Tax Deduction at Source - TDS

October 13, 2010by EconomyWatch


A Tax Deduction or a Tax-Deductible expense has the primary function to reduce ones taxable income. Since taxes constitute a part of the taxable income earned by individuals, tax deductions can reduce the taxable income and offer a certain amount of tax relief.

TDS is a common practice in all the countries of the world. With such an expense, individuals can enjoy a tax deduction right when they get their income. With this, their taxable income falls a great extent.

According to the Indian Tax System any income or salary under any heads of income is eligible for this. The amount is generally collected by state or local governments or any cooperative or a body of trustees and includes any income earned during the previous year from any number of employers. TDS however, does not include, loss incurred from house property income.

The Indian Income Tax Act (IT Act) had provided for certain tax deductions under Chapter IVA for the years 2004-05 and 05-06 and they are as follows:

  • Deductions in respect to contributions to certain family or personal pension fund schemes such as those with the Life Insurance Corporation of India (LIC). The regular pension received by the person or his nominee is taxable but the amount received on full maturity of the pension will be granted tax exemption.
  • Medical insurance premium for the health of an assessee or any of his dependents or any member of the Hindu Undivided Family (HUF) was also granted deduction to the tune of Rs.10, 000. Medical treatment for specified ailments was also allowed this for an assessee or members of the HUF.
  • Tax deductions were there for repayment of loans for higher studies and interest thereon for a maximum of Rs.40, 000 per year over a maximum period of 8 years.
  • Tax deductions were also allowed for donations to charitable institutions and certain funds. For example, if a person was taxed income taxes at 10% with a monthly income of Rs. 10, 000 he would be paying an income tax amounting to Rs. 1000; but with donating Rs. 1000 to a charitable organization, he would be gaining Rs. 100 as his income tax would now be 10% of Rs. 9000 or Rs. 900.

TDS covers receipt of payment under interest earned from securities and other windfall gains such as horse-racing and winning lottery prizes.Payment to contractors in pursuance of work of any contract including labour contract also comes under the purview of TDS according to the Indian Tax System.

Insurance commission related to procuring all insurance business, fees for professional and technical services, Income in respect of Units of Mutual Fund specified under sec 196A of the Income Tax Act, income from units purchased in foreign currency or long term capital gains arising from transfer of such assets under sec 196B is also covered under TDS.

The USA tax system provides similar process like the Indian Tax system. While they also offer tax deductions on charitable contributions to legal welfare organizations, they offer this on mortgage payments on one’s primary residence, tax exemptions to people with disabilities, tax deductions on business start-up and operation costs. USA offers tax deductions on moving expenses such as casualty expenses not covered by casualty insurance and job-search expenses.

In Australia for example, there are no state and local taxes and tax deductions are mostly offered on business investments in the pursuit of future profits. Interest payments on loan might come under this ambit.

In case of the UK, tax deductions are only available for personal subscriptions, mileage or other expenses incurred as part of the work and certain home expenses if a part of the house is used for commercial purposes, i.e., to further ones’ economic pursuit.

Tax deductions on house loans are becoming quite popular, and if they are also extended to car loans with the rising interest rates on them, especially in the case of India, then car sales will remain at a steady level and government can appropriate much needed sales taxes in the form of revenue.


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