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How to Calculate TDS on Salary?
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TDS or Tax Deducted at Source is applicable whenever the tax payee is required to collect the tax at the source i.e, the income before he/she makes any payments for the services provided to the employee.

What is Salary?

Salary is the compensation that an individual receives for providing services to a company and it depends on the contract that has been formulated between the employer and the employees. All types of income cannot be termed as salary. When a professional expertise, then it is known as 'Profession/Technical Fees.' When a person has shares in a company, and they earn an income when the company makes any form of profit, it's called 'Profits and Gains from Business' The income received by politicians and Member of Parliaments is also not categorised under salary. According to Income Tax Act, 1961, a salary includes:

  • Pension or Annuity

  • Wages

  • Commission or Fees

  • Gratuity

  • Profits/Prerequisites on Salary

  • Salary Advance

How is TDS Calculated?

The following categories are considered for TDS exemption:

Conveyance Allowance

It is a type of allowance offered to the employees of a company to commute between work and home. These allowances are the fringe benefits that are received by the employees over and above their basic salary and it may not be taxable as per the Income Tax Act. However, Conveyance allowance is paid by the employer only when the transportation is not provided by the employer. In situations where the employer offers transportation to the employees, conveyance allowance is not provided.   

Dearness Allowance

Due to rising level of inflation in India, most of the commodity prices has increased. An employee takes a direct hit since his/her purchasing power decreases. Dearness Allowance or DA protects the employees from the negative effects of inflation since it is linked with the consumer price index. In the public sector, salary paid by the employers is divided into various components with DA being one of them. It was introduced after World War 2 and was initially known as Dead-Food Allowance. However, it was later linked to the consumer price index and became one of the major component of the salary received by wage earners.  Industrial Dearness Allowance (IDA) is the type of DA which is applicable to the public sector employees. According to the Union Budget-2018, there has been a raise of 2% in the DA of government employees. This move of the central government will benefit 50 lakh central government employees and around 55 lakh pensioners.

Leave Travel Allowance

 It is one of the major part of the gross salary received by employees which also helps in saving income tax when an employee produces his/her travel related bills they can save on the taxable income. The LTA depends on the salary structure of the company and also on factors such as job title, pay scale, etc.

TDS Deductions

Here's the process to calculate the deduction of TDS:

Calculate the total earning

The deductor/employer is required to calculate the total earning of an employee

Calculate the amount that is eligible for tax exemption

After calculating the income the employer is required to calculate the portion of the salary which is eligible for tax deduction.  Here, the employee is required to file a form stating the amount of their compensation which is eligible for deduction

Obtain Declaration and Investments Proof

The employer is then required to collect a Declaration along with the documents that claim the investments made by the employee which are exempted from tax payment.

Deposit TDS deductions

The employer is then required to submit the documents and the total tax collected to the central government

Section 80C

Section 80C is one of the most commonly known sections of the Income Tax Act. It is used to file income tax exemptions on life insurance, health insurance, investments in pension schemes, education fees, home loans and fixed deposits etc. The maximum deduction under section 80C is 1.5 lacs. The deductions that are eligible for exemption under section 80C are:

  • Home loan payments

  • Stamp duty and registration charges for house

  • Health insurance

  • Life insurance

  • Fixed deposits

  • Mutual Funds investments(ELSS)

  • Provident Funds

  • National Savings Certificate

  • Infrastructure bonds

  • Post office deposits

  • Education expenses

  • Pension Funds

  • Senior citizens’ savings scheme

Section 80CCG

An employee is eligible for tax exemption under Section 80CCG if the individual has invested for a minimum of three years after the scheme acquisition date. The maximum annual exemption that can be claimed from this section is 25,000.

Section 80D

Section 80D offers exemptions to the employees over the premiums paid on medical insurance. The exemption also covers the premiums paid for the medical insurance of his/her dependents.

How can I calculate TDS on Salary?

The basic salary received by an employee is taxable depending on the tax bracket under which the employee's income comes. You can follow these steps to know the TDS on your salary

  • Calculate the Gross monthly income. The gross monthly income is a sum of your basic income, allowances and perquisites.

  • Calculate the total tax exemptions applicable to your salary. Tax exemptions are applicable on medical insurance, conveyance and HRA.

  • Subtract the total tax exemptions from your gross monthly salary.

  • Since TDS is filed on a yearly basis, multiply the amount by 12. This is the total taxable amount from your income in terms of TDS.

  • If you have any other source of income such as house rent, then you can subtract that amount from the figure that you obtained in the previous step

  • Certain investments come under the Chapter VI-A of Income Tax Act; you'll be required to deduct that amount from your total income as well. For example, the PPF scheme falls under Section 80C of the Income Tax Act. An exemption of up to 1.5 lakhs can be claimed through this Section of ITA

  • Reduce the maximum allowable income tax exemptions from your salary. An income up to 2.5 lakhs is exempted from all form of taxation. And the income above this level is taxed based on the income tax slabs defined by the Income Tax Department. The maximum tax rate is 30% which is levied on all employees earning more than ten lakhs salary.

  • It's important to notice that people above 60 years of age or senior citizens have a separate income tax slab.

Let's consider an example to understand this procedure better

Assuming that your monthly income is Rs.80,000, where your basic pay is Rs.50,000 and HRA is 20,000. The conveyance allowance is Rs. 800 and the medical allowance, educational allowance and other allowances add up to 14,200 rupees. Suppose, your medical allowance, child education allowance and travel allowance add up to 2250 per month. Then your monthly taxes would be (80,000-2250) and your yearly taxable amount would be (80,000-2250)x 12=9,33,000.

Let's assume that you experienced a loss of 1 lakh on your home loan repayments. This amount, then, will be deducted from your taxable income. Now your taxable income will be (9,33,000-1,00,000)=8,33,000. Let's further suppose that you are eligible for a 1 lakh deduction under the Chapter VI-A of the Income Tax Act. This amount is further deduced from your taxable income

And now the net taxable income becomes, (8,33,000-1,00,000)=7,33,000.

Why is it important to file correct tax returns?

It is essential to mention all the possible income sources while filing the tax returns, since misrepresentation of taxes or providing incorrect details while filing the Income Tax Returns could incur a penalty from the Income Tax Authorities. To avoid paying any additional amount to the tax authorities, it is imperative that you file the returns correctly.