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This means that lower TDS and / or TCS will be deducted from these (interest, dividends, etc.) at the time of payment, thus increasing the amount paid to the same extent. This aims to increase liquidity in the hands of recipients, such as holders of fixed deposits, holders of dividend plans of mutual fund units, and shares and owners of premises leased.
However, the reduction in the TDS and TCS rates does not mean a reduction in the tax liability of the recipients of these payments / income. An individual has to pay taxes on the full payment at the income tax rate applicable to him / her. Therefore, a lower TDS may simply mean that the receiver has to compensate it by paying a higher self-assessment tax later. If the total self-assessment tax payable by a person exceeds the specified limits, then the advance tax is payable. Therefore, the increase in the self-assessment tax can lead to an advance of fiscal responsibility.
This can be explained with an example. In the interest payment by a bank of Rs 50,000 on a fixed deposit, the bank would have deducted TDS @ 10 percent, that is Rs 5,000. With the new rates to take 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, posting TDS, FD interest income will be Rs 46,250. However, people should remember that this will not lead to a change in the taxation of interest income. Instead, it can lead to a higher tax outflow. Assuming your income is in the 30 percent tax slab and 10 percent was deducted through TDS, then you were required to pay only 20 percent as a self-assessment tax.
With the reduction in TDS rates, the individual will now be required to pay 22.5 percent at the time of paying the self-assessment tax instead of 20 percent earlier, i.e. increase the payment through the self-assessment tax by 2.5 %. This is because the previous 10% was reduced as TDS of the payment itself and the deductor deposited it with the government. The deductor would issue a TDS certificate as proof that this tax was paid. This TDS could be used by the individual to offset his total tax liability.
Another point to keep in mind is that lowering TDS can lead to a situation where you have to pay taxes up front. Under the advance tax rules, if your total tax liability on all income less TDS is greater than Rs 10,000 in the financial year, then you are responsible for paying advance taxes. Therefore, if the TDS on the deducted non-salaried payment is lower, a higher self-assessment tax payable will be generated. Consequently, the self-assessment tax payable may cross this limit of Rs 10,000 in an ongoing financial year and you will then be responsible for paying the advance tax under the income tax laws.
The reduction in TDS rates will apply to the payment of the contract, professional fees, interest, rentals, dividends, commissions, brokerage, etc.
TDS on rent is deductible at a rate of 5 percent per tenant if the monthly rent exceeds Rs 50,000. Now this rate has been reduced to 3.75 percent.
Similarly, the TDS is applicable to dividend payments by companies and mutual funds if the total dividend paid to an individual in a financial year exceeds Rs 5,000 for the current fiscal year. This TDS will now be deducted at 7.5 percent instead of the previous 10 percent.
It should be remembered that TDS rates are different for different payments and that TDS itself applies at different levels for different types of payment.
This move would definitely help those people who were able to neutralize their entire tax liability through various deductions at the end of the financial year. Such individuals would normally claim a refund for the TDS already deducted. Consequently, a lower TDS rate would help them.
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