Explained: Difference Between Income Tax and TDS (Tax Deducted At Source)

Income tax and tax deducted at source (TDS) are the two most common terms taxpayers often come across. They may sound similar, but there is a lot of difference between income tax and TDS. Both the taxes have a different mechanism when it comes to computing them.

Therefore, before filing tax returns, it becomes necessary for salaried individuals to avoid confusion related to these terms and understand the relevance and implications of these taxes.

Income Tax

Income tax refers to a compulsory contribution levied on an individual's income as per their earnings. There are standard tax slab rates for the money deducted from your gross income. In other words, it refers to the total tax liability on an individual basis, his annual taxable income after considering deductions & exemptions determined at the end of a financial year.

TDS

On the other hand, TDS represents part of income tax already paid by the assessee, which can be set off against Income tax and balance tax liability to be paid. 

It is a process through which the government can quickly and efficiently collect taxes. TDS, as the name suggests, is a part of your income tax which is deducted by the employer or other deductors while making payment to the employee and the same is deposited by them with the Income Tax department. 

Differences between Income Tax and TDS

Income tax and TDS are two forms of collecting taxes in different ways.

Income tax is paid on the annual income, where taxes are computed for a particular financial year.

TDS is deducted at the source periodically in a particular year.

Income tax is paid directly to the government. At the same time, TDS is an indirect way of discharging one's tax liability where the deductor of taxes facilitates the process of tax recovery for the government.

Income tax is levied on the overall income earned by an individual (assessee) during a financial year.

Under TDS, the income tax law casts an obligation to deduct tax at source only on certain persons making prescribed payments.

Income tax is levied on all salaried individuals or entities for the income they earned above the prescribed tax limit for that particular period after the completion of a certain financial year.

In TDS, the entire process of tax deduction and payment results in an obligation to pay taxes even before the taxpayer receives the income.