02 Apr 2020
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TDS, which stands for Tax Deducted at Source, is essentially just that. If you fall within an income slab which is eligible for taxation, your employer can deduct your income tax at the source, that is, before transferring it to your salary account. There are a few ground rules which the employer must follow in order to be able to do that: having a TAN number, for example, which allows the Income Tax department to track the status of the TDS. (Whether the TDS has been deposited with the Tax department.) So how does your employer do the TDS calculation on salary?

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. This will include perks, such as Housing Rent Allowance, Dearness Allowance, Travel Allowance 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. In such a case, you can file a TDS refund while filing your ITR.

TDS deduction List

There might be limits on how much amount will be exempt from tax against each item. Here is a list of items which are exempt from taxation under the Income Tax Act. 

  • Investment in Public Provident Fund

  • National Savings Certificate

  • Employee’s share of Provident Fund contribution

  • Premium payment towards life insurance policies

  • Tuition fees of children

  • Home loan principal repayment amount

  • ULIP plans

  • Equity linked savings schemes

  • Investment in Sukanya Samriddhi Account

  • Amount paid to buy deferred annuity

  • Senior Citizens savings scheme

  • 5-year deposit 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 or Mutual Fund

  • Subscription to NABARD’s notified bonds

  • Subscription to debentures / equity shares of approved eligible issues

  • PPF (Public Provident Fund)

  • ELSS (Equity Linked Savings Scheme)

  • Contribution to EPF (Employees Provident Fund)

  • Bank FDs

  • NSC (National Savings Certificate)

  • Premiums paid towards life insurance policies

  • Repayment of home loan principal amount

  • Transport allowance

  • House Rent Allowance

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

Conclusion

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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.