Difference between Income Tax and With holding Tax

Difference between Income Tax and With holding Tax


Do you get confused between Income Tax and Withholding Tax? Well, both are charged on the income earned in India. However, the purpose of Income Tax is to tax the local income. Whereas, Withholding Tax is applied on local income earned by a non-resident. This article covers the basic differences between Income Tax and Withholding Tax.

When it comes to taxation, the place where the income is earned takes centre stage. So, as an Indian National, if you work for an Indian company and earn a salary, then you need to pay the local Income Tax.

On the other hand, if a foreign national or an NRI works in India, the earnings are subject to withholding tax in India. Hence, it acts like a TDS for the non-resident. Let’s dig a bit deeper into both these concepts.

When Are You Liable to Pay Income Tax?

Any resident Indian having income that exceeds the basic exemption limit is subject to income tax. The income earned by you is divided into 5 categories, namely:

  • Income from Salaries
  • Income from House Property
  • Income from Business or Profession
  • Capital Gains
  • Income from Other Sources

It is mandatory for taxpayers to hold a PAN Card in their name. This is the registered ID with the Income Tax Department.

What is TDS on Income Tax?

TDS is applicable for the resident taxpayers if the income exceeds the prescribed limits. The payer deducts the TDS and pays the remaining amount to you. You can claim the TDS as a deduction from your tax liability. Let’s understand this with the help of the following example.

Suppose your salary is Rs. 50,000 per month. Now, your annual income becomes Rs. 6 Lakhs that exceeds the basic exemption limit of Rs. 2.50 Lakhs. Hence, your employer is liable to deduct TDS @ 10% on this income.

When is Withholding Tax Charged?

The income earned by a non-resident for the services provided in India is subject to Withholding Tax. Same as TDS, Withholding Tax is deductible at the source of the income. It is mandatory for every non-resident generating income from India to hold a PAN Card.

This tax is applicable not only to foreigners but also to the NRIs (Non-Resident Indians). Whether a non-resident receives the income inside the Indian Territory or outside it, the income is subject to Withholding Tax. Deductions can be made from the following categories of incomes:

  • Interest income
  • Salaries in lieu of services provided in India
  • Work Contract
  • Commission
  • Rental Income
  • Business Income
  • Fess for technical services
  • Income from royalties
  • Income received from other services

Note: Dividend earned by non-residents from Indian Companies is exempt from Withholding Tax.

Tax Rates Under Income Tax and Withholding Tax

  • Income Tax: The income received by the residents is chargeable to tax based on the income tax slab From the year 2020-21, you get an option to choose between the new and old tax regimes.
  • Withholding Tax: India has Double Taxation Avoidance Agreements with around 80 countries. These DTAAs prescribe the slab rates for Withholding Tax. In the absence of a DTAA, the tax rates provided by Section 195 of the Income Tax Act are applicable.

Unlike TDS on the Income Tax, Withholding Tax has another benefit. Suppose a non-resident leaves India after receiving the income. It cannot be certainly said whether he/she will pay the tax later. Hence, deducting the tax at an early stage can simplify the process.