TDS on Salary

Salary is best defined as a fixed payment that is received at pre-determined intervals for providing services as per the contract between two parties – an employer and an employee.

As per Income Tax Act, salary comes under the purview of taxation, wherein the liability is calculated according to applicable slab rates. To understand the concept and applicability of TDS on salary, individuals should gather information on its computation and deductions. 

What is TDS on Salary?

TDS on salary falls under the purview of Section 192 TDS. Under this tax provision, employers are entitled to deduct tax at source on the salary amount payable to an employee. It is because the salary received from the employer is categorised as income, and the same attracts a TDS based on the average prevailing rates of tax.  

The ITA makes it mandatory for employers to deduct TDS on salary if they pay a salaried income to their employees. However, such a deduction can only be carried out if the salaried income is more than the minimum exemption limit. 

Usually, TDS on the salary section is refundable. However, such a refund is only possible if the amount of tax deducted is more than an employee’s tax liability. Also, at times, the investment detail declared at a fiscal year’s beginning is not the same as the investments that were made at its end. Under such a situation, the TDS amount on salary will be refunded.

Formula to Calculate TDS on Salary

Income Tax Rate = Income Tax Payable (computed with slab rates) / Estimated Revenue for the financial year

Who Deducts TDS Under Section 192?

Employers are entrusted with the task of deducting TDS within a given date. They are also required to deposit it with the government.  

The following employers can deduct TDS under the said section –

  • Individuals
  • HUFs
  • Partnership firms 
  • Public and Private companies
  • Trusts
  • Co-operative societies

When is TDS Deducted?

Salary is paid out on a monthly basis, and TDS is deducted each month.

Typically, TDS deduction on salary is carried at the time when salary is paid and not at the time of its accrual. 

It must be noted that paying salary in advance or arrears will still be liable for tax deductions. Also, if an employer fails to deduct the salary, he/she will be subject to a penalty and additional interest. 

In a situation where an employee’s salary is equal to or less than the minimum exemption threshold, the tax will not be deducted. The same stands true even if the employee in question does not possess a PAN

The table below provides TDS on the salary slab:

S.No.  Income Threshold Tax Slab
   1) Upto Rs. 2.5 lakhs Nil
   2) Rs. 2,50,000 – Rs. 5,00,000 5%
   3) Rs. 5,00,000 – Rs. 7,50,000 10%
   4) Rs. 7,50,000 – Rs. 10,00,000 15%
   5) Rs. 10,00,001 – Rs. 12,50,000 20%
   6) Rs. 12,50,001 – Rs. 15,00,000 25%
   7) More than Rs. 15,00,000 30%

What is TDS Computed on?

Salary is usually computed as CTC or Cost to Company, and it comprises two main elements, namely – salary and perquisites.

Usually, perquisites or perks include benefits and facilities extended by an employer, like fuel subsidy, travel expenses, canteen, hotel expenses, etc. 

In other words, CTC includes – a basic salary, house rent allowance, travel allowance, medical allowance, dearness allowance, special allowance, etc. So, based on the information, employees can claim exemptions of tax on the following –

  • Exemption for house rent allowance in case the employee resides in a rented place.
  • Travel allowance to claim the amount spent on commuting.
  • Medical allowance can be claimed by submitting relevant bills.

How to Calculate TDS on Salary

It must be noted that the number of employees that are employed under an organisation is not factored in while computing and deducting TDS rate on salary. 

Nonetheless, one can compute TDS on salaried income by following these basic steps –

Step 1 – Compute Earnings 

Calculate the total earnings an employee accrues over a year. Under this, one must make sure to include commission, perks, bonuses, etc.

Step 2 – Collect and Corroborate Investment Declaration

Collect declarations from an employee regarding planned investments. By the end of the year, one must collect proof of investment by corroborating the same.

By doing so, an employer can approve tax exemptions.

Step 3 – Compute the Amount That is Eligible for Exemption

To do so, one has to factor in all the exemptions that employees are entitled to receive.

Subsequently, employers must proceed to deduct the permitted exemptions from the gross salary. The result obtained is an employee’s taxable income.

Based on the applicable tax slab, an employer must make a TDS deduction of salary.

Step 4 – Deposition of TDS Collected

The collected TDS must be deposited to the Central government by the employer.

One can use a trusted online TDS calculator to compute TDS on salary accurately and without undergoing hassle. Regardless, he/she must ensure to provide accurate details to obtain correct results.

TDS Deductions – In a Nutshell

Besides the standard exemptions an employee is eligible to claim, one can also benefit under these exemptions.

  • Under Section 80C, a salaried employee can declare an amount up to Rs.150000 for exemptions. Typically, these investments in mutual funds, equity shares, life insurance premiums paid, 5-year FD schemes, etc., are factored in for exemptions.

  • Under Section 80CCG, a salaried employee is eligible for exemptions up to Rs.25000 in a year, given they had invested under specific tax saving schemes. Notably, such investments should be active for at least 3 years.

  • Under Section 80D, a salaried employee can claim exemptions against the premiums paid towards medical insurance. It must be noted that such exemptions are extended to the dependents of the employee. 

So, in a nutshell, the items mentioned in the table below qualify for TDS exemptions –

S.No.  Exempted Items
   1) Public Provident Fund or PPF 
   2) Bank Fixed Deposits
   3) Equity Linked Savings Scheme or ELSS 
   4) National Savings Certificate or NSC
   5) Employees Provident Fund or EPF
   6) Contribution to EPF
   7) House Rent Allowance
   8) Transport allowance
   9) Insurance policies premiums
  10) Repayment of the principal amount of a home loan
  11) Savings under Section 80C of ITA, 1961

Furthermore, to understand the TDS calculation on salary salaried employees can refer to Form 16 and get all their doubts cleared successfully. The said form offers details of both the deductor (in this case, the employer) and the deductee (the employee), the amount of TDS deducted and deposited.

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