Withholding tax is essentially the sum deducted directly from the earnings of an individual by the payer or the employer. The payer or employer, in turn, has to pay the deducted amount as withholding tax on the earnings of the individual, to the income tax department.
Most would say that the withholding tax meaning is not all different from that of TDS. However, that is not true. Although withholding meaning and TDS meaning are almost synonyms, there are two stark differences between the two.
To get a grasp on the concept of withholding tax, let us first understand the tax system of the Union of India. As per our constitution, only the Central Government has the authority to collect and levy taxes. Every individual, whose total annual income is more than the minimum limit for tax exemption has to pay income tax according to the slabs mentioned in the income tax act.
This tax will be calculated on the total earnings, including all sources of income of the previous year, in the respective assessment year. However, the amount to be paid by an individual also depends on their residential status in India.
The income tax liability and tax assessment of the individual are determined as per his/her residential status.
The tax liability of a non-resident individual is different from a resident individual. Ideally, their income from foreign sources (sources outside of India) is not taxable even if the amount is remitted to India.
However, a non-resident individual is liable to pay tax on the Indian source of earnings (income from sources within the union of India), such as:
Now that you have a comprehension of the resident and non-resident status of an individual and the tax liability of a non-resident individual, you can better understand what is withholding tax.
Withholding tax, in essence, is an obligation on the payer (an Indian individual or company who has sought the services of the non-resident individual) to withhold a certain amount as tax, while initiating the payment for the services received, such as contract, professional services, salary, commission, rent, etc. The amount to be withheld is prescribed as per the withholding tax rates specified by the income tax act.
In simple terms, withholding tax is mainly applicable to non-resident Indians. The example below will further simplify the process.
Example: A is a non-resident software professional. B, a resident of India, sought the services of A. For rendering the services, A charged Rs 40,000/-. B made a payment of Rs 36,000/- and withheld Rs 4,000/- as tax. Now, it is the liability of B to pay the withheld amount as tax for the services received from A to the income tax department of the Government of India. A can later claim the income tax credit while filing for income tax returns.
The prevailing withholding tax rates applicable on payment made to non-residents are:
These are general rates and do not apply to countries with whom India has a Double Taxation Avoidance Agreement (DTAA).
As you can see, the withholding tax is mainly applicable to non-resident individuals. And the non-resident individuals can take the benefit of this income tax credit while filing their income tax returns.
Following are the due dates for both the filing of tax returns and payment.
In this case, the last date for the payment is the 7th of the same month in which the withholding tax is deducted. But this doesn’t apply for the month of March; the due date, in this case, will be on the 30th of April.
An important point to note about withholding tax is that it is assessed quarterly. In other words, the tax returns are filed quarterly. The returns must also include information about the payee and the total (deducted) tax for the quarter.
The payer of the withholding tax must also provide a tax deduction certificate every quarter to the payee. This certificate can be retrieved online via the TRACES portal. The table below lists the specific quarters, the due dates for filing of returns, and the forms required.
Quarter | Forms (Tax Statements) | Due Date |
Q1 (April – June) | Form 24Q, Form 26Q ; Form 27Q , Form 27EQ | 15th July |
Q2 (July – September) | Form 24Q, Form 26Q ; Form 27Q , Form 27EQ | 15th October |
Q3 (October – December) | Form 24Q, Form 26Q ; Form 27Q , Form 27EQ | 15th January |
Q4 (January – March) | Form 24Q, Form 26Q ; Form 27Q , Form 27EQ | 15th May |
Withholding tax Certificate:(not mandatory that this has to be a separate heading, you can place it in a suitable way)
It’s the quarterly statement of the Tax Deducted at Source (TDS) from salaries.
It’s the quarterly statement of the Tax Deducted at Source (TDS) from all other sources excluding salaries.
It’s the quarterly statement which contains the details of tax deduction from dividends, interest, or other sources that are paid to non-resident Indians.
It’s the quarterly statement of the Tax Collected at Source (TCS).
To check the status, one has to take the total stay into consideration .ie., for the previous year which starts on 1 April and ends 31 March. To be a resident Indian, the assessee must have either stayed in India for (I) atleast 182 days in the previous year or (ii) more than 60 days in the previous year, and must have stayed in India for a total of atleast 365 days in the previous 4 years leading up to the previous year.
If the aforementioned conditions aren’t met, the taxpayer receives an NRI status.
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Very nice information