Tax deducted at source (TDS) is something that every trust will have to go through unavoidably every year. In most cases, TDS is deducted on the income of the trust. But it is also equally applicable on its expenses. Hence, it is very important to know what TDS is and how it affects the trusts.
The government has different ways of collecting tax from the public. One is direct tax and the other is indirect tax. Income tax, for example, is a direct tax collected by the government. So also, Goods and Services Tax (GST), for example, is an indirect tax collected by the government. Normally the government collects the income tax directly from the taxable persons while they file the income tax returns. One of the mechanisms used to collect income tax directly is through TDS.
What is TDS?
TDS is a mechanism to collect income tax; it forces people and companies to disclose their income. It is to be deducted by an employer or company on the payment made to the employee or contractor or customer. It is based on the principle, “pay tax as you earn,” which is beneficial to the employer as well as the employee. It is not a tax, but an amount adjustable against the tax payable or refundable if there are no tax dues. An employer or company/trust deducts the applicable TDS while making a payment. The TDS thus deducted has to be deposited in the income tax account of the government, quoting the deductor’s PAN and TAN as well as the deductee’s PAN. All TDS deductions (from various sources) of a particular PAN get credited to the income tax account of the deductee, who, while filing his income tax returns, calculates the income tax payable by him and either claims refund if his income tax is overpaid or pay the shortfall in other cases. Thus, TDS is the income tax paid by the individuals and organizations and it is adjustable against the tax payable or claimed as refundable.
What is PAN?
Every trust must have a Permanent Account Number (PAN), which needs to be quoted for all financial dealings and filing returns. PAN is a ten digit alpha numeric id, unique for every person/entity. It is to be noted that the fourth character, which determines the percentage of TDS to be deducted, has to be noted. The fourth character of the PAN may be one of the following:
“T” for Trust
“S” for Society
“P” for Individual
“C” for Companies
“F” for Firm/limited liability partnership
“A” for Association of persons
“H” for HUF (Hindu Undivided Family)
In every PAN, the fourth character is a letter which shows the status of the person or organization (as shown above) and the fifth character is a letter denoting the first letter of the name of the organization. For example, AAATJ0723H is the PAN for Jnana Deepa Vidyapeeth, a registered public trust. Note that the fourth letter “T” denotes that the entity is a trust and the fifth character is “J”, standing for the first letter of the name of the trust. Any individual or organization whose income crosses the basic exempt income (currently Rs 2.5 lakhs per annum), is supposed to apply for and get a PAN. Here it is to be noted that no individual person or entity may have more than one PAN. Having multiple PAN is a crime.
Here we try to spell out the instances where TDS is applicable to the trusts. For Trusts, TDS is applicable on the following payments:
- Under Section 192B of the income tax act , TDS is deductible on salaries if the income of the individual is beyond the basic exempt level of Rs 2.5 lakhs. TDS in such a case is deducted on the average rate of tax payable for the financial year.
- Under Section 194C, TDS has to be deducted on the payments to the contractors or sub-contractors, if the single payment is beyond Rs 30,000 or the amount crosses Rs 1 lakh on multiple payments.
[This is the most important section applicable to the trusts. TDS deduction depends on the fourth letter of the payee. If the fourth letter is “P,” very common, it stands for the individual and TDS is deducted at 1%. If the fourth letter is “C” or “F”, then TDS is deductible at 2%. If the payee does not have a PAN, then TDS is deducted at 20%. Hence, we should find out before allotting the work if the person has a PAN or not. If no PAN, no contract work can be given.]
- Under Section 194J, TDS of 10% is applicable on any fees paid for professional consultation or Professional or Technical fees, if the amount goes beyond Rs 30,000/annum. [This section is highly applicable to the trusts. Kindly note that, if the payee is a professional, like an advocate, engineer, architect, doctor, auditor, etc., then, TDS is to be deducted at 10%.]
- Under Section 194A, TDS is deductible if the interest income is more than Rs
10,000/annum, at 10%.
- Under Section 194H, TDS is applicable on the commission or brokerage at
the rate of 10% if the amount is above 5000.00.
- Under Section 194I(a), TDS is applicable at the rate of 1% on the purchase of an immovable property, if the value of the property crosses Rs 50,00,000 as lumpsum or in installment.
- Under Section 194I(b), TDS at the rate of 10% is deductible on the rent, if it is more than Rs 1,80,000/year (15,000/month). TDS is 5% if no audit is necessary for the payee. TDS of 10% is deductible on land, building & furniture; on plant & machinery, 2% TDS is applicable.
If the deductee has no PAN, then TDS deductible is 20% u/s 206AA of the ITA, 1961. If no TDS is deducted, 30% of the amount on which TDS is deductible and not deducted, will be disallowed for the deductor as application of income u/s 40(a)(ia) (new explanation to Sec 11)
TDS has to be deducted from taxable salary and on every single contract bill exceeding Rs 30,000 or on multiple payments if the amount exceeds Rs 1,00,000 per annum. It has to be deposited in the IT Account by the 7th of the next month. In addition, quarterly TDS returns are to be filed electronically within thirty days of every quarter end.
Besides PAN, a deductor should have a Tax deduction Account Number (TAN). Every trust should apply for TAN within one month from the end of the month in which tax is deducted. A trust having various branches and maintaining individual accounting should obtain a separate TAN for each branch other than that of the main trust. Not having a TAN will attract a penalty of Rs 10,000/-
197 CERTIFICATE (for exemption from TDS deduction):
TDS is deducted on receipts such as interest on investments, rent, professional fees, commission, etc. U/S 197, the trust can apply to the Assessing Officer of the TDS department for certificate authorizing the payer not to deduct TDS.
A penalty is applicable if TDS norms are not followed
- There is an interest charged for the late payment of TDS [Sec 201 (1A)].
- a) If TDS was deducted and not paid: 1.5 % per month on the amount of such tax from the date on which tax was deducted to the date on which such tax is actually paid.
- b) If TDS was not deducted and not paid: Up to 100 % of the amount of TDS not paid.
- Interest on interest (Sec 220): Any amount specified as payable in notice of demand u/s 156 shall be paid within 30 days of notice served or else the assessee shall be liable to pay simple interest @ 1% per month.
- Penalty for late filing of TDS Returns (Sec 234E): Rs 200 per day or an amount equal to TDS amount in the quarter, whichever is lower.
- Prosecution u/s 276B: if a person defaults, imprisonment from 3 months to 7 years.
- TDS certificate: The deductor gives the deductee the TDS certificate in (a) Form 16 for salaries and (b) Form 16A for income other than salary. The deductee files this TDS certificates along with the tax returns.
- Forms 26Q and 27A: The deductor files quarterly returns with all details of the TDS deducted. Form 26Q is used for non-salary income. Quarterly returns in Form 27A is a control chart of quarterly TDS/TCS statements to be filed by deductors/collectors along with quarterly statements. It is a summary of TDS/TCS returns which contains control totals of ‘amount paid’ and ‘income tax deducted at source’. A separate Form No. 27A is to be filed for each TDS/TCS return.
- Form 26AS: It is an annual tax credit statement. It indicates that the tax that has been deducted has been deposited with the Govt. Form 26AS contains details of tax deducted on behalf of the taxpayer (you) by deductors (employer, bank etc.). So, TDS deductions that are given in Form 16 or 16 A can be cross-checked using Form 26AS.
Following all the above procedures will require sufficient knowledge of the way TDS functions.
Fr Alex Gnanapragasam SJ
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