How to Calculate TDS on salary?

When you receive a salary from your employer, you may have noticed that a certain amount is deducted as tax. When you ask your company's human resources department, they will tell you that the deductible amount is TDS (Tax Deducted at Source). But do you know what TDS means? If you are unfamiliar with this term or the TDS concept. Here is everything you need to know about the TDS on salary.

How to Calculate TDS on Salary?

When you receive your salary, you may notice that your employer withholds a portion of it as tax. This deduction is known as TDS, which stands for Tax Deducted at Source. TDS is a method used by the government to collect income tax directly from your earnings before the salary is paid to you.
The amount deducted depends on your total income and the tax slab rates applicable to you. Understanding TDS can help you manage your finances better and prepare for any tax liabilities or refunds at the end of the financial year.

What is TDS in Salary?

Section 192 of the Income Tax Act requires your employer to deduct TDS from your taxable salary income. TDS is deducted after taking into account your tax-saving investment, expenses incurred during the financial year that are tax-deductible, and a few other factors. After the employer deducts the TDS, the same is reflected on Form 16 issued by them.

You can use Form 16 as a reference and adjust the TDS in your tax liability when filing your ITR or applying for a tax refund.

Who is Authorised to Deduct TDS on Salary?

According to section 192, it is mandatory to have an employee-employer relationship between the entity/individual deducting TDS and the person from whose salary it is deducted. The TDS deductor can be any of the following.

• Trusts
• Partnership firms
• Public companies
• Private companies
• Co-operative societies
• Hindu Undivided families
• Individual taxpayers

When is TDS on Salary Deducted?

Your employer deducts the TDS at the time of making salary payments and not on an accrual basis. In the case of outstanding or advance salary payments, the employer must deduct TDS before transferring the amount.

However, TDS will not be levied on your salary if it is less than the tax threshold limit. The table below shows the tax-free income for various age groups.

What is the Rate of TDS Deduction?

The rate of TDS (Tax Deducted at Source) deduction under Section 192 of the Income Tax Act is not a fixed percentage. TDS is generally determined based on the applicable income tax slab rates in the financial year for the individual's gross taxable income.
The tax is deducted at the rate applicable to the income slab in which the employee's income falls for that particular financial year. It is levied according to the income tax bracket into which an assessee’s annual income falls. In case of unavailability of a PAN card, the applicable TDS rate will be 20% plus a cess of 4%.

How to Compute TDS on Salary?

Here’s a step-by-step process of computation of TDS on Salary:

1. Sum up Gross Salary: Combine all salary components, including basic pay, allowances, and bonuses.
2. Subtract Non-Taxable Allowances: Deduct non-taxable elements like House Rent Allowance (HRA) and Leave Travel Allowance (LTA).
3. Add Other Income: Incorporate any additional income, such as interest or rental income, into your total.
4. Apply Deductions: Use deductions under sections 80C, 80D, etc., to lower your gross income.
5. Determine Net Taxable Income: This is your income after deductions, used to calculate your tax liability.
6. Apply Tax Rates: Calculate the tax based on current slabs, including any applicable cess or surcharge.
7. Finalise TDS on Salary: Deduct any tax-saving investments and previously deducted TDS from the total tax to find the TDS on your salary.

Let's understand the TDS calculation using an example.

Assume you work for ABC Ltd., and your fixed monthly salary for the financial year 2022-23 is ₹1 lakh. You also have several investments to your name, such as ₹50,000 in equity linked saving scheme (ELSS), ₹60,000 in a Public Provident Fund (PPF), and ₹40,000 in a National Savings Scheme (NSC). Your TDS will be calculated as follows:

According to the above illustration, your employer will deduct ₹9,750 (₹1,17,000/12) as TDS under Section 192.

List of Deductions Allowed for TDS

There are various deductions permissible for TDS calculation. A few of these are 

• Life insurance premium payment
• Children's tuition fees
• Investment in Sukanya Samriddhi scheme
• National Savings Certificate (NSC)
• Public Provident Fund (PPF)
• Senior Citizens Savings Scheme
• Payment made towards deferred annuity
• Bank FDs
• Transport allowance
• House Rent Allowance
• Any investment in saving scheme under section 80C

How is my TDS Calculated if I Work for More Than One Employer?

If you work for multiple employers, it is your responsibility to provide your combined salary details and TDS information in Form 12B to one of the organisations you are employed with. Then, that organisation will be in charge of determining your total gross income for TDS purposes.

In case you leave your current employer and join another, you must provide your previous employment information in Form 12B to your new employer. The new employer will deduct TDS for the remaining months of the fiscal year based on your previous salary income and the salary paid by them.

If you do not want to disclose your previous employment details to your new employer, each employer is responsible for deducting TDS from the salary they pay you.

What is the Time Limit for Depositing TDS Under Section 192?

Under Section 192 of the Income Tax Act, which governs the deduction of tax on salary, employers are required to adhere to specific deadlines for depositing TDS (Tax Deducted at Source) with the government. The guidelines are as follows:

• For TDS deducted from an employee's salary from April to February, the employer must deposit the deducted tax by the 7th day of the month immediately following the deduction. For example, if the tax is deducted in the month of May, the deposit must be made by the 7th of June.
• For TDS deducted in the month of March, the final month of the financial year, the deadline for depositing the tax is slightly extended. Employers have until the 30th of April of the next financial year to deposit the tax deducted in March. This extension accommodates the financial year-end processing.

Conclusion

Your employer deducts the TDS if your income falls under the tax slab. Employers need to keep accurate records of all TDS deductions and deposits to maintain compliance and avoid any potential issues with tax authorities. However, there are numerous methods by which you can avoid TDS or reduce your tax liability. The most effective way is to invest in schemes covered by Section 80C of the Income Tax Act.

To know more, please read the relevant articles at our website PNB MetLife.