What are the differences between income tax and tax deduction at source?

The two phrases that Indian taxpayers encounter most frequently are income tax and tax deducted at source (TDS). Despite their apparent similarities, they are very different from one another. The primary distinction between TDS and revenue Tax is that the former is subtracted from the taxpayer’s annual return or total profit, while the latter is subtracted from the payer’s revenue sources in accordance with the anticipated tax burden. Furthermore, the mechanisms for collecting both taxes are different.

Income Tax

Income tax is a levy imposed on the yearly income a person or business earns within the fiscal year. The Income Tax Act of 1961, which establishes the guidelines for tax assessment, computation, and collection, governs it. It covers a variety of income streams, including capital gains, earnings from real estate, profits from a career or business, and salaries. Anyone making more than Rs. 2.5 lakhs (under the previous tax system) or ₹3 lakhs (under the current tax regime) must pay income tax; failing to do so is penalized by law as tax evasion.

income tax

  • Anyone earning more than ₹3 lakhs (new tax regime) or 2.5 lakhs (old tax regime) annually
  • For senior citizens who are more than 60 years old and less than 80 years old, the limit is 3 Lakhs
  • For senior citizens who aged more than 80 years, the limit is 5 Lakhs

Tax Deduction at Source

When tax is withheld from an individual’s primary source of income and sent straight to the government, it’s known as tax deducted at source, or TDS. When making certain payments, such as salaries, interest, rent, or professional fees, people or organizations are required by law to deduct a predetermined proportion of taxes from the payment amount. This is known as TDS. It is essential for stopping tax evasion and makes the process of collecting taxes easier.

  • Salary Payment
  • Revenue from Rentals and Investments
  • Cash obtained from winning lotteries, games of chance, prizes, puzzles, and related activities.
  • Insurance commissions
  • Contractor payments, brokerage fees, commissions, and other expert costs
  • Payments from a number of sources, including the National Savings Plan.

Differences between Income Tax and TDS

1) TDS is deducted at the source of income throughout the year, whereas the taxpayer pays Income Tax at the end of the financial year.

 

income tax

 

2) The payer (employer or financial institution) deducts TDS and remits it to the government, while the taxpayer directly pays Income Tax after calculating their tax liability.

Read More: 8 Key Points Explaining Income Tax Benefits for Senior Citizens on Interest Income

3) TDS tax rates are determined by the government based on the nature of payment, with no payer intervention, whereas Income Tax rates depend on income slabs outlined in Tax Laws.

4) TDS applies to payments such as salary, interest, rent, professional fees, etc., while Income Tax is imposed on the total annual income, including salary, capital gains, etc.

8 Key Points Explaining Income Tax Benefits for Senior Citizens on Interest Income

The Income Tax Act’s Section 80TTB describes the tax advantages available to older persons for interest income from deposits. The new Section 80TTB provision is one of the incentives expressly aimed at older citizens that were added in the 2018 Finance Budget.

Under Section 80TTB, a person who is 60 years of age or older and an Indian resident for tax purposes can deduct ₹50,000 for interest earned on deposits made at the Post Office, Bank, and Cooperative Society during a year. Interest accrued on both fixed and savings accounts is subject to this deduction.

Interest on deposits made to these companies in whatever form, including savings bank interest, fixed deposit interest, and recurring deposit interest, is covered by this deduction. Above the total ₹50,000, interest earned on deposits made under the Senior Citizen Savings Scheme is also eligible for deduction.

Senior Citizens

Difference between Section 80TTA, and Section 80 TTB

Although they differ, Sections 80TTA and 80TTB both allow deductions for interest income. For savings accounts kept in banks, co-ops, or post offices, people under 60 years of age and Hindu Undivided Families (HUFs) are eligible for interest deductions up to ₹10,000 under Section 80TTA.

It’s crucial to remember that senior folks are not eligible for the advantages of Section 80TTA.

Eight Essential Points to Consider

1) A senior citizen is defined as a resident individual aged 60 years or above.

2) The interest pertains to deposits in banks, whether they are savings or fixed.

3) This includes interest from deposits in cooperative societies involved in banking activities, such as cooperative land mortgage banks or cooperative land development banks.

4) Interest earned on post office deposits is also covered.

5) Banks are not authorized to deduct any Tax at Source (TDS) from interest payments to senior citizens on deposits up to ₹50,000.

Read More: Understanding Section 43B(h) of the Income Tax Act in Ensuring Prompt Payments to MSMEs

6) With the exemption of interest up to ₹50,000 under Section 80TTB, resident senior citizens have a higher limit of ₹50,000 for TDS on interest under Section 194A.

7) Any interest income exceeding ₹50,000 is subject to taxation based on the applicable slab rate for senior citizens.

8) Interest income derived from company fixed deposits, bonds, or Non-Convertible Debentures (NCDs) does not qualify for relief under Section 80TTB.

Understanding Section 43B(h) of the Income Tax Act in Ensuring Prompt Payments to MSMEs

Section 43B of the Income Tax Act of 1961 would have a new clause (h) inserted by the Finance bill of 2023. The aforementioned clause, which has been implemented through micro and small businesses, would have been included as a socio-economic welfare measure to ensure on-time payments. The Act’s Section 43B allows for certain deductions to be made on actual payments. The Finance Bill 2023 would have added a new clause to this section that would read as follows:

Section 43B (h)

Any amount that the assessee owes to a MICRO or SMALL enterprise after the deadline set forth in Micro, Small and Medium Enterprises Development Act, 2006, Section 15.

Section 43B(h)

The aforementioned phrase indicates that in order to qualify for the claim reduction of the amount payable to be given to the micro and small firms, the payment must be made within the time frame established in Section 15 of the Micro, Small, and Medium firms Development Act, 2006.

Section 15 Deadline in MSME Act

According to Section 15 of the MSME Development Act of 2006, if a supplier provides any goods or services to a buyer, the buyer must pay the supplier on or before the date that the two parties have agreed upon in writing, or on the designated day in the absence of such an agreement.

With the caveat that the time frame agreed upon in writing by the buyer and supplier may never be longer than 45 days from the acceptance date or the day of considered acceptance.

The buyer will make the payment as per the agreement between the supplier and the buyer. However, the buyer cannot defer payment for longer than 45 days from the acceptance date, also known as the day of considered acceptance, which is the day the goods or services are accepted.

Consequences of Non-compliance with Section 15 Timeframe for MSME Payments

The buyer will be subject to penalties under the new Finance Bill 2023 clause (h) of Section 43B, as well as compensatory interest obligations under Section 16 of the MSME Development Act, 2006, and will be considered an ineligible business expense if they are unable to pay the supplier of goods or services as a company registered as a micro or small enterprise.

(i) Equitable to the Interest:

Regardless of anything stated in it, the buyer is responsible for filing the compound interest with the monthly rests on that amount from the appointed day to the supplier, or if it is from the date immediately following the date agreed upon, at three times the bank’s rate circulated through the Reserve Bank, if any purchaser would be unable to perform the payment of the amount to the supplier as needed under section 15. The RBI repo rate as of is the RBI-notified bank rate for the same topic.

(ii) Outlawing Interest Payments to MSMEs in Exchange for Compensation:

For the Income Tax Act of 1961’s computation, the interest due amount or paid through any buyer under the provisions of Section 23 of the MSME Development Act, 2006, would not be allowed as a deduction.

(iii) Disallowance for Expenses:

Any amount due from the taxpayer for the expenses incurred or the payment for purchases made to the supplier registered as a micro or small firm will not be permitted if the supplier fails to make the payment within the allotted time frame as stated in MSME Development Act, 2006, referenced above, Section 15.

Identification Procedure for Communities under Section 43B(h)

The condition would only apply to the amount owed to the Micro & Small Businesses. Therefore, the amount that must be paid to the Medium Enterprise is eligible for deduction on an accrual basis.

Definition of Enterprise According to MSME Development Act, 2006:

An enterprise, referred to by any name, is a business concern, industrial undertaking, or establishment engaged in the manufacture or production of goods related to industries listed in the First Schedule to the Industries (Development and Regulation) Act, 1951. It can also be involved in providing or rendering any service.

Types of Enterprises as Per MSME Development Act, 2006:

The Central Government has the authority to classify various types of enterprises, including proprietorships, Hindu undivided families, associations of persons, cooperative societies, partnership firms, companies, or undertakings, as micro, small, or medium enterprises. This section overrides Section 11B of the Industries (Development and Regulation) Act, 1951.

Section 43B(h)

The classification of enterprises into Micro, Small, and Medium categories, as outlined in the Micro, Small and Medium Enterprises Development Act, 2006, is provided below for your reference:

Micro Enterprise:
    • Investments below Rs. 1 crore
    • Turnover less than Rs. 5 crore
Small Enterprise:
    • Investments below Rs. 10 crore
    • Turnover less than Rs. 50 crore
Medium Enterprise:
    • Investments below Rs. 20 crore
    • Turnover less than Rs. 100 crore

It is advised for business entities to obtain an annual declaration from their respective suppliers, indicating their classification as micro or small enterprises registered under the Micro, Small and Medium Enterprises Development Act, 2006. This ensures compliance and facilitates purchasers in identifying the enterprise. Micro and small enterprises are encouraged to include a note on their invoices stating their enrollment under the MSME Development Act, 2006, for the convenience of purchasers in understanding compliance requirements.

Commencement Date of New Clause (h) under Section 43B

Starting April 1, 2024, clause (h) of Section 43B becomes effective. This provision mandates the inclusion of any outstanding amounts payable to micro and small enterprises, left unpaid beyond the specified duration in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006, into the income calculation under Section 28 of the Income Tax Act, 1961.

Assessment of Section 43B(h) Impact on the MSME Sector

The introduction of clause (h) in Section 43B of the Income Tax Act, 1961 has sparked debates. This clause, applicable from the Assessment Year 2023-24 onwards, pertains to expenses incurred on purchasing goods or services from Micro and Small Enterprises starting April 1, 2023. The definition includes industrial undertakings, business entities engaged in the manufacture or production of goods related to specific industries, or those providing services.

To qualify for deductions, payments must be made within 15 or 45 days, as specified in Section 15 of the MSMED Act 2006. Small enterprises must have investments not exceeding 1 Crore and turnover not exceeding 5 Crores, while medium enterprises should have investments not exceeding 10 Crores and turnover not exceeding 50 Crores. Enterprises involved in trading are excluded.

Despite the specified timeframe, deductions are allowed even if payments are made beyond the stipulated days within the same year, subject to the payment of compounded interest at a rate of 19.5%, which might be deemed high compared to the prevailing RBLR of 6.5%. The interest is considered penal in nature and raises questions about the possibility of waiver.

Section 43B(h)

Applicability to All Taxpayers

This provision is seen to apply universally to all taxpayers, extending beyond manufacturers or industries to include professionals who acquire goods or services from MSMEs.

Read More: Starting April 1, 2024, MSME Registration and Recognition Status Required for New ITR-5 & ITR-6 Filing.

Udyam Registration and Section 43B(h) Benefits

A Chartered Accountancy firm with Udyam Registration can leverage the advantages offered by Section 43B(h). This enables the firm to prompt clients, including Banks and Government enterprises, to settle bills within the specified 15-day period.