Reduction in rate of Tax Deduction at Source (TDS) & Tax Collection at Source (TCS)
As was declared by the honorable Finance Minister of India in her address, and which was part of economic stimulus package announced, to provide more funds at the disposal of the taxpayers for dealing with the adverse economic situation arising out of COVID-19 pandemic, the rates of Tax Deduction at Source (TDS) for the following non-salaried specified payments made to resident Indian has been reduced by 25% for the period from 14th May, 2020 to 31st March, 2021. The revised rebates and the applicability are as follows:-
Further, the rate of Tax Collection at Source (TCS) for the following specified receipts has also been reduced by 25% for the period from 14th May, 2020 to 31stMarch,2021:-
Therefore, TDS on the amount paid or credited during the period from 14thMay, 2020 to 31stMarch, 2021 shall be deducted at the reduced rates specified in the table in para 1 above.
Similarly, the tax on the amount received or debited during the period from 14thMay, 2020 to 31stMarch, 2021 shall be collected at the reduced rates specified in the table in para 2 above.
It may be clarified here that the reduced rates are only applicable on the payments made or due , which-ever is earlier during the period mentioned above and will in no way effect the payments made or made due before or after this period.
It is further clarified that the reduction of TDS/TCS rates are only effected for the above sections and specified people. The TDS rate in relation to the above payments made,where the tax is required to be deducted or collected at higher rate due to non-furnishing of PAN/Aadhaar, will remain same as earlier and will not be subject to the above reduced rates. For example, if a payment is made for professional fees and the recipient does not have a PAN number, higher rate of TDS @ 20% is to be deducted. This will still be deducted @ 20% and will be covered under above reduced rates of TDS
The move of Finance Minister is to give relief to the payments made by PAN holders to PAN holders. A lower TDS rate will immediately increase the amount of cash available in the hands of recipient. So for example, if a person receives a payment of 1lakh per month from 14.5.2020 to 14.3.2021 for providing professional services, the total gross receipts would be 10Lakh for 10 months. He would have to pay a TDS @ 10% if the above benefit was not given, so the net receipts would have been 9Lakh. But now with the reduced TDS rate of 7.5%, the net receipts would be 9.25Lakh.
There will be no impact on the actual tax liability of the person making the payment or receiving the payments, but the move will only effect the cash flow. Further if the recipient is falling in a higher tax bracket, he or she will need to do a good tax planning from May 2020 onwards itself , as with the reduced TDS rate, the actual tax liability might be much in excess of the TDS and the assesse might land up paying interest at the time of filling of ITR.
The move will further increase the difference in TDS rates of a PAN holder and a non PAN holder. The move also motivate more and more people to take PAN, who still do not have PAN numbers and thus bringing in more payments in the main stream of economy, which might have escaped otherwise.