TDS, also known as Tax deducted at Source, is a form of advance tax payment. It refers to the amount deducted from one’s salary or other forms of income by an authorized tax deductor and deposited with the government as per the IT Act. TDS on salary is the tax deducted from an employee’s salary by the employer and deposited with the IT department. Here the authorized deductor is the employer and as per the IT Act, 1961, employers are bound to deduct TDS and deposit with the IT Department, if the employee’s salary exceeds the threshold.
If you are an employee, and you want to know how TDS on salary is calculated, then here are all the details for the same.
How is TDS on salary calculated?
When you join a company, a CTC is mentioned in the joining letter, this is the cost to the company. CTC consists of salary and the perquisites. The perquisites include the cost of different facilities like travelling, hotel expenses, food, etc. For calculating TDS on salary, the employer finds out the employee’s taxable income and then levies the TDS according to the tax slabs for the year.
As CTC includes basic salary and allowances, the exemptions need to be calculated first. Exemptions are available for –
- HRA: House rent allowances which you receive from the employer and live in a rented house can be exempted from your income. The lowest amount of the following will be deducted –
- Total rent paid minus 10% of the basic salary and DA (if applicable)
- If the employee rents the house in a metropolitan city then 50% or else 40% of the basic salary
- Actual HRA paid to the employee
- Standard deductions include transport and medical allowances and exemption up to Rs. 50000 is available.
- Children’s education allowances: Rs. 100 per child for a maximum of 2 children is available as an exemption
- Leave travel allowances: The lowest amount of actual travel cost or LTA allotted in salary. It can be claimed two times within a block of 4 years.
Apart from the exemptions, for calculating TDS on salary, you also need to calculate the deductions available and deduct them from the total income to derive the taxable income. A list of deductions available for an employee is –
- Section 80C: Under this section of the IT Act, a total deduction of Rs. 1.5 lakh is available.
- Section 80 CCG: A maximum deduction of Rs. 25000 annually can be availed under this section by an employee if there is an investment of the employee in any equity saving schemes – ELSS and the tenure for the investment must be at least three years from subscription.
- Section 80D: An employee can obtain the deductions available under section 80D as well which are for premiums paid towards Mediclaim policies and others.
Steps for calculating TDS on salary
For TDS calculation on salary, you can follow these steps –
- Calculate the gross income for a month by summing up your basic salary, allowances, and perquisites.
- Then calculate all the exemptions mentioned above: HRA, medical allowances, travel, and other exemptions. Then deduct the exemption amount derived in step 2 from the gross salary derived in step 1. Now multiply the figure you derived in step 3 by 12 to get the annual income after all exemptions
- Add any other income you have from other sources to the same (annual figure)
- Then calculate all the deductions under sections 80C, 80 CCG, and 80D
- Now deduct all the deductions derived in step 6 from the amount derived in step 5. This is your total taxable income for the year.
Now, if the total taxable income is more than Rs. 2.5 lakhs, then the employer will deduct TDS on salary at the prevailing tax slabs for the year.
Suppose, your gross annual income is Rs 12 lakhs, i.e. your gross monthly income is Rs 1,00,000.
Gross Income includes Basic Salary (usually 40% of gross and 50% of Cost to the Company CTC), medical allowance, dearness allowance, house rent allowance, travel allowance, etc.
Let us take this example:
|Gross Income||Rs 12,00,000|
|Basic per month (40% of Gross Income)||Rs 4,80,000|
|House Rent Allowance (Actual rent paid subject to a maximum of 25% of Gross Income)||Rs 3,00,000|
|Medical Allowance||Rs 40,000|
|Travel Allowance||Rs 10,000|
|Other Allowance||Rs 3,70,000|
|Total (i.e. Gross Income)||Rs 12,00,000|
The actual rent paid is say Rs 20,000. So, Rs 2,40,000 would be deducted from the Gross Taxable Income.
The maximum amount of standard deduction allowed is Rs 50,000 per annum.
|Gross Salary||Rs 12,00,000|
|Standard Deduction (Medical and Travel)||Rs 50,000 (maximum)|
|Standard VI-A Deductions (under section 80C, 80D, etc.) as declared by the employee||Rs 1,50,000 + 25,000|
|Net Taxable Income||Rs 12,00,000 – 50,000 – Rs 2,40,000- Rs 1,50,000 – Rs 25,000|
|= Rs 7,35,000|
No other income sources are there, so, your total income after exemptions remains Rs. 7,35,000 for FY 2022-23.
TDS for income beyond Rs 2.5 lakhs would be deducted as per the Income Tax slab:
|Tax Rate||Income Tax|
|Rs 0 to Rs 2.5 Lakhs||NIL||0|
|Rs 2.5 Lakhs to Rs 5 Lakhs||5%||Rs 12,500|
|Rs 5 Lakhs to Rs 10 Lakhs||20%||Rs 47,000|
|Total TDS||Rs 59500|
|TDS deduction per month||Rs 4958.33|
Note: TDS calculations in the above example have been calculated as per the Old Tax Regime. If the employee wishes to opt for the New Tax Regime, then the calculations would be done accordingly and no standard deductions or other deductions would be applicable.
Every employer is bound to deduct TDS on salary as per IT Act if the employer’s salary exceeds the threshold. Thus, every employee needs to be aware of exemptions, deductions, and TDS calculations.