Difference Between TDS and Income tax

Tax Deducted At Source (TDS) vs Income Tax

Income tax is imposed by the state on an individual, a firm or a corporate house when income of the individual or the business entity exceeds a particular basic limit exempted by income tax law of the country. Income tax is the income of the state required to meet its expenditure on defense, development programs, salaries of state employees and various other plan and non-plan expenditures.

Income tax is calculated on the basis of annual income of the concerned individual or business enterprise. However, although income tax is calculated on annual income basis, the tax is deducted at source periodically over the accounting year for which income tax is payable. In case of salary payable to an employee, the employer has the duty to deduct income tax from the salary every month. In case of distribution of prizes of lottery and gambling, a certain percentage of such winning is deducted at source from the amount payable to such winner. There are scores of other individuals whose income is taxed at source by the person making payment to such individuals.

Therefore the term ‘Income tax’ and ‘Tax deducted at source’ may be confusing to a layman. A comparison is given below to clear such confusion.

1. While Income tax is calculated on the annual income and is a definite amount, the TDS is a sort of tax deducted periodically in anticipation of a deemed annual income, the sum total of such periodic deduction is supposed to be equal or near equal to the actual income tax calculated at the end of the accounting year.
2. Whereas Income tax is a person’s total annual tax liability, the TDS represents a fraction of his total annual tax liability.
3. A person may not have to pay tax at source, but may have to pay income tax at the end of the year in certain cases. For example, if an individual has income from salary as well as income from house property. Tax may not be deducted from his income from salary if it is below taxable limit. But if his total income, including the income from house property, exceeds the exemption limit, he will have to pay tax on his annual taxable income in one lump sum at the end of the year.
4. Similarly, an individual may not have taxable income, but still may have to pay TDS. One case in example is income from dividends or income from bank interests. Such dividend or interest income is taxed at source. But on yearly basis he may not have taxable income. So he is eligible to get income tax refund after submitting annual return and claiming refund of such TDS amount.

Summary:
1. Income tax is a tax on the total annual earning of an individual or a profit making business entity. TDS is a fraction of the total anticipated tax deducted monthly/ periodically or occasionally from the earning of an individual which may be of regular or irregular nature.
2. One may not have to pay tax at source but may have to pay income tax at the end of the year.

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