New TDS/TCS Provisions in India from July 1, 2021
The Finance Act 2021 has introduced three key changes in rules relating to tax deducted at source (TDS) or tax collected at source (TCS). These amendments will come into effect from July 1, 2021, and are directed towards easing compliance norms for businesses, as well as making the society tax compliant in general.
The key amendments made are with respect to purchase of goods, pension income of eligible senior citizens and accelerated TDS rates for non-filers. While the changes with respect to purchase of goods and increased TDS for non-filers first will be applicable from July 1, changes made in provisions relating to pension income will be applicable throughout the current financial year (FY 2021-22), that is, with effect from April 1, 2021.
To prevent confusion regarding key tax compliance matters, businesses are welcome to reach out to our tax advisors at firstname.lastname@example.org.
What is tax deducted at source (TDS)?
As per the Income Tax Act, any company or person making a payment (deductor) must deduct tax at the source on behalf of the person receiving the payment (deductee), if the payment exceeds certain threshold limits. The aim is to collect tax from the very source of the income to avoid tax evasion. The deductee, from whose income the tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26 AS or TDS certificate issued by the deductor.
Which transactions attract TDS?
Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payment. The TDS is deducted on following types of payments:
- Monthly salary payments
- Interest earned on fixed deposits
- Dividend income exceeding INR 5,000 (US$67.37)
- Rent payment exceeding INR 50,000 (US$673.71) per month
- Sale of land or building with value exceeding INR 5 million (US$67,370)
- Contract payments exceeding INR 30,000 (US$404.23)
- Professional fees and technical services fee exceeding INR 30,000 (US$404.23)
Individuals or Hindu Undivided Family (HUF), whose books are not required to be audited, are exempt from TDS deduction while making the payment. However, those individuals or HUF making rent payments exceeding the threshold of INR 50,000 per month, TDS is deducted at five percent.
The TDS rates vary across different categories. This compilation can be referred to for a detailed look at TDS rates applicable for financial year 2021-22 and assessment year 2022-23.
What are the changes in TDS norms from July 1, 2021?
1) TDS on purchase of goods (Section 194Q): Under this provision, any person who is a buyer responsible for paying any sum to any seller for purchase of any goods (including capital goods), where the total value exceeds INR 5 million (US$67,370) in any previous year, shall deduct TDS if the following conditions are met:
- The total sales, gross receipts, or turnover from the business carried on by the buyer exceed INR 100 million (US$1.35 million) during the financial year immediately preceding the financial year in which the purchase of goods has been made.
- The purchase of goods has been made from a resident person.
- The aggregate value of goods purchased exceeds INR 5 million in any previous year.
- The buyer is not on the list of persons excluded from the provision for deduction of tax.
- No tax is deductible or collectible under any other provision except Section 206C(1H), which deals with TCS on sale of all goods. This provision has been in force since October 1, 2020.
Access the CBDT circular on guidelines relating to Section 194Q here.
The buyer shall deduct tax at the rate of 0.1 percent of the purchase value exceeding INR 5 million at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier. If no permanent account number (PAN) is provided by the seller, then the rate of TDS will be five percent. The tax shall be deducted even if the sum is credited to the ‘Suspense Account’. The value on which TDS shall be charged is the sum left after deducting INR 5 million from the total value.
Value on which TDS shall be charged = Total value (-) INR 5 million
For example, if the purchase is for INR 6.2 million, then the TDS will be applicable only on the amount exceeding the threshold value of INR 5 million. In this case, the TDS will be deducted only on INR 1.2 million.
It is to be noted that no TDS shall be deducted in case of imports since this provision is applicable only in the case of resident sellers.
2) TDS on pension income of senior citizens (Section 194P): Applicable since April 1, 2021, this provision has been introduced to provide conditional relief to senior citizens aged 75 years and above, from filing income tax return (ITR) subject to following conditions:
- The senior citizen should be of age 75 years or above.
- Senior citizens should be ‘resident’ in the previous year.
- He/she receives pension income in the bank account maintained with the specified bank.
- The senior citizen does not have any other income except interest income received or receivable from any account maintained in the same specified bank in which he/she is receiving his pension income.
- Such individual has furnished a declaration to the specified bank containing such particulars, in such form and verified in such manner, as may be prescribed.
- The bank is a ‘specified bank’ as notified by the Central Government.
Such a bank shall calculate the total income of the deductee after allowing deduction under Chapter VI-A and rebate under Section 87A and deduct the TDS applicable.
Additionally, if the specified bank deducts tax under this provision, the resident senior citizen shall not be liable to file their ITR for the assessment year relevant to the previous year in which tax has been deducted.
3) Higher rate of TDS or TCS in case of non-filers (Section 206AB and Section 206CCA)
Under the new provisions, those who have not filed their ITR but their income is liable for TDS deduction, there will be a levy of TDS at a higher rate. For those whose Aadhar is not linked with PAN, the rate of tax deduction will be higher. This new amendment is to increase the compliance of ITR filing among individuals liable for TDS deduction. This provision will be applicable on following “specified persons”:
- If one has not filed an ITR for two financial years immediately before the financial year in which tax is required to be deducted.
- The due date to file such return of income, as prescribed under Section 139(1), has expired.
- In each of these two previous years, the total amount of TDS deducted by the payer is INR 50,000 or above.
If the returns have not been filed, then the TDS deducted will be double the existing TDS rate or at the rate of five percent, whichever is higher.
To ease the compliance burden, CBDT has issued a new a functionality compliance check under Section 206AB and 206CCA. This functionality is made available through the reporting portal of the income tax department. The tax deductor or the collector can feed the single PAN (PAN search) or multiple PANs (bulk search) of the deductee or coIIectee and can get a response from the functionality if such deductee or collectee is a specified person. For PAN Search, the response will be visible on the screen that can be downloaded in the PDF format. For Bulk Search, response would be in the form of a downloadable file that can be kept for record.
This provision is applicable to payments such as interest, contract, professional services, rent, etc. The transactions where full amount of tax is to be deducted, are excluded from the ambit of this provision. Those excluded transactions include:
- Premature withdrawal of employees’ provident fund
- Winnings from any lottery or crossword puzzles or card games
- Winnings from any horse races
- Income from investment in securitization trust
- TDS on cash withdrawals above INR 10 million (US$13,474.18)
This provision is not applicable in case of a non-resident who does not have a permanent establishment in India.
Which yearly tax returns should be checked for compliance?
Since the new provisions come into effect July 1, the returns and compliance of previous financial years FY 2018-19 and FY 2019-20 will be considered.
This article was originally published June 28, 2021. It was last updated July 1, 2021.
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