TDS is basically a part of income tax. It has to be deducted by a person for certain payments made by them. TDS or Tax Deduction at Source is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making payments.
Usually, the person receiving income is liable to pay income tax but the government with the help of TDS provisions makes sure that income tax is deducted in advance from the payments being made by any person. Thus the recipient of income receives the net amount after deduction of tax at source.
The concept of TDS is based on a simple principle i.e. tax is to be deducted at the time of payment getting due or actual payment whichever is earlier. A set of scenarios for will be helpful in understanding the concept:
Suppose, Startease Online Filings Private Limited has to make payment of Rs 50,000/- to Mr XYZ in exchange for professional services
Scenario 1:
Mr. XYZ was paid Rs 30,000/- in advance on 20th Oct 2018. XYZ raised invoice after completion of work on 25th Oct 2018 and rest of payment is to be made.
In such case the company should have deducted tax in the following manner:
On 20th Oct 2018: Rs 3000/- (@ 10% on the advance of Rs 30000/-)
On 25th Oct 2018: Rs 2000/- (@ 10% of total invoice amount as deducted by tax already deducted i.e. Rs 5000/- deducted by Rs 3000/-)
Scenario 2:
Mr XYZ raised the invoice on 20th Oct 2018 and was paid whole consideration at one go on 25th Oct 2018.
In such whole amount of Rs 5000/- shall be deducted on 25th Oct 2018, the date when payment got due, and a net payment of Rs 45000/- shall be made on 25th Oct 2018.
Scenario 3:
Mr XYZ is to receive the whole amount of Rs 50,000/- well in advance before completion of the assignment.
In such particular case tax of Rs 5000/- shall be deducted right at the time of payment of advance and no tax is to be deducted at the time of making an entry for the bill due.
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