Income Tax and Tax Deducted at Source (TDS) are two of the most common terms Indian taxpayers often come across. They may sound similar, but there is a vast difference between them. Income Tax is a tax on the annual income earned by an individual or company during the fiscal year, while TDS refers to the tax deducted from the payer’s sources of income based on the expected tax liability. The Income Tax is deducted from the payer’s overall profit or annual return, while TDS is deducted from the payer’s very source of income.
The Income Tax Act of 1961 governs Income Tax and outlines the norms for tax calculation, assessment, and collection. It applies to income sources such as salary, income from house property, profits from profession or business, and capital gains. Any individual earning above Rs. 2.5 lakhs (old tax regime)/ Rs. 3 lakhs (new tax regime) is required to pay the income tax; avoiding it will be considered as tax evasion.
On the other hand, TDS is tax deducted from the payer’s very source of income and is directly remitted to the government. Individuals or organizations making specified payments like salary, interest, rent, or professional fees must deduct a certain tax percentage before making the payment. TDS is crucial in preventing tax evasion and simplifying the tax collection process.
Income Tax return is applicable to individuals having an annual income higher than 2.5 Lakhs (old tax regime)/ Rs. 3 lakhs (new tax regime). On the other hand, TDS is deducted from payments like salary, investments, rent, winnings from contests/lotteries, commissions from insurance, payment to contractors, and various other sources.
In conclusion, TDS is deducted periodically throughout the year at the very source of the income, while Income Tax is paid by the taxpayer at the end of the financial year. Furthermore, TDS ensures that tax is deducted at the source, unlike Income Tax, which is directly paid by the taxpayer after calculating the tax liability based on income slabs outlined in the Tax Laws. These are the major differences between TDS and Income Tax.
