How TDS on Salary Works: A Comprehensive Guide

As per Section 192 of the Income Tax Act, 1961, Tax Deducted at Source (TDS) is deducted from the income earned by an employee. Your employer deducts the TDS on salary based on your net taxable income and deposits it with the Income Tax Department. 

 

This TDS is reflected on Form No. 16, which is issued annually. Post this, you can compute your liability on tax after the current financial year ends and adjust the TDS to either pay the excess liability or claim a tax refund.

Salary refers to the compensation received by an employee from an employer. It encompasses the below-listed variables which are subject to taxation as per the applicable income tax laws: 

• Basic Pay

• Dearness allowance

• EPF contributions

• Bonus

• Gratuity

• Commissions

• Annuity payments

• Perquisites that the employer grants

• Other allowances (HRA, meal allowance, LTA, etc.)

XYZ Private Limited makes a payment for the rent of the office of Rs. 1,00,000 per month to the property owner. TDS is needed to be deducted at a rate of 10% (let’s say). XYZ Pvt Ltd should deduct a TDS of Rs. 10,000 and pay the remaining balance of Rs. 90,000 to the property owner. Hence, the property owner in this case will receive a net amount of Rs. 90,000 after deducting the tax at the source. He will then add the gross amount of Rs. 1,00,000 to his income and take credit of the already deducted amount by XYZ Pvt Ltd against his final tax liability.

 

 Let’s discuss the TDS on Salary and all of its dimensions.

According to Section 192, the following entities can deduct the TDS:

• Individual taxpayers

• Trusts

• Private and public corporations

• Hindu Undivided Families (HUFs)

• Partnership firms

• Cooperative societies

However, this can only be done under Section 192 if there’s an employee-employer relationship between the taxpayer and the above-mentioned entities. For the determination of the TDS, the salary and the number of employees are irrelevant.

Tax deduction on salary as TDS is only deducted from the income salary when that amount is paid to the employee. It is never deducted at the time when your income salary is being accrued, that is when you earn it but the employee has not paid for it. Besides, if they pay the outstanding amount in full sum or you get an advance on your salary, then the TDS shall get deducted from it.

 

If your taxable income salary, however, is less than the threshold tax limit, TDS will not be deductible from your salary income. Below is the limit of the threshold for the current F.Y.:

• Hindu Undivided Families and individual taxpayers less than 60 years of age - Rs. 2.5 Lakhs

• Senior citizens whose ages lie between 60 and 79 years - Rs. 3 Lakhs

• Older senior citizens more than 80 years of age - Rs. 5 Lakhs.

TDS on salary is only deducted from the income when it’s credited to the employee’s bank account. This tax deduction is not made while your salary is being accrued. This means TDS won’t be deducted until the employer has disbursed the amount as payment to the employee. 

 

On the other hand, if they pay the outstanding amount in full or as an advance on your salary, then TDS will be applicable. However, if your taxable income salary is less than the threshold tax limit, TDS will not be deductible from your salary income. 

Under Section 192, TDS is computed on the basis of the estimated income that you earn during the financial year at an average rate of tax. There is no fixed rate of TDS under this section. 

 

In order to calculate the rate of TDS, the total tax liability that is estimated on such estimated income is divided over the employment period in months. Hence, TDS rate on salary = Estimated Total Tax Liability/Employment Period

In order to compute the TDS, the employer is required to estimate the net salary which is taxable, and deduct the TDS from it. The exemptions and the allowances that are tax-free are deducted from the gross salary in order to calculate the net salary income. 

 

After this deduction, if the employee declares any tax-saving investments or expenses covered under relevant sections of the I-T Act, they will be deducted from the income. Other income is also added to the salary if declared by you. Then, based on the tax slab applicable, TDS is deducted. 

Let’s consider the below-mentioned illustration to understand the process of calculation of TDS:

• Basic Salary - ₹5,00,000

• Dearness Allowance - ₹2,00,000

• Home Rent Allowance - ₹1,00,000

• Leave Travel Allowance - ₹1,00,000

• Bonus - ₹2,00,000

 

Gross salary is nothing but equal to the sum of the above-mentioned terms and will come up to ₹11,00,000. The net salary will be determined for the TDS calculation on salary as mentioned below:

Here’s how you can calculate the tax payable: 

Up to ₹5,00,000 – 5% of 250000 = ₹12,500

₹5,00,000 to ₹8,50,000 – 12,500 + 20% of 350000 = ₹82,500

 

Here’s how you can calculate the TDS rate using the formula: Tax liability / gross total income x 100

= (82,500 / 11,00,000) x 100

= 7.5%

 

Hence, the employer will deduct 7.5% TDS from the salary before crediting the amount to the employee’s bank account. 

In case there is an involvement of more than one employer, here are the applicable scenarios: 

• If you change your job during the financial year:

The details of your previous employer must be included in the Form 12B provided to your current employer for them to deduct the TDS properly. The new employer will consider your prior salary and TDS while computing the TDS for the rest of the financial year.

• If you are engaged with multiple employers simultaneously:

When you are working with multiple employers simultaneously, you should provide one of them with the details of your salary and TDS in Form 12B. Then, that employer must deduct TDS from your aggregate salary. 

Chapter VI A of the I-T Act provides you with several deductions that help you lower the TDS deducted by your employer. To claim these deductions, you must declare them to the employer, who will record the same while computing your net taxable income. 

 

Here are some commonly claimed deductions: 

1. Section 80C

Deductions of up to ₹1.5 Lakh are allowed u/s 80C of the I-T Act, provided you incur qualifying expenses or invest in the eligible avenues during a specific financial year. Below mentioned are a few eligible deductions under this section:

• Life insurance premiums

• Sukanya Samriddhi Yojana

• National Pension System (NPS)

• Equity-linked Savings Scheme 

• Employee Provident Fund

• Home loan repayment 

• Public Provident Fund

• Stamp duty paid on a property

• National Savings Certificate (NSC)

• Tuition fee paid for children

• Senior Citizen Saving Scheme

2. Section 80D

Under this section, health insurance premiums paid by you can be claimed as deductions. The maximum amount deductible is up to ₹25,000 for individuals under 60 years. Meanwhile, senior citizens can claim up to ₹50,000. 

 

In addition, if you’re paying your parents’ health insurance premiums, you can claim deductions of either ₹25,000 or ₹50,000. 

3. Section 80CCD (1B)

If you have invested in NPS, you can claim an additional deduction of up to ₹50,000 under this section. 

4. Section 80TTA

Interest amount earned on your savings account of up to ₹10,000 is tax-free under this section.

5. Section 89

This section helps you manage tax implications when you receive salary arrears or advance salary. It calculates tax on the total income, considering the specific year of actual receipt. This prevents a higher tax burden by spreading the income over the years it was earned, ensuring fair taxation.

After deducting the TDS from your salary, the employer must offer the TDS statements showing the detailed breakdown of the TDS. Form 16 contains these statements which are issued by the employer once the current financial year ends but prior to the last date of the tax filing. 

 

If you receive any profits or perquisites related to your salary, Form 16 may be available attached with the Form 12BA.

As per the provisions of the Income Tax Act, employees can claim tax deductions for the following: 

• Public Provident Fund (PPF)

• National Savings Certificate (NSC)

• Provident Fund contribution

• Subscription to debentures/equity shares of approved eligible issues

• Subscription to deposit scheme of companies involved in offering housing finance or public sector companies

• Life insurance premium 

• ULIP investments

• Tuition fees for children

• Repayment of home loan principal amount

• Sukanya Samriddhi Account

• Subscription to NABARD’s notified bonds

• Subscription to notified deposits scheme / notified securities

• Amount paid to buy deferred annuity

• Contribution to LIC’s notified annuity plan

• Senior Citizens Savings Scheme

• Contribution to notified Pension Fund set up by UTI

• Deductions u/s 80C 

• Subscription to National Housing Bank’s Home Loan Account Scheme

• Tax-saver FDs

• Transport allowance

• House Rent Allowance

TDS which a government employer deducts should be transferred on that very day. Below are a few pointers that shall aid you with the deadlines for the tax deposit if you’re not a government employee:

• The amount should be transferred before 30th April if TDS is deducted in March

• Transfer the amount within 7 days from the last day of the month after deduction (if TDS is not deducted in March) 

Below mentioned are a few consequences of non-compliance under Section 192:

1. Levy of Interest

If the TDS is not deducted from the salary by the employer and deposited to the government, the interest will then be levied on that amount.

2. Disallowances of Expenses

The employer cannot claim the deduction of income expense from Profit and Gains of Business or Profession (PGBP) income if they don’t deduct the TDS on time. The disallowed amount of salary expenses will be:

• 30% of the salary paid to the resident

• 100% of the salary paid to the non-resident

TDS certificates, like Form 16 for salaried individuals and Form 16A for non-salary TDS, summarise tax deductions made by employers or deductors. They detail income, deductions, and taxes, aiding in filing accurate income tax returns. 

 

Here’s a quick breakdown of the two types of TDS certificates: 

Understanding the nuances of TDS on salary is crucial, particularly as the income tax filing period approaches. Having grasped the available deductions under the Income Tax Act, consider optimizing your tax planning strategy. 

 

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