Salary can be described as a fixed remuneration paid at regular intervals for services rendered, according to the agreement made between the employer and the employee.
According to the Income Tax Act, salary falls under taxable income, and the liability is determined by the applicable tax slab rates. To better understand TDS on salary, individuals should be familiar with its calculation and deductions.
What is TDS on Salary?
TDS on salary is governed by Section 192 TDS. This provision mandates that employers deduct tax at source from the salary paid to employees. Since salary is categorized as income, it is subject to TDS based on the prevailing tax rates.
Under the ITA, employers are required to deduct TDS on salary if the salary paid exceeds the minimum exemption limit.
Typically, TDS on salary can be refunded. This happens when the tax deducted exceeds an employee’s actual tax liability. Moreover, when the investment details declared at the beginning of the fiscal year differ from the actual investments made by the end of the year, the TDS amount on salary may be refunded.
Formula for Calculating TDS on Salary
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Income Tax Rate = Income Tax Payable (calculated using slab rates) / Estimated Revenue for the financial year |
Who is Responsible for Deducting TDS Under Section 192?
It is the responsibility of employers to deduct TDS on salary and deposit it with the government.
The following types of employers can deduct TDS under this section:
- Individuals
- HUFs
- Partnership firms
- Public and Private Companies
- Trusts
- Cooperative Societies
When is TDS Deducted?
Salaries are generally paid monthly, and TDS is deducted during each payment cycle.
Typically, TDS on salary is deducted when the salary is paid, not when it is accrued.
It is important to note that whether the salary is paid in advance or in arrears, TDS will still apply. Employers who fail to deduct TDS will incur penalties and additional interest.
If an employee’s salary is below the minimum exemption threshold, no tax will be deducted. The same applies even if the employee does not possess a PAN.
Below is a table outlining TDS on salary slabs:
| S.No. | Income Range | Tax Rate |
| 1) | Up to Rs. 2.5 lakhs | No tax |
| 2) | Rs. 2,50,000 to Rs. 5,00,000 | 5% |
| 3) | Rs. 5,00,000 to Rs. 7,50,000 | 10% |
| 4) | Rs. 7,50,000 to Rs. 10,00,000 | 15% |
| 5) | Rs. 10,00,001 to Rs. 12,50,000 | 20% |
| 6) | Rs. 12,50,001 to Rs. 15,00,000 | 25% |
| 7) | Above Rs. 15,00,000 | 30% |
What is TDS Based On?
Salary is typically calculated as the CTC (Cost to Company), which includes two major components – salary and benefits.
Benefits, also known as perquisites, often consist of allowances or facilities provided by an employer, such as fuel subsidies, travel reimbursements, canteen services, and hotel accommodations.
In essence, CTC is made up of the basic salary, house rent allowance, travel allowance, medical allowance, dearness allowance, special allowance, and more. Employees can claim tax exemptions based on the following elements:
- House rent allowance exemption, applicable if the employee lives in a rented accommodation.
- Travel allowance, allowing the employee to claim the expenses incurred for commuting.
- Medical allowance, which can be claimed by submitting the appropriate medical receipts.
How to Calculate TDS on Salary
It is important to note that the number of employees in an organization does not affect the computation and deduction of TDS on salary.
However, TDS on salaried income can be calculated by following these basic steps:
Step 1 – Calculate Earnings
First, determine the total earnings of an employee for the year, ensuring to include commissions, bonuses, perks, and other relevant benefits.
Step 2 – Gather and Verify Investment Declarations
Collect the employee’s investment declarations. By the end of the year, verify the declarations with the corresponding proof of investment.
This allows the employer to authorize tax exemptions.
Step 3 – Calculate the Exemption Amount
Next, determine all exemptions the employee qualifies for.
Then, subtract the allowed exemptions from the gross salary to calculate the taxable income.
Based on the applicable tax slab, employers will make a TDS deduction from salary.
Step 4 – Deposit the TDS Collected
The employer must deposit the collected TDS with the Central government.
A reliable online TDS calculator can help in accurately computing TDS on salary without any difficulty. However, it’s essential to input accurate data for accurate results.
TDS Deductions – A Quick Overview
In addition to the standard exemptions, employees may also benefit from these deductions:
- Section 80C allows salaried employees to declare an exemption up to Rs.150000, typically including investments in life insurance premiums, 5-year FD schemes, mutual funds, equity shares, etc.
- Section 80CCG provides exemptions up to Rs.25000 per year for employees investing in certain tax-saving schemes, as long as the investment remains for at least 3 years.
- Under Section 80D, employees can claim exemptions for premiums paid towards medical insurance, which also extends to the employee’s dependents.
In summary, the following items are eligible for TDS exemptions:
| S.No. | Exempted Items |
| 1) | Public Provident Fund (PPF) |
| 2) | Bank Fixed Deposits |
| 3) | Equity Linked Savings Scheme (ELSS) |
| 4) | National Savings Certificate (NSC) |
| 5) | Employees' Provident Fund (EPF) |
| 6) | Contribution to EPF |
| 7) | House Rent Allowance (HRA) |
| 8) | Transport Allowance |
| 9) | Insurance Premiums |
| 10) | Principal Repayment of Home Loan |
| 11) | Savings under Section 80C of the ITA, 1961 |
Additionally, salaried employees can refer to Form 16 to clarify any queries regarding TDS calculation on salary. The form contains detailed information about the deductor (employer), the deductee (employee), and the TDS deducted and deposited amounts.