Many taxpayers often confuse TDS in Income Tax with TDS in GST. Both involve Tax Deducted at Source (TDS), but their purpose, rate, and applicability differ significantly. Therefore, to stay compliant and avoid penalties, businesses must clearly understand the difference between TDS in Income Tax and TDS in GST.
What is TDS in Income Tax?
TDS in Income Tax means tax deducted at the time of making specific payments such as salary, rent, commission, or professional fees.
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Purpose: The government collects tax in advance through deduction.
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Who deducts: Companies, individuals, and entities responsible for payments.
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Who receives deduction: The recipient of income.
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Rate: The rate depends on the type of payment. For example, 10% applies to professional fees, and 30% applies to winnings from lotteries.
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Credit: The deducted amount appears in the taxpayer’s Form 26AS and gets adjusted against their final Income Tax liability.
In short, Income Tax TDS ensures early tax collection from income sources.
What is TDS in GST?
TDS in GST works differently. It applies when notified entities deduct tax while paying suppliers of goods or services under a contract.
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Purpose: GST TDS ensures transparency and early tax compliance.
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Who deducts: Government departments, local authorities, PSUs, and other notified entities.
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Who receives deduction: The supplier of goods or services.
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Rate: A flat 2% (1% CGST + 1% SGST) or 2% IGST on taxable value.
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Credit: The deducted amount directly reflects in the supplier’s electronic cash ledger and helps discharge GST liability.
Thus, GST TDS supports better tax tracking in the indirect tax system.
Key Difference Between TDS in Income Tax and TDS in GST
Here is a clear comparison table:
| Particulars | TDS in Income Tax | TDS in GST |
|---|---|---|
| Law Applicable | Income Tax Act, 1961 | GST Act, 2017 |
| Purpose | Collect advance income tax | Ensure GST compliance |
| Applicability | On specified payments like salary, rent, fees | On contracts above ₹2.5 lakh |
| Who Deducts? | Companies or individuals making payment | Govt. departments, PSUs, local authorities |
| Rate of Deduction | Varies from 1% to 30% | Flat 2% |
| Return to be Filed | TDS Return (Form 24Q, 26Q, etc.) | GSTR-7 |
| Credit Available To | Deductee through Income Tax Return | Supplier through GST cash ledger |
| Revenue Adjustment | Against Income Tax liability | Against GST liability |
Why Understanding This Difference is Important
Understanding the difference between TDS in Income Tax and TDS in GST helps businesses avoid compliance errors. Moreover, both laws impose strict penalties for non-deduction or late payment.
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If you deduct Income Tax TDS, you must file TDS returns on time to avoid late fees.
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If you deduct GST TDS, you must deposit it and file GSTR-7 before the due date.
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Proper compliance builds trust with tax authorities and reduces audit risks.
Therefore, businesses should carefully evaluate each transaction and apply the correct TDS provisions.
Conclusion
The difference between TDS in Income Tax and TDS in GST lies in their law, rate, purpose, and compliance. Income Tax TDS applies to income-related payments, while GST TDS applies to supply contracts above ₹2.5 lakh. In both cases, timely deduction and filing ensure smooth compliance and prevent penalties.
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