TDS On Salary – Calculation, Deductions, Limit & more

Under Section 192 of the Income Tax Act, an employer will deduct TDS from an employee’s salary and remit the employee’s income tax to the government. 

The tax liability generally lies with working professionals. With the concept of TDS on salary, the Government of India can deduct tax beforehand from the employee’s payment amount. The Central Board for Direct Taxes is responsible for collecting and managing the TDS. 

Which Entities Can Deduct TDS Under Section 192?

Employers who belong to the following categories are liable to deduct TDS from the salary of their employees.

• Private and public companies 
• Individuals
• Trusts
• Partnership Firms
• HUF (Hindu Undivided Families)
• Cooperative Societies
• Central/State Government/P.S.U

When is TDS Deducted Under Section 192?

As per Section 192 of the Income Tax Act, Employers deduct TDS from salary when crediting it. Employers deduct tax even if they disburse salary in advance. 

However, employers cannot deduct TDS if the estimated salary of an employee does not go beyond the basic exemption limit. The rules of TDS deduction remain the same even if salaried individuals do not have PAN cards. 

It is important to know that the basic limit of exemption from taxation varies for different age groups. Individuals belonging to certain age groups do not require TDS deduction accordingly. To gain further clarity regarding the same, refer to the table below-

How to Calculate TDS on Salary?

The basic salary of an employee is taxable. However, some exemptions are extended as allowances and perks are taken out from the overall annual income of an employee. Salaried individuals can calculate TDS on their salary by following the mentioned steps:

Step 1: First, evaluate gross monthly income for a particular financial year. One must include the basic income, bonuses, incentives, allowances and other prerequisites.

Step 2: Individuals must compute all exemptions under Section 10 of the Income Tax Act and subtract the amount from their gross salary to obtain the net salary, which is then treated as taxable income. 

Step 3: Next, individuals must combine additional earnings if they have any, like rental income, bank deposits etc. If they have any financial liabilities involving home loan interest payments and the like, they must subtract these amounts from the net taxable salary. This leads to an employee’s gross taxable income.

Step 4: Then, individuals must calculate their yearly investment (this falls under chapter VI-A of ITA) and deduct the amount from annual taxable income. For instance, under Section 80 C, one can enjoy a tax deduction of up to Rs. 1.5 lakhs for investment avenues like life insurance premiums, mutual funds, PPF/ EPF, NSC, Sukanya Samridhi account etc. Even under Sections 80 D and 80 G employers extend deductions to employees.

Step 5: Salaried individuals will have to calculate final taxable income by reducing the maximum allowable deductions from their gross taxable income. Finally, refer to the tax slabs according to the tax regime and evaluate the TDS deduction on salary as per income tax slabs and the TDS rate on salary. 

A payment made as an advance tax can be adjusted for TDS calculation if the employee made such a payment. The employee needs to intimate the same to the employer.

Another thing to note is that the tax slabs are different for senior citizens. Furthermore, they enjoy higher deductions than mentioned above.

Also Read: Loan Settlement and Its Impact  on Your Credit Score

How is TDS Calculated? 

The CTC (Cost to Company) quoted to an Individual while he or she joins a company or firm includes a detailed break-up of their salary, which encompasses basic salary, house rent allowance, special allowance, medical allowance, travel allowance and so on. The CTC is further divided into salary and perquisites. Salaried individuals can claim tax exemptions on some of these components mentioned, which will not be counted for TDS calculation on salary. 

In this regard, salaried employees must know the components that qualify for tax exemptions, which will be deducted from the employee’s salary to obtain the taxable income. 

However, there can be instances when an employer does not have a clue about the investment plans of employees, resulting in higher TDS deductions on salary than what they have to pay. This is why employees must provide investment declarations to employers. It will help them reduce TDS. 

Allowances That Are Considered for Tax Exemption

At the time of calculating TDS on salary, one has to subtract the total amount of income tax exemptions from the annual remuneration of an employee. The exemption limit is determined by the Income Tax Department. Before approving the exemption amount, an employer must retrieve adequate evidence and declaration from employees. 

The CTC format of a company encompasses allowances for medical expenses, travel costs, housing etc. It varies from one company to another. Here are the allowances that salaried individuals can avail. These are eligible for tax exemption:

• Standard Deductions

The Government of India has replaced conveyance and medical allowance with standard deductions. The exemption limit set is Rs. 50000. From FY 2023-2024, this exemption will be claimed under both old and new tax regime. 

• House Rent Allowance

Employees who live in rented apartments can reap the benefits of HRA (House Rent Allowance). Employees paying rent can claim tax exemptions for the amount. It will be exempted partially or completely as per the amount derived through the calculation of the exemption.

• Leave Travel Allowance

Even for leave travel allowance, employees can claim tax exemptions. Under this benefit, employees can get a refund on their domestic travel costs. However, employees can claim a refund for two journeys in a span of 4 years. Individuals must note that the entire cost of the trip is not covered. 

• Children Education Allowance

There are several companies that extend children’s education allowance to their employees. Under such perks, employees will receive Rs. 100 per month per child. You can claim the amount for a maximum of two children.

TDS Implication on Salary from More Than One Employer

If you are working with more than one organisation or firm simultaneously, then you must give information regarding their salary and TDS in Form 12B to one of your employers.

On receiving the necessary details, employers will calculate the gross salary and deduct TDS. However, in case you resign and join another company, you have to give out all details of your previous work to the new employer. Then, the new employer will take into account your previous salary and deduct TDS for the remaining months accordingly.

An employee choosing not to provide information about another workplace will see both employers deducting TDS on salaries paid by each of them. 

Deductions to Lower Rate of TDS On Salary

As mentioned above, in chapter VI A of the Income Tax Act, salaried individuals can file different deductions, lowering taxable income, reducing tax outgo and reducing the TDS rate that is supposed to be deducted by the employer. Here are the deductions that can be claimed by employees in general. Note that Almost all of these deductions are not applied in the new tax regime.

1. Section 80C

Under Section 80C of the Income Tax Act, salaried individuals can claim a deduction of up to Rs. 1.5 lakhs if they are investing in the avenues mentioned below.

• Life insurance Premium Paid 
• ELSS investments
• NPS
• NSC (National Savings Certificate)
• Stamp duty paid in property
• Senior Citizen Saving Scheme
• Tuition fee paid for children
• Fixed deposit scheme for a period of minimum 5 years

2. Section 80CCG

Employees who have made an investment for at least three years under any equity saving schemes which is notified by the central government are eligible for an annual exemption of a maximum Rs. 25,000. The span of three years is counted from the day of the scheme acquisition.

3. Section 80D

Employees who have the liability to make payment for the premiums of a health insurance plan can avail of exemptions under Section 80D. You can claim deductions for even dependents for the premium payments.

4. Section 80TTA

In case an employee has earned an interest income of up to Rs. 10,000 on their savings account, it will be considered a tax-free income as per Section 80TTA of the Income Tax Act.

5. Section 80EE

Section 80EE of the Income Tax Act allows salaried individuals to reduce their TDS on salary if they are going to purchase a residential property for the first time and have opted for a home loan. In such cases, they can raise a claim on the interest component. However, individuals must note that deductions will be over the bracket of Rs. 2 lakhs as per Section 24 of the ITA. The benefit under this section is applicable only if the loan was sanctioned in FY 2016-17.

6. Section 89

As per Section 89 of ITA, salaried individuals can claim benefits if they are working in a university, company, cooperative society, local authority etc. Under this section, if an employee’s remuneration is subjected to a higher rate because of the arrear /advance salary is taxed in the year of receipt of the same and not in the year in which it is actually due. Then they can enjoy marginal relief on tax with respect to salary. However, to get marginal relief, one must fill out Form 10E, available on the official website of the Income tax department. 

Importance of TDS Statements

The employer of a company must provide a TDS statement to employees. TDS statement reflects all the details related to payments, date of TDS credit to the government etc. TDS statements are offered with Form 16. Even employers can attach Form 12BA with Form 16, which contains information related to profits or prerequisites. 

This particular document is imperative for filing an ITR return. Furthermore, Individuals have to submit the TDS statement to the Income Tax department if the Income Tax department scrutinises returns filed by them. 

Time Limit to Deposit Tax Under Section 192

There are certain timelines that employers must follow while depositing tax to the Income tax department on behalf of all employees.

• A government employer must submit TDS on the same day of the TDS deduction.
• For other employers- tax must be submitted on 30^th April or before it if the salary is disbursed and TDS is deducted in the month of March.
• In case salary credit and TDS deduction is made by an employer in any month other than that of March, TDS must be transferred within seven days of the month in which TDS was deducted.

What Happens if TDS is Not Deposited?

As mentioned above, all employers need to deduct TDS and deposit the same to the Income Tax department within the stipulated time. However, there can be such circumstances where the employer has not deposited TDS or has furnished the same with the incorrect PAN of employees.

In case the employer has not deposited TDS, the concerned employee’s TDS will not be reflected against their PAN in Form 26AS, which will stop an employee from getting a tax credit of the TDS on salary while filing their ITR (Income Tax Returns). 

In case the employee takes the tax credit; it will lead to a discrepancy between the TDS claimed and they paid taxes, and the employees will receive notification regarding the same from the IT department, 

In such a scenario, the taxpayers will suffer inconvenience between the Income tax department and the employer. In order to combat such delays, the Central Board of Direct Taxes has started levying penalties on those who are not abiding by the deadlines. 

As per Section 201A of the ITA, companies will be charged interest per month for failing to deposit or deduct TDS on salary. One can refer to the table below to know more about the penalty.

Final Word

In conclusion, it is imperative for salaried individuals to be well versed with the ins and outs of TDS on salary. Through TDS, income tax is collected from working individuals. There are multiple exemptions and deductions available on your taxable income. You should maximize their use to reduce your tax liabilities. TDS enables working professionals to adhere to the duty of paying taxes. 

Frequently Asked Questions