ITR 2024: Income Tax vs TDS. How the two are different?

• February 16, 2024
• CA Chandan Agarwal's Office

The main difference between Income Tax and TDS is that the Income Tax is deducted from the payer’s overall profit or annual return, on the other hand, TDS refers to the tax deducted from the payer’s sources of income based on the expected tax liability

Income Tax and Tax Deducted at Source (TDS) are the two most common terms Indian taxpayers often come across. Both may sound similar, but there is a vast difference between them. The main difference between Income Tax and TDS is that the Income Tax is deducted from the payer’s overall profit or annual return, on the other hand, TDS refers to the tax deducted from the payer’s sources of income based on the expected tax liability. Also, both taxes have a different mechanism when it comes to the collection process.

What is Income Tax?

Income Tax is a tax on the annual income earned by the individual or company during the fiscal year. It is governed by the Income Tax Act of 1961, which outlines the norms for tax calculation, assessment, and collection. It applies to income sources like salary, income from house property, profits from profession or business, and capital gains etc. Any individual earning above Rs. 2.5 lakhs (old tax regime)/ ₹3 lakhs (new tax regime) have to pay the income tax; avoiding it will be considered as tax evasion, punishable under the law.

What is TDS?

Tax Deducted at Source (TDS) is tax deducted from the payer’s very source of income and is directly remitted to the government. Under TDS, individuals or organizations making specified payments like salary, interest, rent, or professional fees, must deduct a certain tax percentage before making the payment. It is crucial in preventing tax evasion and also simplifies the tax collection process.

Here’s a more comprehensive breakdown of the Income Tax and TDS components:

Income Tax Return (ITR): 

• Any individual having annual income higher than 2.5 Lakhs (old tax regime)/ ₹3 lakhs (new tax regime)
• For senior citizens who are more than 60 years old and less than 80 years old, the limit is 3 Lakhs
• For senior citizens who aged more than 80 years, the limit is 5 Lakhs

Tax Deducted at Source (TDS): 

• Salary Payment
• Earnings from Investments and rent
• Money from winning contests, lotteries, gambling, prize money, riddles, and similar activities.
• Commissions from insurance
• Payment to contractors, brokerage, commission and other professional fees
• Payments related to the National Savings Scheme and various other sources.

Major differences between TDS and Income Tax

• TDS is deducted periodically throughout the year at the very source of the income. On the other hand, Income Tax is paid by the taxpayer at the end of the financial year.
• TDS is deducted by the payer (employer or financial institution) and is remitted to the government, whereas Income Tax is directly paid by the taxpayer after calculating his/her tax liability.
• TDS tax rate is based on the nature of payment specified by the government with no payer’s intervention. On the other hand, the Income Tax rate is based on income slabs outlined in the Tax Laws

• TDS is applicable to payments like salary, interest, rent, professional fees, etc, whereas Income Tax is levied on the total annual income, including salary, capital gains, etc

Source: https://www.livemint.com/money/personal-finance/itr-2024-income-tax-vs-tds-how-the-two-are-different-11708021106857.html