TDS reduction: Where it will benefit you and where it will not

The government has reduced tax deducted or collected at source on payment of dividend, insurance policy, rent, professional fee and on the acquisition of immovable property by 25 per cent for a period up to March 31. Following Finance Minister Nirmala Sitharaman's announcement of a reduction in the rate of tax deducted at source (TDS) and tax collected at source (TCS) for non-salaried payments, the Central Board of Direct Taxes (CBDT) notified revised rates that will be applicable from May 14, 2020, to March 31, 2021.

The relief measure would immediately address the liquidity issues to the recipient entities as this would help them in better fund management and blockage of funds requiring tax refunds, explained Suresh Surana, Founder, RSM India.  

“However, it is to be noted that this reduced rate of TDS would not in any way affect the final tax liability. Any deficit or shortfall has to be paid either by way of advance tax or self-assessment tax for the financial year 2020-21,” he said.

Clarifying on why the TDS rate has not been reduced for salaried class, Finance Secretary Ajay Bhushan Pandey on Thursday said TDS is deducted from salary after taking into account various eligible deductions like 80C and others of the salaried person. This, he said, has been done to ensure that salaried individual do not have to bear the burden of paying high taxes at the year end and also the interest burden. 

"If we reduced the TDS rate for salaried class then their compliance burden would have increased because they would be required to pay higher taxes at the year end along with interest. Hence TDS rate has not been cut for salaried class," he said.

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Surana said that the announcement will help both businesses and personal taxpayers. He added that while the reduction is with respect to payments towards contracts, professional fees, fees for technical services,  interest payments, rent, dividend, commission, brokerage, etc paid to residents, it will not be applicable on TDS on salary payments and for payments to non-residents. 

“Noticeably, the benefit of reduction in TDS rate is also applicable to payment towards dividends to residents, which has been newly introduced from Financial Year 2020-21 onwards. This will benefit investors in equity and bond markets/ bank deposits as well as those having property rental income,” he said.

Surana further explained that all payments made on or after 14 May 2020, even if the expenses accrued or were booked prior to 14 May 2020 would not be covered, though the finer prints need to be analysed. 

“As under the relevant sections for deduction of tax, the TDS is to be provided either on the date of payment or credit in the books, whichever is earlier. As such, any expenses which have been provided prior to 14 May 2020 and on which TDS has been accrued in the books, it seems that the payment even if made on or after 14 May 2020, the earlier rates (i.e. before reduction) shall continue to be applicable,” he said.