The government of India imposes a tax on the income/earnings of corporations, individual employees, pensioners, trusts, etc. to get revenue so that they can run the country. The tax collected is used for all kinds of public sector services which we avail.
The tax collected is used to give government employees salaries, run different schemes, aid donations/charities in times of crises, issue tenders to build new infrastructure, and much more.
That’s why it’s important that each and every individual/corporation pay their taxes on time. The government collects tax in different types as described in the Income Tax Act of India, 1961.
Some taxes are collected throughout the year while others are collected at the end of the fiscal year. The most common type is TDS or tax deducted at source and the Income tax. Both are different. Now, let’s see what’s the difference between TDS and income tax. in simple terms.
I will try to keep it simple. I will start with a simple explanation of what TDS and Income tax mean.
Income tax: As the name suggests, income tax is the tax imposed upon the income of people or corporate within a fiscal year. Income tax is a type of direct income tax and is calculated as per the income tax slab rates of the Income Tax Act.
TDS: TDS stands for Tax Deducted at Source, meaning it’s the tax a taxpayer pay at the time of the income, which can be monthly/periodically throughout the year. TDS is deducted by the employer before crediting the salary. TDS is deducted by banks and financial institutions on the interest earned periodically. Different types of TDS rates are applicable for different types of income throughout the year.
What is TDS means in income tax?
So, we can easily say that TDS is also a type of income tax paid periodically throughout the fiscal year.
Alright, that’s clear now so we can move on to the differences between TDS and income tax.
The table below will help you understand this better.
| Income Tax | Tax Deducted at Source, TDS |
| Income tax is collected annually and is charged on the gross income generated in a fiscal year. | TDS is collected monthly/periodically and is charged at the time the salary is credited. |
| Income tax is paid by the taxpayer. | TDS is deducted by the employer or the third party. |
| Income tax is on the income according to the tax slab in which the individual’s income falls. | TDS is imposed when the taxable income is more than INR 2,50,000. |
| Income tax must be paid at the end of the financial year. | TDS must be paid by the deductor before the 7th of every month in which it is deducted. |
| Income tax is the total tax liable on a person’s income in a financial year. | TDS is a partial payment of the income tax, which is paid periodically throughout the year. |
What is difference between TDS & TCS income tax?
TDS stands for tax deducted at source. TDS is deducted by the employer at the time of crediting the salary. TDS includes the tax on interest, salary, brokerage, rent, dividends etc. TDS is applicable as per the income tax slab rates. If the income is less than or equal to INR 2,50,000 then no TDS is charged. TDS is paid every 7th day of the month.
TCS stands for Tax collected at source. TCS is collected by the seller at the time of selling goods from the buyer. TCS includes the tax on timber, minerals, liquor, toll plaza etc. TCS is applicable when the sale of goods is more than INR 50 lacs. TCS is deposited in the government account within 10 days from the end of the month in which it is collected.
To see how is TDS calculated on income tax or what TDS tax with example see below.
TDS tax is deducted by the employer/deductor/third party every month before your salary is credited. The tax is imposed on the basis of the tax slab given in the Income Tax Act.
TDS on the salary can be calculated using this TDS Calculator.
There are Rules and Acts that must be read and followed for accurate calculation of the TDS.
The calculator has the following fields:
Financial year, Residential status, recipient type, PAN, Section/description, and Amount of payment.
You can select the type of income on which TDS is to be calculated, i.e. salary, dividends, rent, interests, etc. from the drop-down menu under section/description.
Enter the amount of payment for TDS.
Click on calculate. The required/estimated TDS along with the surcharge, health and education cess, and total TDS to be deducted will appear on the remaining fields of the form.
Manual method:
The other way is to calculate the income tax using this formula:
Average income tax rate = income tax payable ÷ estimated income in the financial year
The steps are as follows:
- Calculate the gross monthly income i.e., CTC plus allowances and perks.
- Now, subtract the exemptions from the gross monthly income as per the guidelines of section 10 of IT act.
- Now, calculate the yearly taxable income by multiplying the monthly income after exemptions by 12.
- Add any other form of periodic income to the annual income to get the gross annual income.
- Deduct any form of EMI paid/rent paid from the income.
- Then, calculate your investment and exemptions under section 80C, in which the tax exemption limit is up to INR 1.5 lakh.
- Now, get the maximum allowable income tax exemption for your salary. If it’s up to 2,50,000 lakh no TDS is to be deducted. If it’s more than calculate the tax rate as per the tax slab of the IT act. Income more than 2.5 lakh to 5 lakh, at 10%, income 5 to 10 lakh at 20%, and income above 30 lakhs at 30%.
Example:
Monthly gross income= INR 80,000
Basic pay=50,000
HRA = INR 20,000
Monthly allowances = INR 2,250
Other allowances = INR 12,750
- Yearly taxable income = monthly gross income multiplied by 12
(80,000 – 2,250) X 12= INR 9,33,000
- Deducting loan interest repayment of INR 1,50,000, the taxable income will be INR 9,33,000 – 1,50,000 = 7,83,000.
- Deducting the investment, say of a total amount INR 1,50,000 which falls under the categories of section 80D. We will get INR 7,83,000 – INR 1,50,000 = INR 6,33,000.
- Now, as per the income tax slab your income falls under the income of 5 to 6,33,000 lakh. The TDS deduction will be as follows: 10 % of (5,00,000 – 2,50,000) = INR 25,000.
And, TDS deduction of 20% (INR 6,33,000 – 5,00,000) = INR 26,600.
- Total TDS will be INR 25,000 + INR 26,000 = INR 51,600.
- The monthly TDS payable on income will be INR 51,600/12= INR 4,300 per month.
Conclusion
Income tax is levied on the overall gross income of the individual earned from different sources, regular or irregular in a financial year. TDS is the monthly tax levied on your income before the salary is credited. Income tax is paid by the individual whereas, TDS is deducted by the employer/deductor/third party. Income tax should be paid at the end of the financial year whereas, TDS must be paid as soon as the salary is credited. The tax rates are on the basis of income tax slab rates mentioned in the income tax act. I hope the difference between TDS and Income tax is clear now.