In one of previous post on WorknHire.com we discussed about the Income Tax Implications for the freelancers in India. While we had covered most of the points regarding income tax, one of the questions that most of the visitors of the website kept asking was about TDS and Service Tax. So here we discuss TDS deductions and its implications on a freelancer working in India.
TDS common abbreviation for Tax Deducted at Source is the deduction of tax from the income source itself, at the time of earning. The government has adopted the method of TDS to simplify the taxation procedure and to ensure that the payer and receiver are accounting the same while filing their income tax returns. TDS in plain simple terms is a part of your tax obligation deposited to the government by the payer right at the source.
TDS for freelancers
TDS for freelancers becomes a unknown territory with a lot of unanswered questions ranging from why do I need to pay government TDS? What happens after TDS is deducted? Lets take up a few questions and try to shed some light on this.
Who can deduct TDS from my earning?
Individual/Company from India having a valid Tax Deduction Account Number (TAN) can only deduct TDS from your earning. TAN much like PAN is a account number provided by government to registered entities making it compulsory for them to deduct TDS. Unless your client has a TAN they are not eligible to deduct any TDS. Since companies/individuals from outside of India don’t have this they won’t be deducting TDS from your earnings. Similarly if you are working for a client who is an individual and doesn’t have a TAN number (most individuals won’t be having a TAN unless they are running a business on their name), no TDS is applicable. In such cases depositing Tax through Advance Tax (in some case) becomes your liability. We will cover advance tax implications for freelancers in another post.
What happens after TDS is deducted?
The Company/Individual who has deducted the Tax from your earning has to pay the TDS to the government on your behalf. If they fail to do so, fines are levied on them (you are not responsible for this in any way). Once they have paid the TDS to the government they will be providing you with a certificate called Form 16A which proves that Tax was deducted from your earning and deposited on your behalf. Your client can provide this to you after the end of the quarter when the payment was made.
How much is the TDS for a freelancer?
In case of freelancers, the TDS is 10.3% of the total payment amount. So lets say you have invoiced a client for Rs 50,000 . The client will be making a payment of Rs 44,850 to you and deducting Rs 5,150(10.3%) and depositing it with the government. Once the quarter ends the client will be providing you with a Form 16A which will mention the Rs 5,150 deducted from your payment . It will also have other details like receipt number by which payment was made to government, date when the amount was deposited to government etc.
TDS and Refunds
Now since we are clear that clients have to deduct TDS and it is compulsory for them (for entities having a TAN), lets review the case where your earnings for the entire financial year doesn’t fall under tax bracket. So lets say you made a total earning of 1.8 lakh from different clients and each one of them deducted TDS from your earning which would amount to a total TDS of Rs 18,540 (10.3% of 1.8 lakh) . Lets also consider you didn’t have any other source of income. Your total income for the current financial year hasn’t crossed the tax slab of 2 lakh (which is tax free) and hence you don’t need to pay any taxes to the government, what happens then? Well you claim refund from the Income Tax Department. Since TDS was deducted at source without knowing how much your total income for the year would be, you can become eligible for refunds in case the total TDS exceeds the amount of your tax liability. In the example above when you file your IT return you will be requesting for a refund of Rs 18,540 which will be processed by the IT department after checking details provided in your return.
Next time you hear the word TDS, don’t worry and understand that TDS is also your part of the earning and no one is taking it away from you, they are just depositing it on your behalf to the government which you would have eventually done.
Share your problems about TDS here and also if some point has been missed regarding TDS feel free to comment below.