Tax deducted at source (TDS) - overview

This functionality is specific for India.

Withholding Tax or Tax Deducted at Source (TDS) is one way to collect income tax at the place where the payment is made. Deduction of Income Tax occurs at the time of registration for payment (liability) or actual payment, whichever is earlier. The payer deducts the tax from the total amount and pays the balance. The tax so deducted at source by the payer, must be paid to the government.

Deduction of Withholding Income Tax or TDS only applies to the payment of purchase invoices for services received , for example, services from a contractor. Deduction of TDS can apply to purchase invoices and credit notes, and on payments such as advance payments and standing orders using a cash transaction or a check.

In addition to TDS on the invoice amount, a surcharge calculated over the TDS tax amount and cess on the sum of TDS and the surcharge can also occur.

Note

LN does not support TDS on Electronic Bank Statements (EBS) and trade notes.

Example: The invoice value is 1000. TDS surcharge and cess also apply.

Description	Tax rate or formula	Amount
Invoice value	not applicable	1000
Basic TDS	10 per cent	100
TDS Surcharge	5 per cent of basic TDS amount	5
CESS	2 per cent of (basic TDS + surcharge), normal rounding	2
Total TDS amount		107
Payable to supplier or contractor	invoice amount - total TDS (1000 - 107)	893
Payable TDS		107

To calculate and declare withholding tax

Withholding tax often applies in combination with other kinds of tax such as service tax. You must use a group tax code to combine various kinds of tax. The setup procedure is described in Setting up withholding tax and social contributions.

The procedure to set up and prepare the withholding tax declaration is like that of other tax declarations. For details, refer to Tax Deducted at Source - declarations and payments.