TDS, TCS rates cut to put cash in your hand but your tax liability remains same

A reduction in TDS, TCS rates does not mean reduction in the tax liability of the receivers of these payments/incomes.

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The government has reduced TDS and TCS rates for interest, dividend, rent payments and other non-salaried payments by 25 per cent with effect from May 14, 2020 for the current financial year. Finance Minister Nirmala Sitharaman announced this in a press conference dated May 13, 2020. The tax deduction at source (TDS) and tax collection at source (TCS) rates have been similarly cut for certain other specified payments as well.

This means that lower TDS and/or TCS will be deducted from these (interest, dividends etc.) at the time of payment thereby increasing the amount paid to the same extent. This is aimed at increasing the liquidity in the hands of the recipients such as fixed deposit holders, holders of dividend plans of mutual fund units and shares and landlords of premises given out on rent.

However, reduction in TDS, TCS rates does not mean reduction in the tax liability of the receivers of these payments/incomes. An individual has to pay tax on the entire payment as per the income tax slab rate applicable to him/her. Therefore, a lower TDS may simply mean that the receiver has to compensate for the same by paying higher self assessment tax later. If total self assessment tax payable by a person exceeds specified limits, then advance tax is payable. Therefore, increase in self assessment tax may lead to advance tax liability.


This can be explained with an example. On interest payment by a bank of Rs 50,000 on a fixed deposit, the bank would have deducted TDS @ 10 per cent i.e. Rs 5,000 in a financial year. With the new rates coming into effect from May 14, 2020, the TDS will be deducted @ 7.5% i.e. the TDS in the financial year is likely to be Rs 3,750.

The move will lead to more money in your hands. From the example above, post TDS, the interest income from fixed deposit will be Rs 46,250. However, individuals should remember that this will not lead to change in the taxation of interest income. Instead it may lead to higher tax outgo. Assuming your income lies in the tax slab of 30 per cent and 10 per cent was deducted via TDS then you were required to pay only 20 per cent as self assessment tax.

With reduction in TDS rates, the individual will now be required to pay 22.5 per cent at the time of paying self assessment tax instead of 20 per cent earlier, i.e. increase in payment via self-assessment tax by 2.5%. This is because earlier 10% was cut as TDS from the payment itself and deposited with the government by the deductor. The deductor would issue a TDS certificate as proof of this tax being paid. This TDS could then be used by the individual to set off his/her total tax liability.

Another point to keep in mind is that reduction in TDS may land you in a situation where you have to pay advance tax. As per the advance tax rules, if your total tax liability on all income minus of TDS is more than Rs 10,000 in the financial year, then you are liable to pay advance tax. Therefore, if TDS on non-salaried payment deducted is less, then it will be lead to higher self-assessment tax becoming payable. Consequently, the self assessment tax payable may cross this Rs 10,000 limit in a current financial year and you would then become liable to pay advance tax as per the income tax laws.

The reduction in TDS rates will be applicable to payment of contract, professional fees, interest, rent, dividend, commission, brokerage, etc.

TDS on rent is deductible at the rate of 5 per cent by the tenant if the monthly rental exceeds Rs 50,000. Now this rate has been reduced to 3.75 per cent.

Similarly, TDS is applicable on dividend payments by companies and mutual funds if the total dividend paid to an individual in a financial year exceeds Rs 5,000 for current financial year. This TDS will now be deducted at 7.5 per cent instead of 10 per cent earlier.
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It is to be remembered that TDS rates are different for different payments and TDS itself kicks in at different levels for different types of payment.

This move would definitely help those people who were able to neutralise their entire tax liability via various deductions at the end of the financial year. Such people would normally claim a refund for TDS already deducted. Consequently, a lower rate of TDS would help them.
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