Understanding TDS Deductions for Employees and Freelancers

Posted In | Finance | Accounting Software | India Accounting Tax

Tax Deducted at Source (TDS) is a means of collecting income tax in India. It is deducted at the source from which an individual's income is generated. Both employees and freelancers are subject to TDS deductions, but the process and rates differ. This article aims to provide an understanding of TDS deductions for both employees and freelancers.

 

What is TDS?

TDS is a method of collecting income tax from the taxpayer at the source of income generation. The payer or employer deducts a certain percentage of the payment as tax before the amount is credited to the payee or employee. The deducted amount is then deposited with the government as tax on behalf of the recipient. This ensures that the government receives tax revenue on a regular basis and reduces the chances of tax evasion.

 

TDS for Employees

For salaried individuals, TDS is deducted under the head 'Salaries' in their Income Tax Return (ITR). The employer deducts TDS based on the employee's salary and investments declared by the employee. The deductions are made according to the tax slabs applicable to the employee's income. Employers are required to provide employees with a Form 16, which is a TDS certificate that shows the total salary paid and the TDS deducted. Employees can claim a refund from the Income Tax Department if they have paid excess tax through TDS.

 

TDS for Freelancers

Freelancers, or professionals who are not employed by a company, are also subject to TDS deductions. In their case, TDS is deducted under the head 'Professional or Technical Services' in their ITR. The TDS rate for freelancers is 10% of the total payment made to them. However, if the freelancer does not provide their Permanent Account Number (PAN), the rate of TDS deduction increases to 20%. Freelancers can also claim deductions for expenses incurred to perform their work, such as internet charges, rent, and telephone bills. To claim these deductions, freelancers must maintain proper records and receipts of their expenses.

 

How to Reduce TDS Deductions?

Both employees and freelancers can reduce their TDS deductions by investing in tax-saving instruments. Some of these investments include:
 

• Life insurance premium
   

• Public Provident Fund (PPF)
   

• Employee Provident Fund (EPF)
   

• National Savings Certificates (NSC)
   

• Equity-Linked Savings Scheme (ELSS)
   

By investing in these instruments, individuals can claim deductions under Section 80C of the Income Tax Act, which reduces their taxable income and, consequently, the amount of TDS deducted.

 

TDS deductions are an essential part of the income tax system in India. Understanding the TDS process and rates for both employees and freelancers can help individuals plan their finances better and save on taxes. By investing in tax-saving instruments and maintaining proper records of expenses, individuals can reduce their TDS deductions and maximize their take-home income.