For example, an employer withholds the income tax from its employee’s wages and pays it directly to the government.
Here, the third party (the employer) withholds the income tax of its employees at the time of payment of wages (at the source) and directly pays it to the government (the authority) on behalf of the concerned party (the employee).
This tax is also called the retention tax. It not only applies to income but sometimes it also applies to interest and dividends. Additional Withholding tax can also be levied on earnings by a non-resident from some other legal jurisdiction.
Withholding tax is a measure taken by the government to minimize tax evasion. The withholding tax is generally a fixed percentage of the employment income. It is paid by the third party on behalf of the employee and the employee can ask for a refund in case the employee’s tax liability is less than the tax withheld.