to the contractors, arguing that the provision only applies when the amount is
still 'payable' and not when it has been paid. This issue was raised before various authorities,
including the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal
(ITAT), and the High Court of Himachal Pradesh.

Arguments:

The appellant argued that Section 40(a)(ia) should be interpreted to cover only those cases
where the amount is still due and payable, and not when it has already been paid. They
contended that the provision should not be applied retroactively to disallow expenses for
payments already made.
On the other hand, the Income Tax Department argued that the language of Section 40(a)(ia)
is clear and unambiguous, and it does not make a distinction between amounts payable and
amounts already paid. Therefore, they contended that the provision should be applied to
disallow expenses for payments made without deducting tax at source.

Judgment:

The court examined the language of Section 40(a)(ia) and observed that it uses the term
'payable', but does not explicitly address whether it applies to payments already made. After
considering relevant provisions of the Income Tax Act and relevant case law, the court
concluded that Section 40(a)(ia) should be interpreted to cover both situations - where the
amount is payable and where it has already been paid without deducting tax at source.

The court noted that there were divergent views among different High Courts on this issue.
However, it agreed with the views of the Punjab & Haryana, Madras, and Calcutta High
Courts, which held that Section 40(a)(ia) applies even to payments already made without
deducting tax at source.

Therefore, the court dismissed the appeal and upheld the decision of the High Court,
affirming the disallowance of expenses under Section 40(a)(ia) of the Income Tax Act.

Section 194A and 194C

The key differences in the applicability and rates of tax deduction between Section 194C
(payments to contractors/sub-contractors) and Section 194A (interest other than "Interest on
securities") are as follows:

Applicability:

 Section 194C: Applicable to payments made to contractors or subcontractors for

carrying out any work or providing services under a contract, including civil
contracts, supply contracts, and works contracts. It covers a wide range of contractual
relationships.
 Section 194A: Applicable to interest payments other than "Interest on securities," such
as interest on fixed deposits, recurring deposits, loans, advances, and savings
accounts. It pertains specifically to interest income.
Nature of Payment:

 Section 194C: Tax deduction applies to payments made for work or services rendered
under a contract, irrespective of the nature of the recipient's income. It focuses on
payments for labor or services.
 Section 194A: Tax deduction applies specifically to interest income earned by
individuals or entities. It concerns payments of interest on financial instruments or
loans.

Rates of Tax Deduction:

 Section 194C: The current rate of TDS deduction under Section 194C varies
depending on the nature of the contract and the status of the payee. It typically ranges
from 1% to 2% for individuals or Hindu Undivided Families (HUFs) and 2% to 5%
for other entities.
 Section 194A: The TDS rate under Section 194A is fixed at 10% for recipients who
provide their Permanent Account Number (PAN). For recipients without PAN, the
TDS rate is higher at 20%.

Threshold for Tax Deduction:

 Section 194C: TDS under Section 194C is applicable when the aggregate of payments
to a contractor or subcontractor exceeds specified thresholds during a financial year.
 Section 194A: There is no specific threshold for TDS deduction under Section 194A.
TDS is applicable to all interest payments exceeding a nominal amount.

Sections 194C and 194A of the Income Tax Act classify different types of payees and
determine tax deduction obligations accordingly based on their residency status, type of
income, and other relevant factors. Here's how each section classifies payees and determines
tax deduction obligations:

Section 194C - Payments to Contractors/Sub-contractors:

 Resident Contractors/Sub-contractors: Tax deduction obligations under Section 194C

apply primarily to resident contractors and subcontractors. These individuals or
entities are liable to have tax deducted at source when receiving payments for work or
services rendered under a contract. The applicable TDS rates and thresholds vary
based on the nature of the contract and the status of the payee.
  Non-Resident Contractors/Sub-contractors: Non-resident contractors and
subcontractors are subject to different provisions under Section 195 of the Income Tax
Act. Tax deduction obligations, rates, and compliance requirements may differ for
non-residents compared to residents.

Section 194A - Interest other than "Interest on securities":

 Resident Individuals/Entities: Tax deduction obligations under Section 194A

primarily apply to resident individuals and entities earning interest income other than
"Interest on securities." This includes interest earned on fixed deposits, recurring
deposits, loans, advances, and savings accounts. The TDS rate is fixed at 10% for
recipients who provide their Permanent Account Number (PAN), and 20% for
recipients without PAN.
 Non-Resident Individuals/Entities: Non-resident individuals and entities earning
interest income in India are subject to different provisions under Section 195 of the
Income Tax Act. Tax deduction obligations, rates, and compliance requirements may
differ for non-residents compared to residents.

Sections 194C and 194A classify payees based on residency status and type of income
earned. They determine tax deduction obligations accordingly, ensuring that tax is deducted
at source from payments made to contractors/sub-contractors or from interest income, as per
the provisions of the Income Tax Act. Compliance with these provisions helps in accurate tax
deduction and adherence to regulatory requirements.
 Conclusion
In conclusion, Sections 194A and 194C of the Income Tax Act, 1961, are vital components of
the Tax Deducted at Source (TDS) framework, designed to streamline tax collection and
ensure compliance. Under Section 194A, which governs interest payments other than those
on securities, entities are mandated to deduct tax at specified rates before making such
payments. Failure to adhere to this provision can result in penalties or the disallowance of
expenses. Similarly, Section 194C pertains to tax deduction on payments made to contractors
and subcontractors for services rendered or work performed. It requires tax to be deducted at
source from such payments. Non-compliance with this provision may lead to the
disallowance of expenses related to these payments.

In essence, these sections serve to facilitate tax collection by ensuring that taxes are deducted
at the source of income. Compliance with Sections 194A and 194C is crucial for taxpayers to
avoid penalties and contribute to a smooth tax administration process.

References
1) Income Tax Act, 1961
2) TDS Rate Chart for FY 2023-24 (AY 2024-25) with TDS Section List, Host Books
3) Threshold Limit for TDS Under Income Tax Act, Tax2win
4) Case laws
a) AIR 2007ACJ1897, 2007(4)KLT49
b) AIR 2017 (7) SCC 613
5) TDS- What is Tax deducted at source, Income Tax, Clear Tax
6) Section 194 A, TDS, Income Tax, Tax2Win
7) Sectiom 194C, TDS, Income Tax, Tax2Win
8) CA Sandeep Kanoi, Section 194A, Income Tax, Tax Guru
9) R. S. Karla, Section 194C, Income Tax, Tax Guru