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TDS on Salary and TDS Calculation Procedure

Overview

Under Section 192 of Income Tax Act, TDS on Salary should be deducted by the payer/employer both individual and HUF from the payee/employee’s salary at the time of payment. It is compulsory to deduct TDS from the salary paid to the employee, if the salary amount exceeds the basic exemption limit of the financial year. The amount after deducting TDS is payable to the payee/employee.

What is TDS?

TDS (Tax Deducted at Source) is a taxation system where the payers, both individual and businesses, are required to collect taxes before making any kind of remuneration. It includes fees, salary, rent, interest, commission, etc. The payer is directed to send the deducted percent to the Central Government.

TDS is generally required on the below-given transactions:

  • Salary Payment
  • Dividend Payments
  • Interest on Securities
  • Interest other than interest on Security
  • Winner from race horse
  • Winner from lottery or crossword puzzle
  • Payment to contractor and sub-contractors
  • Deposits under NSS
  • Insurance Commission
  • Commission on sale of lottery ticket
  • Commission on Brokerage
  • Repurchase of Units by Mutual Funds or UTI
  • Transfer of immovable property
  • Compensation on acquisition of immovable property
  • Rent
  • Income in respect of units
  • Fees for professional or technical services

Definition of Salary

A remuneration received periodically by an individual for providing service of an expressed/implied contract is known as salary under Income Tax Act. For instance – employer-employee relationship. However, all payouts made by an individual/organisation for a service rendered do not come under ‘salary’ and they follow different taxation system.

For example –

  • Professional/Technical fees: The payment made to professionals for their professional capacity
  • Profit and Gains from Business and Professions: The payment received by a partner from his/her partnership firm
  • Income from Other Sources: The salary of MP and MLA

According to the definition of Salary in Section 17(1) of Income Tax Act – Wages, Gratuity, Annuity or pension, perquisites or profits in lieu of salary, Fees or Commission, Leave Encashment, Advance of Salary, Compensation because of variation in Service contract, etc. comes under salary.

Discussing salary is incomplete without defining CTC as this is the new term used by the corporate employers while offering the salary to their employees. Cost to Company (CTC) is the total amount paid to an employee by an organization for a period under consideration. Apart from the basic salary CTC includes Statutory liability such as PF, LWF, ESIC and other commitments like Pension, Gratuity, Leave Encashment, Employee Accident Insurance, Statutory bonus, Mediclaims, etc.

In short:

CTC = Gross Salary + PF + ESIC + LWF + Gratuity + Leave Pay + Insurance. 

TDS on Salary

TDS on Salary is the income tax on salary. It is also termed as withholding tax. Salary or the payment made by an employer to an employee can be bifurcated into two parts – Salary and Perquisite/Perks. Salary is purely the cash pay-out; while perquisite comprises of the facilities and benefits enjoyed by the employee while providing the service to the organization. For instance – car service, transportation, canteen subsidy, hotel accommodation, lodging & boarding, fuel & gas subsidy, travelling expenses, interest-free loans, etc.

Under Section 10 of ITA, some portion of allowances and perks are exempted from taxation. For instance – Upto Rs. 800/- per month is exempted on conveyance allowance, HRA exemption, etc.

The tax which is deducted as TDS on Salary from an employee’s salary is reflected in Form 16. It is issued by the employer at the end of the financial year. Moreover, the employee/ taxpayer can check the details of TDS deducted and deposited by his/her employer. After verifying his/her details through Form 26AS the taxpayer can easily check the details online. If the employee’s income is less than the taxable slab and is not liable for any income tax then TDS will not be deducted from his/her income.

If the taxpayer is an employee with more than one employer (may be the taxpayer has switched job and joined a new organization) then he must furnish a statement in Form 12B to the new employer, stating the salary received and TDS deducted at his/her previous job/service. Based on the provided information the new employer will deduct TDS on Salary accordingly.

This deducted TDS on Salary is deposited to the Central Government account by the employer before the prescribed due date, where the employer needs to mention his/her TAN number on the deposited challan. The employer needs to mention the salary paid to each employee and the tax deducted thereon while depositing TDS on Salary to the Government. It is also mandatory requirement to quote employee’s PAN number while depositing the TDS. In case, if an employer fails to deduct TDS from his/her employee or fail to pay the deducted TDS on Salary to the government, the employer is liable for interest or penalty.

Further, if an employer had deducted lower TDS on salary in the initial months as compared to the amount he/she needs to deduct, then the employer can adjust by deducting higher amount in the remaining months and vice-versa. The TDS on Salary deducted annually should be equal to the tax on salary payable by the employee based on his/her tax slab. If the TDS on salary is more than the tax paid then the employee can claim for a tax refund of excess tax paid.

Note: The employer/deductor should obtain TAN Registration. TAN is an alphanumeric 10-digit number used for tracking all TDS deductions on Salary by the IT- Department.

TDS Calculation

It is mandatory to deduct TDS on salary if the employee’s income exceeds the tax limit unless the employee falls under any exemptions of that financial year. Under Section 80C and 80D, the government allows tax exemptions, where a taxpayer can claim an exemption based on his/her various investments in that financial year. It is a mandatory for an employer to obtain declaration/proof from the individual to approve their tax exemption.

The category which comes under tax exemption are as follows:

  • HRA (House Rent Allowance) – An employee can claim tax exemption on the amount he/she paid for accommodation as rent.
  • Conveyance or Travel Allowance – An employee can claim tax exemption on the amount if he/she is provided with conveyance allowance.
  • Medical Allowance – An employee can claim tax exemption if he/she is entitled to the medical allowance. He/she should provide medical bills for the same as proof.

However, there are certain limits to the maximum amount that can be considered for tax exemption.

Further, the process involved in the deduction of TDS is as follows:

  • Calculate Total Earning: An individual responsible for deducting TDS on Salary needs to calculate the total earning of an employee for that Financial Year
  • Calculate total exemption amount: To calculate the total exemption amount, an employee needs to declare the exemption type and amount eligible for exemption to the employer.
  • Obtain declaration and investment proof: It is important to obtain declaration and investment proof from the employee.
  • TDS Deposition: The employer should deposit the deducted TDS to the central Government within the given time frame.

Step by Step Procedure to Calculate TDS on Salary

To calculate TDS on Salary, follow the below steps:

Step1: Calculate Total Gross Salary – Depending on the time and various laws related to labour requirement, the income tax keeps on changing. Therefore, the basic salary is usually kept as minimum as possible based on the state and in addition to this, the required allowance is paid by the employer.

The Gross Salary is the sum of Basic, Dearness Allowance, HRA, Conveyance/ Transport Allowance, Special allowance and other allowances agreed to pay to the employee under terms of the contract.

Step2: Providing Exemption on the Allowance – Under Section 10, some portion of the allowance paid is exempted.

Step3: Calculate annual taxable Gross Salary – The monthly taxable Gross Salary of the financial year is the net of Calculate Total Gross Salary and Providing Exemption on the Allowance. Then the annual taxable gross salary is the result of multiplying monthly taxable gross salary with 12 if the employer is calculating the TDS from the month of April, if not, multiply with the number of remaining months of that financial year.

Step 4: Adding income or loss reported by the employee – To obtain the Gross total income of the employee, the employer should add other income earned or loss reported by the employer to the Annual Taxable Gross Income. This may include interest income on bank deposits, income from house property or loss from house property such as interest paid on housing Loan take, etc.

Gross Total Income of an employee = Annual taxable Gross Salary +/- additional income or loss income reported by the employee

Step 5: Calculate deduction liable for the employee – Deduction from the taxable gross salary is allowed if the employee make certain investment (Given below Section 80C)

Step 6: Calculate net taxable income and tax amount – The employer has to deduct a maximum amount not chargeable under income tax act for the financial year.

What is Section 80C about?

Under Section 80C, the following investment schemes are considered for exemption:

  • Premium paid on Life Insurance
  • Mutual Funds and equity shares investments such as ULIP, Linked Shaving Scheme of a Mutual fund or UTI.
  • Subscription for National Saving Certificates and Home Loan Account Scheme
  • Certain amount of tax is exempted on Interest earned through few of National Saving Certificates
  • Minimum 5 years fixed deposit schemes.

Further, under Section 80CCG, if an employee has invested in certain equity saving schemes, he is eligible for an exemption of a minimum of Rs. 25,000. However, the investment should carry on for at least 3 years from the date of scheme acquisition. Last but not the least, if an employee has paid premium on Medical Insurance; then under Section 80D, he/she will be offered an exemption, which may extend to his/her dependent.

TDS deduction rate for the Financial Year 2017-18

TDS should be deducted as per the following rates along with surcharge and Education Cess.

The following is the applicable tax for individuals below 60 years –

Annual Income Tax rate Education Cess Secondary & Higher education Cess
Up to Rs.2,50,000 Nil Nil Nil
Between Rs.2,50,001-Rs.5,00,000 5% 2% of income tax 1% of income tax
Between Rs.5,00,001-Rs.10,00,000 Rs. 12,500 + 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,12,500 + 30% 2% of income tax 1% of income tax

The following is the applicable tax for individuals above 60 years but below 80 years –

Annual Income Tax rate Education Cess Secondary & Higher education Cess
Up to Rs.3,00,000 Nil Nil Nil
Between Rs.3,00,001-Rs.5,00,000 5% 2% of income tax 1% of income tax
Between Rs.5,00,001-Rs.10,00,000 Rs.10,000 + 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,10,000 + 30% 2% of income tax 1% of income tax

The following is the applicable tax for individuals above 80 years –

Annual Income Tax rate Education Cess Secondary & Higher education Cess
Up to Rs.5,00,000 Nil Nil Nil
Between Rs.5,00,001-Rs.10,00,000 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,12,500 Rs.1,00,000 + 30% 2% of income tax 1% of income tax

TDS on Salary Certificate

After the deduction of the TDS on Salary the employer should provide Form 16 to the employee, as a proof of the deducted TDS, with his/her salary breakup in the Form 12BA. If the employee is eligible for any tax relief/exemption under Section 89(1) of the ITA, the employee should furnish the details in Form no. 10E.

Moreover, the employee should be true to oneself and fill the details correctly for tax calculation perspective. If you miss out some details such as income from the previous job (if you switch job recently), any additional income from a contractual opportunity; such things may lead to hiding or misrepresenting income source. Avoid such misdirection as the individual will be heavily penalised by the concern tax authority finds out while conducting cross verification at a later stage.

Conclusion

To conclude, every individual who is responsible for deducting TDS should fulfil his/her duty to the government by deducting TDS on salary from his/her employees and sent it to the government timely. And on the other hand, the employees should cooperate with their employer by providing the exemption and its proof without any misrepresenting income source.

Frequently Asked Questions

Q. What is Salary Income?
Under Section 17 of the IT Act, Salary Income is defined as the amount received by an employee from an employer as cash, kind or facility.
Q. What is meant by allowance?
Apart from the salary, the fixed periodic amount paid by your employer to meet some requirements is called allowance. For example – transport allowance, tiffin allowance, etc. Generally, there are 3 types of allowances, namely, Taxable allowance, fully exempted allowances and partially exempted allowances.
Q. Does pension income come under Salary income?
Yes, except for pension received from United Nations Organization.
Q. Can an employee consider relief under Section 89 to calculate his TDS on Salary?
Yes, however, the employee should be a Government employee or an employee of PSU, company, co-operative society, local authority, university, institution or association. Where Form No. 10E needs to be furnished by the employee to the employer.
Q. Does leave encashment taxable as salary?
Yes, it is taxable if you receive while you are in service.