KNOWLEDGE CENTRE Tax Planning / What is TDS and How Can You Save TDS with ELSS Funds?
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What is TDS and How Can You Save TDS with ELSS Funds?


What Is TDS?

Anyone who is working and draws a salary would be aware of the term TDS. It may not be the favorite term among the employees!

What is TDS?

Tax deducted at source (TDS) was introduced to collect taxes from individuals at the time of income generation. The government uses TDS to collect taxes to reduce tax evasion because the tax is levied when income is generated and not deferred to a later date.

What is the applicability of TDS?

TDS is levied on different types of income such as interest, salary, commissions, and others. However, it is not applicable to all individuals and on all types of incomes. It is charged at different rates as prescribed by the authorities. The rates vary based on the type of income and the recipient’s category. For example, if an Indian resident exits his debt mutual fund investment, he does not have to pay TDS. However, TDS is levied if a non-resident Indian (NRI) exits from debt mutual funds.

How does TDS work?

Not everyone understands this deduction and often asks, “What is TDS?” The concept of TDS is based on the premise that every individual who makes certain payments to another person deducts tax at a prescribed rate at the source. The tax amount so collected must be deposited in the authorities’ accounts.

The payer, also known as the deductor, is responsible to deduct TDS and deposit it with the government. The person who receives the payment after the TDS deduction is known as the deductee. Form 26AS is a statement that reports the amount of TDS deducted and deposited against the deductee’s Permanent Account Number (PAN) or name.

How is TDS deduced based on your salary?

Most employers ask their employees to provide an investment declaration statement at the start of the financial year. As such, the employees must furnish a tax declaration statement, which shows the potential investments they will make in instruments falling under Section 80C. Based on the employee’s income and this statement, the employer estimates the tax liability arising during the year. A certain monthly amount is deducted as TDS towards the year-end income tax liability. When the income exceeds the exempted limit, employers deduct TDS before paying the employees their salaries.

If anyone wants to know what is TDS and its associated liabilities, he/she may reduce his/her Section 80C investments from his total income to determine the income tax liability for the year.

How can you save TDS deduction?

TDS is calculated after considering the eligible deductions from an individual’s income. However, many people seek to know how to save tax to reduce their outflows. After all, tax saved is income earned.

Employees submit an investment declaration statement at the start of the financial year. However, to ensure excess tax is not deducted, they need to show actual investment proofs in different tax-saving options. Although the last date to submit such proofs varies from one organization to another, submitting it in advance is recommended.

Saving until the last date to invest is not a good idea. You may miss out on reducing your tax liability in case of technical errors. Here are three popular tax-saving options:

  1. Public provident fund (PPF)
    PPF has been one of the most popular options for several decades because this investment is safe and offers a fixed rate of return. A PPF account may be opened with any bank or post office. A minimum deposit of INR 500 per year must be made into this account. PPF comes with a lock-in period of 15 years. This is an EEE (exempt, exempt, exempt) scheme, which means that the principal, interest, and maturity proceeds are tax-free.
  2. Life insurance premium
    Indians have used life cover as a tax-saving instrument for several years. The premium paid to avail of life insurance for self, spouse, and children are exempt from tax. Such exemption is available on different types of policies, which include unit-linked insurance plans (ULIPs), endowment policies, and term plans.
  3. Equity-linked saving schemes (ELSS)
    Many people want to know how to save tax with ELSS. Before understanding this, investors must remember that ELSS is a diversified equity fund. This means a majority of its corpus is invested in equities and related products. ELSS investments come with a three-year lock-in period. Additionally, if a person invests through SIPs, each installment becomes a fresh investment. ELSS has the potential to deliver exceptional returns because of its exposure to equity instruments. Furthermore, ELSS is the only other EEE scheme, whereby the investment, dividends, and maturity benefits are tax-free.

Choosing the right ELSS fund from the different available options is not an easy task. ARQ, our smart investment engine, simplifies this task for investors. It automates the entire evaluation procedure to provide customized recommendations that most appropriately suit individual requirements. Advanced algorithms and quants conduct this procedure to eliminate all human bias.

Download the Angel Bee mobile app now and save excess TDS deduction through ELSS investments quickly!


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