TDS on Salary

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Introduction

Employers pay a fixed salary at predetermined intervals, usually monthly, for services rendered under a contract with an employee. According to the Income Tax Act, salary income is taxable, and employers deduct tax at source (TDS). They calculate TDS based on applicable tax slabs and available exemptions under the Income Tax Act. Understanding TDS on salary is essential for salaried individuals to ensure compliance and optimize tax benefits.

What is TDS on Salary?

Section 192 of the Income Tax Act governs TDS on salary, requiring employers to deduct tax at source from employees’ salaries. Since salary qualifies as taxable income, employers must withhold a portion and remit it to the government.

TDS is deducted based on the income tax slab rates applicable to the employee. The tax amount depends on the employee’s income and eligible exemptions. It is important to note that TDS is deducted only if the employee’s salary exceeds the exemption limit set by the government.

TDS Calculation Formula

The formula to calculate TDS on salary is:

Income Tax Rate = Income Tax Payable (computed with applicable slab rates) ÷ Estimated Income for the year

Who Deducts TDS Under Section 192?

Employers are entrusted with the responsibility of deducting TDS on salary and depositing it with the government. Any of the following entities can deduct TDS on salary under Section 192:

Individuals
Hindu Undivided Families (HUFs)
Partnership Firms
Public and Private Companies
Trusts
Cooperative Societies

When is TDS Deducted?

TDS on salary is deducted every month. It is typically withheld when the salary is paid, not when it accrues. If an employer fails to deduct the TDS, they are liable to pay penalties and additional interest. Additionally, salary paid in advance or arrears will also be subject to TDS.

If an employee’s salary falls below the minimum exemption limit, the employer does not deduct TDS. Additionally, TDS is not deducted if the employee lacks a PAN card.

You may also want to know What is TAN?

TDS Slab Rates for Salary

The following tax slabs apply to the salary income for the financial year (2024-25):

Income Range	Tax Rate
Upto Rs. 2.5 Lakhs	Nil
Rs. 2,50,001 – Rs. 5 Lakhs	5%
Rs. 5,00,001 – Rs. 7.5 Lakhs	10%
Rs. 7,50,001 – Rs. 10 Lakhs	15%
Rs. 10,00,001 – Rs. 12.5 Lakhs	20%
Rs. 12,50,001 – Rs. 15 Lakhs	25%
More than Rs. 15 Lakhs	30%

What is TDS Computed On?

Employers generally compute TDS based on the CTC (Cost to Company), which includes the basic salary, allowances, perquisites, and additional benefits. Perquisites may include things like travel expenses, fuel subsidies, medical expenses, and others.

Employees can claim exemptions from TDS on the following:

House Rent Allowance (HRA): For those living in rented accommodations.
Travel Allowance: For commuting expenses.
Medical Allowance: Based on actual medical expenses with receipts.

You may also want to know Section 80CCD(1B)

How to Calculate TDS on Salary

Follow these steps to calculate TDS on salary:

Compute Earnings: Calculate the total earnings for the year, including base salary, bonuses, commissions, and perks.
Gather Investment Declarations: Employees should submit investment declarations early in the year. At year-end, they should provide proof of investment to enable employers to approve exemptions.
Compute Exemptions: Deduct eligible exemptions like HRA, insurance premiums, etc., from the gross salary to calculate the taxable income.
Calculate TDS: Apply the appropriate income tax slab rate to the taxable income and deduct TDS accordingly.
Deposit the TDS: Employers must deposit the deducted TDS with the government.

TDS Deductions – Key Exemptions

Salaried individuals can reduce their taxable income by declaring certain investments. Here are the key exemptions that employees can avail:

Section 80C: Exemption of up to Rs. 150,000 for investments in tax-saving schemes like Public Provident Fund (PPF), Life Insurance, 5-year Fixed Deposits, and Employee Provident Fund (EPF).
Section 80CCG: Exemption of up to Rs. 25,000 for investments in specified tax-saving schemes, provided the investments are active for at least 3 years.
Section 80D: Exemption for premiums paid on medical insurance for the employee and their dependents.
House Rent Allowance (HRA), Transport Allowance, Insurance premiums, and Repayment of Home Loan Principal are also eligible for exemptions.

Form 16 – A Helpful Tool

Employees can use Form 16 to verify their TDS deductions. This form contains details of both the employer (deductor) and the employee (deductee), the amount of TDS deducted, and the tax deposited with the government. It serves as proof of TDS deductions and is essential for filing Income Tax Returns.

Conclusion

Employees must understand TDS on salary to manage their tax liability and avoid over-taxation. By properly declaring investments and exemptions, employees can optimize their tax deductions and avoid penalties. Form 16 is a valuable tool to track TDS and ensure compliance with tax laws.

Frequently Asked Questions

What happens if my salary is below the exemption limit?

If your salary is below the exemption limit of Rs. 2.5 lakh, no TDS will be deducted.

Can I claim tax deductions on HRA?

Yes, you can claim tax deductions on HRA if you live in rented accommodation. The amount is subject to conditions like the rent paid, the salary, and the city of residence.

What if the TDS deducted is more than my actual tax liability?

If the TDS deducted is more than your actual tax liability, you can claim a refund by filing your Income Tax Return (ITR).

Can I reduce my taxable income with investment deductions?

Yes, you can reduce your taxable income by investing in tax-saving schemes under sections like 80C, 80D, and 80G, among others.

Do I need to submit investment proofs to my employer?

Yes, you need to submit proof of your investments at the end of the financial year or as required by your employer to claim exemptions.

How do I calculate TDS on salary?

TDS is calculated based on your total taxable income, including salary and perks, and applying the applicable income tax slab rates. You can use online TDS calculators to get an accurate figure.

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