Jan 232013

TDS exempted on Certain Payments

TDS refers to the tax deduction at source; it is the tax deducted by the employer, from the salary at a fixed rate when the salary is credited. The central board of direct taxes (CBDT) has exempted certain categories of payments from TDS (tax deduction at source) including specific services offered by the banks.  The finance ministry has decided so as to reduce the burden of compliance on businesses, individuals, firms, corporate etc using the financial services offered by the banks. From Jan 1, 2013, the businesses need not pay any tax on these services.

The payment categories exempted from tax deduction are:

  • Bank guarantee commission
  • Cash management service charges
  • Depository charges on maintenance of Demat accounts
  • warehousing service charges for commodities
  • Underwriting service charges
  • Clearing charges (MICR charges)

Also credit card/ debit card commission for transactions between the merchants’ establishment and acquirer bank refrains from tax deduction.

All the above mentioned payments being made to the banks specified under the second schedule of the Reserve Bank of India Act, 1934 are exempted from TDS. However, foreign banks are excluded from this release.

CBDT has conveyed this news of exemption to the general public by way of NOTIFICATION NO. 56/2012 [F. NO. 275/53/2012-IT(B)], DATED 31-12-2012. This notification has been initiated to implement the powers granted by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961).

This notification serves the purpose of eliminating the ambiguity about the TDS provisions application on the certain payments and the subsequent legal action. It also encourages the use of plastic money in the economy by exempting the tax deduction on the connected transactions.