What is TDS on Salary and How to Calculate it?

TDS (Tax Deduction at Source) is a type of income tax, which is deducted by the person making a payment. Tax is generally paid by the person earning the income, however, with the concept of TDS, the government ensures that tax is deducted in advance from the payment amount. Since TDS enables the government to charge tax at the source itself, it is a robust tool that minimises tax evasion. This concept compels the person making a payment to deduct TDS and transfer it to the central government.  

 

 

Section 192 of the Income Tax Act, 1961, deals with tax deducted at source (TDS) on salaried income. And, this article explains the fundamentals of TDS on salary.

What is TDS on Salary?

Since salary is a type of income, the payer, i.e. the employer, is liable to deduct TDS on the amount payable to you. Section 192 makes the employer responsible to deduct and remit their employees’ income tax to the government.

But, what is the meaning of salary as per Section 192?

A salary is a type of payment received from the employer. It can also be defined as an income received for rendering services to an organisation. Hence, your employer is bound to deduct TDS if your yearly income crosses the threshold. The income tax threshold is a basic exemption limit for individuals prescribed by the Income Tax Act, 1961. If your annual income surpasses that limit, you are liable to pay income tax.

Who can Deduct TDS on Salary?

Employers that belong to the following categories are liable to deduct TDS on salary:

  • Companies (private and public)

  • Hindu Undivided Families (HUF)

  • Individuals

  • Trusts

  • Partnership Firms

  • Co-Operative Societies

Please note that the strength of an organisation holds no relevance to TDS. If there is an employee-employer relationship, the organisation is liable to deduct TDS on salary.

When is TDS Deducted Under Section 192?

According to Section 192 of the Income Tax Act, TDS is deducted at the time of crediting the salary. The employer is liable to deduct TDS while paying salary in advance as well. However, TDS shall not be deducted if your annual salary does not exceed the basic exemption limit.

Even if an individual does not have a PAN, the rules of TDS on salary are applicable to them. Let us explore the TDS on the salary limit exempted from taxation based on different age groups. It will help you determine whether TDS should be deducted from your salary.

Age Group

Minimum Income for TDS on Salary

Indian residents below the age of 60

₹2.5 lakh

Indian residents between 60 and 80 years of age

₹3 lakh

Indian residents aged 80 and above

₹5 lakh

 

How to calculate TDS on Salary

It is very simple to do the TDS calculation on salary. Here are six easy steps for you to calculate the TDS on salary:

  1. Note your monthly income, and multiply it by 12, to find your yearly income. This will usually be equal to your CTC. Let this number be q.

  2. Calculate your exemptions through a list provided below. These will usually be medical allowances, travel expenses, HRA, and so on. Multiply this number by 12, and let's call it e.

  3. Next, add any income you might have from other sources and calculate the yearly income from that source. Same goes for any losses that you incurred. Home loan EMIs included, for example. However, the losses will be subtracted and not added. Let this number be l.

  4. Next, think of your investments. Calculate the amount of money you invest. Investment tools like EPF/PPF enjoy a tax exemption of up to 1.5 lacs a year. Calculate the amount of money that you invest which is also exempt from taxes. Let this number be i.

  5. Now, calculate (q + l) - (e + i). This is the amount of money for which you will be taxed. Let this be t.

  6. Now, refer to the tax slab you fall under, using the number t. The following calculation will be pretty straightforward.

Let us look at an example to understand this better.

Mohan earns 9.6 lacs p.a. For his job as a Software Engineer. He invests 2.4 lacs on a yearly basis through various ULIPs and insurance. He lives in a rented house for which he pays Rs. 8,000 monthly. He also gets a medical and travel allowance of Rs 4,000 monthly. Following the steps above, here is what the numbers look like:

q = 9,60,000; l = 0;

e = (8,000 + 4,000)*12 = 1,44,000;

i = 1,50,000.

Now, taxable income t = q + l - (e + i)

= 9,60,000 - (1,44,000 + 1,50,000)

= 6,66,000

In order to understand the TDS deduction on salary for Mohan, we need to see the income tax slab that he belongs to. This is what it looks like for him:

Up to Rs.2.5 lakhs

Nil

Nil

Rs.2.5 lakhs to Rs.5 lakhs

5%

Rs.12,500

Rs.5 lakhs to Rs.6.66 lakhs

12500 + 10% 0f (Rs.6,66,00-Rs.5,00,00)

Rs.29,100

 

Consequently, Mohan will pay Rs 41,600 as income tax on his salary.

What is TDS Calculated on?

When you accept an offer/position at a firm, you will be provided a detailed break-up of your salary, including your basic pay, your allowances, such as Housing Rent Allowance (HRA), and so on. Some of these components will be exempt from taxation and will not figure into the TDS calculation on salary. There is a list of components/investment tools which are exempt from taxation and these will be deducted from your total salary to calculate your taxable income. Since your employer might not be in sync with all your investment plans, the TDS deduction on salary might be more than what you need to pay. Hence, companies ask for investment declarations from employees to avoid excess TDS. In case you end up paying more income tax than you are supposed to, you can always claim a TDS refund while filing your ITR.

How to Calculate TDS on Salary?

While calculating TDS on salary, companies need to reduce the amount of income tax exemptions from their employees’ annual income. As stated earlier, they obtain an income declaration from the employee before approving the exemption amount. Around December January on that given financial year, companies also ask for proof of these investments.

 

Here’s a list of allowances available for salaried people:

 

  • House Rent Allowance

If you have a rented apartment, you can benefit from HRA (House Rent Allowance). It can be exempted from income tax partially or completely. The parameters to calculate HRA for tax benefits are as follows:

 

  1. The actual house rent paid should be less than 10% of your basic salary

  2. If you stay in a metropolitan city, 50% of your basic salary and 40% in case you stay in a non-metro city

  3. The actual amount offered by your employer as HRA

Note: The least of the aforementioned amounts must be taken into account for tax deduction.

 

  • Standard Deduction

Transport and medical allowances have been replaced with a standard deduction of ₹50,000.

 

  • Children Education Allowance

Many employers offer education allowance for their employees’ children. Such an allowance is exempt from tax. However, you can only claim ₹100 per month and for a maximum of 2 children.

 

  • Leave Travel Allowance

The Income Tax Act also offers an exemption on Leave Travel Allowance. With LTA, employees can claim a refund on their domestic travel expenses. However, it is important to note that it does not cover your entire trip. You claim your leave travel allowance twice within a block of 4 years. LTA can either be claimed on the actual travel cost or on the component amount allotted in the salary, whichever is less.

Salary From More Than One Employer

In case you are working with more than one organisation, you need to provide details about your salary and TDS in Form 12B to one of your employers. This employer is responsible for evaluating your gross salary to deduct TDS. If you resign and join another organisation, provide your previous employment details in Form 12B to the new employer. Now, this employer shall be responsible to consider your old salary and deduct TDS accordingly for the remaining period of the financial year. In case you don’t wish to share details of other employment, each employer shall deduct TDS on salary paid by them.

Standard Deduction for Salaried Individuals

The Central Government had introduced the concept of standard deduction of ₹40,000 in Union Budget 2018. It replaced transport and medical allowances of ₹19,200 and ₹15,000 p.a., respectively. This amount could be claimed as a standard deduction on your gross salary. In Union Budget 2019, the standard deduction amount was increased to ₹50,000, which reduces the tax liability for salaried individuals. Let us understand how this affects your taxable income with an example.

Particulars

CTC for AY 2018-19 (in ₹)

CTC for AY 2019-20 (in ₹)

CTC for AY 2020-21 (in ₹)

Gross Salary

9,00,000

9,00,000

9,00,000

Travel Allowance

19,200

-

-

Medical Allowance

15,000

-

-

Standard Deduction

-

40,000

50,000

Taxable Income

8,65,800

8,60,000

8,50,000

 The above table explicitly illustrates how the current standard deduction amount reduces your tax liability.

TDS Deduction List

Here is a list of items for which salaried employees can claim a tax deduction under the Income Tax Act.

 

  • Investments in Public Provident Fund (PPF)

  • National Savings Certificate (NSC)

  • Employee’s share of Provident Fund contribution

  • Premium paid towards life insurance policies

  • Tuition fees of children

  • ULIP investments

  • Investment in Sukanya Samriddhi Account

  • Amount paid to buy deferred annuity

  • Senior Citizens Savings Scheme

  • Subscription to notified deposits scheme / notified securities

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

  • Contribution to LIC’s notified annuity plan

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

  • Contribution to notified Pension Fund set up by UTI

  • Subscription to NABARD’s notified bonds

  • Subscription to debentures / equity shares of approved eligible issues

  • Bank FDs

  • Repayment of home loan principal amount

  • Transport allowance

  • House Rent Allowance

  • Savings under Section 80C of the Income Tax Act, 1961

Time Limit to Deposit the Tax Under Section 192

TDS deducted by a government employer must be transferred on the same day. If you are not a government employer, the below pointers will help you with the deadlines for depositing the tax:

 

  • If TDS is deducted in March, the amount must be transferred before April 30

  • If TDS is deducted in any other month, it must be transferred within 7 days from the end of the month in which the deduction is made

Conclusion

According to Section 80C of the Income Tax Act, premiums paid towards life insurance qualify for tax deduction up to ₹1.5 lakh. Additionally, the maturity amount is fully exempted from tax under Section 10(10D) if the sum assured is 10 times the premium amount. This is exactly why life insurance is such a popular tool for saving income tax. The Bajaj Allianz Smart Protect Goal available on Finserv MARKETS can help you save money on your TDS while also providing you with a significant life cover.

With Bajaj Allianz Smart Protect Goal, you can get a cover of up to ₹1 crore by paying premiums as low as ₹500 a month. Log in to Finserv MARKETS today and channel your TDS towards life insurance so that you can truly protect those you care for.

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FAQs

  • ✔️What is the TDS rate for AY 2020-21?

    The following TDS rates are applicable for AY 2020-21: • Salary: Regular Slab Rate or the Rate of Income Tax applicable to the employee based on the slab he/she falls in. • Interest earned on securities: 10% • Dividend income: 10% • Interest earned (other than securities): 10% • Income from lottery/card games and other similar activities: 30% • Income from horse races: 30% • Payments made to contractor/subcontractors: 1% (HUF/Individuals) and 2% (Other Persons) • Insurance Commission: 5% • Commission earned on the sale of lottery tickets: 5% • Any commission or brokerage: 5% • Rent on Plant & Machinery: 2% • Rent on Land/building/furniture/fitting: 10% • Rent payable by HUF or individual not covered under section 194I: 5% • Payment upon the transfer of immovable property (except agricultural land): 1% • Any money paid as the charge for professional services/technical services/remuneration/fee/commission for directors/royalty/copyright: 10%
  • ✔️Can HRA be claimed as a deduction when calculating TDS deduction on salary?

    Yes, if the employee declares the amount of money he pays for rent, it can be claimed as an exemption.
  • ✔️How much deduction can I claim under Section 80C on investments when calculating TDS deduction on salary?

    The maximum amount that can be claimed under Section 80C of the Income Tax Act is Rs.1.5 lakh.