Difference Between Income Tax and TDS Explained

Understanding taxation is crucial for every individual and business in India. Two of the most common terms that taxpayers come across are Income Tax and Tax Deducted at Source (TDS). While they might seem similar, they serve distinct purposes in tax collection and compliance. This comprehensive guide explains the differences, mechanisms, and significance of both, ensuring you have a clear understanding of how they impact your financial obligations.

What is Income Tax?

Income Tax is a direct tax levied by the government on the income earned by individuals, Hindu Undivided Families (HUFs), firms, and corporations during a financial year. It is governed by the Income Tax Act, 1961 and is calculated based on the taxpayer’s total income.

Types of Income Subject to Income Tax

The Income Tax Act categorizes taxable income into five broad heads:

1. Income from Salary – Earnings received by an individual from an employer in the form of salary, wages, bonuses, allowances, and pensions.
2. Income from House Property – Rental income from a property owned by the taxpayer.
3. Income from Business or Profession – Profits earned by self-employed individuals, businesses, freelancers, and professionals like doctors, lawyers, and consultants.
4. Income from Capital Gains – Profit earned from the sale of capital assets such as property, stocks, or mutual funds
5. Income from Other Sources – Income not covered under the above categories, such as interest earned on Fixed Deposits (FDs), dividends, lottery winnings, or gifts exceeding the specified exemption limit.

What is Tax Deducted at Source (TDS)?

TDS (Tax Deducted at Source) is a system where tax is deducted at the time of income generation rather than at the end of the financial year. It is implemented by the payer (deductor) before making payments to the payee (deductee), ensuring tax collection in advance and reducing tax evasion.

Where is TDS Applicable?

TDS is deducted on various types of payments, including:

• Salary Payments – Employers deduct TDS on salary as per the employee’s applicable income tax slab.
• Interest on Fixed Deposits and Savings Accounts – Banks deduct TDS if the interest earned exceeds ₹40,000 (₹50,000 for senior citizens) per year. For FY 2025-26, the TDS exemption limit has been hiked to ₹50,000 for general citizens and ₹1 lakh for senior citizens.
• Rent Payments – If rent exceeds ₹50,000 per month, TDS at 5% must be deducted by the tenant.
• Professional and Consultancy Fees – TDS is deducted at 10% if professional fees exceed ₹30,000 annually.
• Commission and Brokerage – Agents, brokers, and intermediaries receive payments after a TDS deduction of 5-10%.
• Winning from Lotteries, Gambling, and Contests – Winnings above ₹10,000 (single transaction) attract a 30% TDS deduction.
• Payments to Contractors – Deducted at 1% for individual contractors and 2% for others.

TDS Rates on Key Transactions

Key Differences Between Income Tax and TDS

Filing Returns: Income Tax vs. TDS

• Income Tax Returns (ITR): Taxpayers must file their ITR annually before the due date (usually 31st July for individuals and 30th September for companies).
• TDS Returns: Entities deducting TDS must file quarterly TDS returns (Form 24Q, 26Q, 27Q, 27EQ) to ensure proper crediting of TDS to the payees.