Indian Tax Collection: TDS, TCS, and Income Tax Basics

TDS and TCS: Tax Collection Mechanisms

TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) are methods within the Indian tax system designed to collect tax at the point of a transaction. This approach assists the government in maintaining a consistent revenue flow and minimizing tax evasion. The primary distinction lies in who collects the tax and the nature of the transaction involved.

Tax Deducted at Source (TDS)

With TDS, the payer deducts a specified percentage of tax before paying the recipient and deposits this amount with the government on the recipient's behalf. This deduction is treated as advance tax for the recipient, who can claim credit for it when filing their income tax return.

TDS applies to various income payments, such as:

• Salaries
• Bank interest
• Rent above a certain limit
• Professional fees
• Payments to contractors

Example: If a company pays a freelancer ₹60,000, it might deduct 10% as TDS (₹6,000) and pay the freelancer ₹54,000, remitting the ₹6,000 to the government.

Tax Collected at Source (TCS)

TCS involves the seller collecting an additional tax amount from the buyer during the sale of specific goods or services and depositing it with the government. The buyer can then claim credit for this amount when filing their ITR.

TCS primarily applies to the sale of specific items, including:

• Alcoholic liquor
• Certain forest products
• Scrap metal
• Minerals
• Motor vehicles over a set value (e.g., ₹10 lakhs)
• Overseas tour packages

Example: A car dealership selling a car for ₹12 lakhs would collect an extra 1% TCS (₹12,000) from the buyer and deposit it with tax authorities.

Income Tax Fundamentals

Definition of Income Tax

Income tax is a direct tax imposed by the government on the income earned by individuals and other entities during a financial year. In India, income tax is levied and collected by the Central Government under the Income Tax Act, 1961.

The amount of tax payable depends on the nature and level of income and the prescribed tax rates.

Basic Concepts of Income Tax

1. Person

Under the Income Tax Act, a “person” includes:

• Individual
• Hindu Undivided Family (HUF)
• Firm
• Company
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Local Authority
• Artificial Juridical Person

2. Assessee

An assessee is a person who is liable to pay income tax or any other sum under the Income Tax Act. It also includes a person in respect of whom legal proceedings have been initiated under the Act.

3. Assessment Year (AY)

Assessment Year is the year in which income is assessed and tax is paid. It is a 12-month period starting from 1st April to 31st March.

Example: Income earned in 2024–25 is assessed in AY 2025–26.

4. Previous Year (PY)

Previous Year is the year in which income is earned. It is also a 12-month period immediately preceding the assessment year.

5. Gross Total Income (GTI)

Gross Total Income is the total income computed under all five heads of income, before allowing deductions.

6. Heads of Income

Income is classified under five heads:

1. Income from Salary
2. Income from House Property
3. Profits and Gains from Business or Profession
4. Capital Gains
5. Income from Other Sources

7. Total Income

Total Income is calculated as:

> Gross Total Income – Deductions under Sections 80C to 80U

Detailed Heads of Income

Income from Salary

This head includes income received by an employee from an employer. Conditions:

• Employer–employee relationship must exist.
• Income is taxable on due or receipt basis, whichever is earlier.

Components: Basic salary, Dearness allowance, Bonus and commission, Allowances (HRA, TA, CCA, etc.).

Income from House Property

Income earned from buildings or land attached to buildings.

Types of House Property: Self-occupied property, Let-out property, Deemed let-out property.

Taxable Income Includes: Rent received or receivable.

Deductions Allowed (Section 24): Standard deduction @ 30%, Interest on borrowed capital (housing loan).

Profits and Gains from Business or Profession

Income arising from business or professional activities.

Examples: Profit from trading or manufacturing, Professional fees (doctor, lawyer, CA), Commission or brokerage income.

Key Points:

• Expenses incurred wholly and exclusively for business are allowed.
• Depreciation on assets is allowed.
• Presumptive taxation schemes may apply (Sections 44AD, 44ADA).

Capital Gains

Income arising from the transfer of a capital asset.

Capital Assets Include: Land and building, Shares and securities, Mutual funds, gold, bonds.

Gross Total Income (GTI) Calculation

Gross Total Income (GTI) means the total income of an assessee computed under all the five heads of income, after setting off losses but before allowing deductions under Sections 80C to 80U of the Income Tax Act, 1961. In simple words, GTI is the aggregate of taxable income from all heads of income.

Heads Included in Gross Total Income

GTI includes income computed under the following five heads:

1. Income from Salary
2. Income from House Property
3. Profits and Gains from Business or Profession
4. Capital Gains
5. Income from Other Sources

How Gross Total Income Is Calculated

Step 1: Compute Income Under Each Head

Calculate taxable income separately under each head:

• Salary income (after exemptions like HRA, allowances, etc.)
• House property income (after deductions under Section 24)
• Business or profession income (after allowable expenses)
• Capital gains (after exemptions)
• Other sources income (interest, dividends, etc.)

Step 2: Set-off of Losses

Losses under one head are adjusted against income of another head as per the rules:

• Intra-head set-off (within the same head)
• Inter-head set-off (between different heads)

(Note: Some losses like capital loss have restrictions.)

Step 3: Add All the Incomes

After adjusting losses, add income from all five heads. > This total is called Gross Total Income (GTI).

Computation of Total Income

Total Income means the aggregate income of an assessee computed under the five heads of income, after allowing exemptions, deductions, and set-off of losses, on which tax is finally charged. According to Section 2(45), Total Income is the income referred to in Section 5, computed in the manner laid down in the Act.

Steps Involved in Computation of Total Income of an Individual

The computation of total income is done in a systematic sequence:

Step 1: Determine Residential Status

The first step is to determine whether the individual is:

• Resident and Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)
• Non-Resident (NR)

Residential status decides which income is taxable in India.

Step 2: Classify Income under Five Heads

All incomes must be classified under the following five heads of income:

• Income from Salary
• Income from House Property
• Profits and Gains from Business or Profession
• Capital Gains
• Income from Other Sources

Step 3: Compute Income under Each Head

(a) Income from Salary

• Basic salary
• Allowances (HRA, DA, etc.)
• Perquisites
• Deduct exemptions (HRA, LTA)
• Deduct standard deduction
• ➡️ Result = Taxable Salary

(b) Income from House Property

• Determine Gross Annual Value
• Deduct Municipal Taxes
• Allow deductions under Section 24: Standard deduction (30%), Interest on borrowed capital

Permanent Account Number (PAN)

What is PAN?

PAN stands for Permanent Account Number. It is a 10-character alphanumeric number issued by the Income Tax Department of India to taxpayers (Example format: ABCDE1234F).

According to the Income Tax Act, 1961, PAN serves as a unique identity number for an assessee for all income tax–related purposes.

Definition of PAN

PAN is a permanent and unique identification number allotted to a person to track all financial transactions and income tax records. Once allotted, PAN remains the same throughout the life of the person and is valid all over India.

Importance of PAN

PAN plays a very important role in the taxation and financial system of India.

1. Identification of Taxpayers: PAN helps the Income Tax Department to identify each taxpayer uniquely.
2. Prevents Tax Evasion: By linking all financial transactions to PAN, it reduces tax evasion and black money.
3. Compulsory for Filing Income Tax Return: PAN is mandatory for filing Income Tax Return (ITR).
4. Tracking Financial Transactions: All high-value transactions are tracked through PAN.
5. Link Between Taxpayer and Department: PAN acts as a link between the assessee and the Income Tax Department.

Uses of PAN

PAN is required in many financial and legal transactions, such as:

1. Filing Income Tax Return: PAN must be quoted while filing ITR.
2. Opening a Bank Account: PAN is mandatory for opening a Savings account or Current account.
3. Payment and Deduction of Tax: PAN is required for TDS (Tax Deducted at Source).