TDS is the tax deduction at source for receiving any earnings, be it salary, commission, or any contract payments that come under the tax slab. The most common TDS deduction among all is the Tds On Salary. This deduction will always be taken from the employer’s end when giving salaries to employees. The TDS rate on salary varies between 10 to 30%. The employer for making a TDS deduction must have a valid TAN number issued by the Indian government. It is a 10-digit alphanumeric number required to track the summary of TDS deduction as per Section 192 of the Income Tax Act of India.
How to calculate TDS on salary
- Check the gross monthly income: It is the sum of basic income + allowances and perquisites
- Exemptions as per the Section 10 of the Income Tax Act. These are mainly HRA (House Rent Allowance), medical, and leave travel allowance. Deduct all these exemptions from the gross salary.
- TDS calculation takes place on the annual income by multiplying the corresponding figure after making a deduction of exemption from gross salary. The figure comes from yearly taxable earnings.
- If you have any other source of income such as rental income, or any kind of losses incurred from paying interest on the home loan. One needs to add or subtract the same during TDS calculation.
- Next, calculate investments made in a year that fall under Chapter VI-A of the ITA (Income Tax Act). One needs to deduct the same from the gross salary online. The tax exemptions under Section 80C are allowed up to Rs. 1.5 Lakhs. The main investment avenues that one can include in Tds On Salary calculation are the SSC scheme, NSC, Sukanya Samridhi, etc.
The tax exemptions for senior citizens are different compared to individuals below the age of 60 years.
Factors to keep in mind while making TDS deduction on salary
The TDS deduction will take place after excluding the exemption income from the total earned salary of the employee. The ITA of India defines the limit of the exemption. When the employer is making a TDS deduction on the employee, he or she has to furnish the required details such as income proof and declaration from the employee.
The list of allowances to be considered for tax exemption are:
1. House rent allowance
To avoid TDS on salary, an employee can claim the house rent allowance and furnish the required details such as rent receipts.
2. Standard deduction
To minimise the TDS deduction on salary, one can also ask for conveyance and medical allowance. The standard deduction offered by the government is Rs. 50,000.
3. Education allowance of children
The government is giving an education allowance of Rs. 100 each month for up to two children.
4. Leave travel allowance (LTA)
It is a kind of allowance that the employer offers to the employees. It is given when an employee is travelling outside the city for work reasons. An employee can claim the LTA as per Section 10(5) of the Income Tax Act 1961. One must understand that the leave travel allowance can only be claimed if the LTA component is a part of the salary break-up. An employee can claim the tax exemption on the LTA for up to one journey in a maximum of 4 years.
Ramesh is earning a salary of Rs. 70,000 each month. His annual income is Rs. 8,40,000 annually. As per the salary, he can claim up to Rs. 100,000 tax exemption. After deduction, his taxable income is Rs. 8,40,000. The annual tax would be Rs. 78,000+ Cess Tax @3% i.e., Rs. 2,340.
The average rate of TDS on a salary of Rs. 8,40,000 is 9.56%
Who all are liable to make TDS deductions on salary?
The employee can deduct Tds On Salary at the time of making monthly payments to the employee. It is a part of the salary break-up of the employee. If anyone is earning a salary up to Rs. 250,000 annually, then no deduction will take place.
According to Section 192 of the ITA, the following are liable to make TDS deductions at source:
- Companies (Public or Private)
- HUF (Hindu Undivided Family)
- Private firms
- Co-operative societies
All the above-mentioned people have to make a TDS deduction at a specific time and submit the same to the government treasury as defined by the Indian government. According to Section 192 of the ITA, the employer must submit proof of the employee-employer relationship between two employees. So, all the employees deducting TDS such as HUF, company, or firms, are not liable to make TDS deduction as per Section 192 of the ITA.
Tax Slab for TDS deduction
Tax rates as per the new tax regime
Main Sections under which TDS deductions take place:
1. Section 80C
Here one can claim a tax exemption of up to Rs. 1,50,000 annually. Following is the list of schemes under which exemptions are allowed:
- Mutual fund investments such as link-saving schemes, ULIP, etc.
- Life insurance policies
- Contributions are done in PPF account and superannuation funds
- The five-year term fixed deposit scheme. It is also known as a tax-saving fixed deposit.
- Children tuition fees
- National Saving Certificate
- Principal payment of the home loan
- Sukanya Samriddhi Scheme
- Amount paid as a deferred annuity
- Senior citizen saving scheme
- Annuity plan of life insurance policy
- Pension fund scheme of UTI
- Mutual fund investment
- National Housing Bank home loan scheme
- Equity shares and debenture investment
2. Section 80CCG
An employee is eligible to claim an annual exemption of a maximum of Rs. 25,000 under Section 80CG of the ITA. The minimum investment tenure must not be less than three years.
3. Section 80D
Under Section 80D, one is allowed to make tax exemptions for all amounts paid annually as a premium of medical insurance.
What are the time limits to make TDS deductions on salary?
All TDS deductions on salary are to be done as per Section 192 of the Income Tax Act and must be done on or before 30 April.
An income earned by the employee falls under the heading “Income from Salaries”. But make sure the employer has valid TAN and offers you Form 16, and all deductions are reflected in Form 26AS.
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Q. Can one make a Claim on HRA while doing a calculation of TDS on Salary?
Ans. All TDS deductions on salary to be done as per Section 192 of the Income Tax act must be done on deduction on or before 30th April.
Q. How much deduction one can claim as tax exemption under Section 80C of income tax?
Ans. The maximum tax exemption one can claim under Section 80C of the Income Tax Act is Rs. 1.5 Lakh annually.
Q. How to deduct TDS on salary under Section 192 of the Income Tax Act?
Ans. The TDS deduction can only be carried out when one proves the employee and employer relationship. For this, an employer has to make a TAN registration.