TDS on Salary

All individuals and business houses are eligible for Tax Deducted at Source (TDS). It is the responsibility of the employer to collect tax at source before making certain types of payments for rendering specific services. The types of payments include salary, fees, interest, rent, commission, etc. It is mandatory for the employee to collect a certain percentage of TDS that is sent to the Central Government.

Salary is defined as the remuneration that a person receives from his employer periodically, for rendering services. If you are in an employee-employer relationship, you belong to the salaried class of individuals.

However, not all income can be termed as salary. If a professional is being paid for his/her expertise in a professional capacity, it is termed as ‘Professional/Technical Fees’. Similarly, a business partner, earning his salary, from his/her company, is charged taxes under ‘Profits & Gains from Profession or Business’. Some of the other examples include the salary paid to a Member of Parliament or a Member of Legislative Assembly. According to the Indian Income Tax Act (ITA), 1961, a salary includes pension or annuity, wages, commission or fees, gratuity, profits or perquisites on salary, salary advance etc.

It would benefit our readers to understand what CTC is. CTC stands for Cost-To-Company. It is the amount of money the company will spend on a particular employee, in a particular year. The major part of the CTC is taken up by the employee’s salary also called as Take-Home-Salary/package. The CTC quoted to an employee at the time of joining includes components such as basic salary, travel allowance, HRA or House Rent Allowance, medical allowance, dearness allowance, special allowances and other allowances. The CTC is divided into two major categories: salary and perquisites. Perquisites, or perks as they are popularly called, include facilities and benefits provided by the employer towards expenses such as traveling, canteen and fuel subside, hotel expenses and so on.

For the benefit of all its salaried employees, the Central Government has extended tax exemption under Section 80C and 80D. This allows an individual to seek for exemption on taxes based on various types of investment he/she is making for that particular financial year.

The TDS on salary can be calculated by reducing the exemption from total annual earning as specified by the Income Tax department. The employer is required to obtain a declaration and proof from individuals to approve tax exemption.

The following categories are considered for exemption:

  • House Rent Allowance –
  • Conveyance or Travel Allowance.
  • Medical Allowance.  

Though the basic salary is fully taxable according to respective tax bracket, some exemptions are available for payments made as allowances and perks. To calculate TDS on salary, follow these basic steps.

 

  • Calculate gross monthly income as a sum of basic income, allowances and perquisites.
  • Take into account the exemptions as applicable under Section 10 of the Income Tax Act (ITA). Exemptions are applicable on allowances such as medical, HRA, travel.
  • While calculating gross monthly income, reduce the exemptions.
  • As TDS is calculated on yearly income, multiply the corresponding figure from above calculation by 12. This computes your yearly taxable income from salary.
  • Should you have any other source of income such as income from house rent or have incurred losses from paying housing loan interests, add/subtract this amount from the yearly taxable income.
  • Next, calculate your investments for the year which fall under Chapter VI-A of ITA, and deduct this amount from the gross income. An example of this would be exemption of up to Rs.1.5 lakh under Section 80C, which includes investment avenues such as PPF, life insurance premiums, mutual funds, home loan repayment, ELSS, NSC, Sukanya Samriddhi account and so on.
  • Reduce the maximum allowable income tax exemptions on a salary. Currently, income up to Rs.2.5 lakhs is fully exempt from paying taxes, while income from Rs.2.5 lakhs to Rs.5 lakhs is taxed at 10%, and Rs.5 lakhs to Rs.10 lakhs income bracket is taxed at 20%. All income above this amount is taxed at 30%.

It is to be noted that senior citizens have different tax slabs and receive higher exemptions than those discussed above.

 

While calculating TDS on salary, it is of paramount importance that you declare your income honestly and correctly. Hiding or not declaring complete income can attract serious penalities. You have to ensure that all your data is in order and will hold up to any cross verification at a later stage to avoid problems with the taxman.

 

TDS On Salary – Frequently Asked Questions

Questions Answers
Can HRA be claimed as a deduction while calculating TDS? Yes. HRA can be claimed by declaring it.
How much deduction can I claim under section 80 C while calculating TDS? The max amount that can be claimed is Rs. 1.5 Lakhs.
Is PPF or Public Provident Fund entitled for TDS deductions Yes. PPF is eligible for TDS deductions
What is the tax rate for an employed individual below 60 years with an income upto 2.5 Lakhs? The applicable Tax rate under this sector is NIL.
What does CTC stand for? CTC stands for Cost To Company.