Rationalization of tax deducted at source (TDS) rates

Rationalization of tax deducted at source (TDS) rates The Union Budget 2025-26 has introduced several key changes in Tax Deducted at Source (TDS) rate

Rationalization of tax deducted at source (TDS) rates

The Union Budget 2025-26 has introduced several key changes in Tax Deducted at Source (TDS) rates and rationalization measures. These changes are aimed at simplifying tax compliance, reducing the burden on taxpayers, and improving ease of doing business. In this blog, we will discuss these modifications in detail, their implications, and how they affect various sections of taxpayers.

Introduction to TDS and Its Importance

Tax Deducted at Source (TDS) is a mechanism implemented by the government to ensure tax collection at the point of income generation. The deductor (payer) is responsible for deducting a certain percentage of tax before making payments to the deductee (payee). This system ensures a steady inflow of revenue to the government and minimizes tax evasion.

TDS applies to various types of incomes such as salaries, interest, rent, professional fees, and commissions. Over the years, the government has revised TDS provisions to improve tax compliance, simplify procedures, and provide relief to small taxpayers.

The Budget 2025-26 continues this trend by introducing several changes that impact individuals, senior citizens, landlords, businesses, and financial institutions. Let’s explore these changes in detail.

There are various provisions of Tax Deduction at Source (TDS), with different thresholds and multiple rates. To improve ease of doing business and better compliance by taxpayers, it is proposed to rationalize certain rates of TDS and to increase the threshold limit for applicability of the TDS provisions.

Key Changes in TDS Rates and Thresholds in Budget 2025-26

1. Higher TDS Threshold for Senior Citizens

What Has Changed?

Previously, banks and financial institutions deducted TDS on interest income exceeding ₹50,000 for senior citizens (under Section 194A of the Income Tax Act). The Budget 2025-26 has increased this threshold to ₹1,00,000.

Impact and Benefits

• Senior citizens who primarily rely on interest income from fixed deposits (FDs), savings accounts, and other investments will benefit from this increase.
• It enhances liquidity by reducing premature tax deductions on moderate savings.
• Senior citizens who have a total taxable income below the exemption limit can now avoid unnecessary TDS deductions and filing refund claims.

2. Increased TDS Limit on Rental Income

What Has Changed?

Under Section 194-I, the TDS threshold for rental income has been increased from ₹2.4 lakh to ₹6 lakh per annum.

Impact and Benefits

• Small landlords earning rental income will now have lower tax deductions, ensuring a higher take-home income.
• Individuals and small business owners who lease out properties for commercial or residential purposes will benefit.
• The compliance burden on landlords is reduced, as fewer people will be required to file TDS returns.

3. Rationalization of TDS Rates and Simplification of Provisions

• TDS Threshold Rationalization
  
  TDS provisions have various thresholds of payment amounts or income amounts beyond which tax is required to be deducted. It is proposed to rationalize these thresholds as follows:
  

1. Section 193 - Interest on Securities: Threshold increased from Nil to Rs. 10,000/-.
2. Section 194A - Interest other than Interest on Securities:
1. Rs. 50,000/- for senior citizens
2. Rs. 40,000/- in other cases when payer is a bank, cooperative society, or post office
3. Rs. 10,000/- in other cases
3. Section 194 - Dividend for an Individual Shareholder: Threshold increased from Rs. 5,000/- to Rs. 10,000/-.
4. Section 194K - Income in Respect of Units of a Mutual Fund or Specified Company:
1. Rs. 1,00,000/- for senior citizens
2. Rs. 50,000/- in other cases when payer is a bank, cooperative society, or post office
3. Rs. 10,000/- in other cases
5. Section 194B - Winnings from Lottery, Crossword Puzzle, etc.: Threshold increased from Rs. 5,000/- to Rs. 10,000/-.
6. Section 194BB - Winnings from Horse Race: Threshold increased from Rs. 10,000/- per transaction to Rs. 10,000/- aggregate during the financial year.
7. Section 194D - Insurance Commission: Threshold increased from Rs. 15,000/- to Rs. 20,000/-.
8. Section 194G - Income by Way of Commission, Prize, etc., on Lottery Tickets: Threshold increased from Rs. 15,000/- to Rs. 20,000/-.
9. Section 194H - Commission or Brokerage: Threshold increased from Rs. 15,000/- to Rs. 20,000/-.
10. Section 194-I - Rent: Threshold changed from Rs. 50,000/- per month or part of a month to Rs. 2,40,000/- during the financial year.
11. Section 194J - Fee for Professional or Technical Services: Threshold increased from Rs. 30,000/- to Rs. 50,000/-.
12. Section 194LA - Income by Way of Enhanced Compensation: Threshold increased from Rs. 2,50,000/- to Rs. 5,00,000/-.

These amendments will take effect from the 1st day of April 2025..

Impact and Benefits

• Taxpayers will have a clearer and simpler system, reducing confusion in calculating TDS obligations.
• Businesses will have fewer compliance requirements, leading to lower administrative costs.
• Individual taxpayers will experience fewer instances of tax deductions on small income streams.

4. Decriminalization of Delay in TCS Payments

What Has Changed?

Previously, delays in Tax Collected at Source (TCS) payments could result in criminal prosecution. The Budget 2025-26 has removed criminal liability for such delays.

Impact and Benefits

• Businesses will no longer face legal action for inadvertent delays in TCS payments.
• This follows the earlier move to decriminalize delays in TDS payments, making the system more taxpayer-friendly.
• Encourages voluntary compliance without the fear of legal consequences.

TDS Rate Reduction for Section 194LBC Section 194LBC of the Act requires that where any income is payable by a securitization trust to an investor, being a resident, in respect of an investment in a securitization trust as specified therein, the person responsible for making the payment shall deduct income-tax at the rate of 25% if the payee is an individual or a Hindu undivided family and 30% if the payee is any other person.

It is proposed that the TDS rate under section 194LBC of the Act be reduced from 25% and 30% to 10% as this sector is sufficiently organized and regulated.

This amendment will take effect from the 1st day of April 2025.