For employed taxpayers, salary forms the primary component of their annual taxable income. So, if you are employed, your salary would determine the tax liability that you would have to pay. However, before crediting your salary, the employer is required to deduct TDS (Tax Deducted at Source) on your salary income and then credit the salary to your bank account. Let’s understand what TDS on salary is all about.
What is TDS on salary?
As per Section 192 of the Income Tax Act, 1961, TDS is deductible on salary income. Depending on your net taxable salary, the TDS is deducted by the employer on your behalf and deposited to the income tax department. The TDS deducted by the employer is reflected on Form 16 issued annually. You can, then, calculate your tax liability at the end of the financial year and then adjust the TDS to pay either the differential liability or to claim a tax refund.
How is salary defined?
Salary, for the purpose of TDS deduction, is determined as your gross salary paid by the employer less the tax-free exemptions and deductions. In technical terms, salary is the payment paid by your employer to engage your services. In includes the following
- Basic pay
- Dearness allowance
- Other allowances granted by the employer like HRA, LTA, meal allowance, etc.
- Perquisites granted by the employer
- EPF contributions
- Annuity payments, etc.
Who can deduct TDS under Section 192?
Under Section 192, TDS can be deducted by the following entities
- Public and private companies
- Individual taxpayers
- Hindu Undivided Families
- Co-operative societies
- Partnership firms
There should be an employer-employee relationship between the aforementioned entities and the taxpayer for Section 192 to be applicable. The number of employees and the salary is irrelevant in the determination of the TDS.
When is TDS deducted from salary income?
TDS is deducted from the salary when the amount is paid. It is not deducted when your salary accrues, i.e. when you are earning the salary but it is not being paid by the employer. Moreover, if you receive an advance on your salary or if your employer pays the outstanding salary in one lump sum, TDS would be deducted from such payments. If, however, your taxable salary is below the threshold limit of tax, TDS would not be deducted from the salary income.
To calculate the TDS deduction on salary, you can use the given formula:
Income Tax Rate = Income Tax Payable (computed with slab rates) / Estimated Revenue for the financial year.
Union Budget 2022
The Union Budget 2022, presented by Finance Minister Mrs Nirmala Sitharaman, allows an increase in standard deductions and higher tax rebates. The highest tax rate of 42.74% has now been reduced to 39%. The budget also states the following updates:
- The introduction of Section 194S
States that an individual is liable for a 1% TDS at the time of payment transfer of virtual digital assets
- Section 194-IA
Sale of immovable property, an individual buying property should deduct 1% tax of the stamp duty value or of the sum paid (whichever is more).
- Section 194R
A 10% TDS has to be deducted by an individual who offers gifts/ benefits that may or may not be convertible into money to any individual for carrying out a business or profession by any resident individual.
Union Budget 2023
In the recently announced Union Budget 2023, Finance Minister Mrs Nirmala Sitharaman revised Income Tax Slabs for the financial year 2023-24.
|Income tax slabs under new tax regime
|Income tax rates under new tax regime
|0 to Rs 3 lakh
|Rs 3 lakh to Rs 6 lakh
|Rs 6 lakh to Rs 9 lakh
|Rs 9 lakh to Rs 12 lakh
|Rs 12 lakh to Rs 15 lakh
|Income above Rs 15 lakh
Allowances under TDS:
Mrs Sitharaman made the following announcements that would be applicable from 1st April 2023.
- EPF Withdrawals:
The tax deducted on your EPF withdrawal has been decreased to 20% for non-PAN cases. This was earlier 30%. If the EPFO has your PAN details, only a 10% TDS will be applicable, that too when the withdrawal amount is over INR 50,000.
- Winnings in games:
Winning money from lotteries, TV shows, fantasy sports, crossword puzzles and other similar games/ online games, etc., will attract a TDS when the amount crosses INR 10,000 in one year. The TDS would be deducted by the company giving away the prize money.
- Increase in threshold limit for cooperative societies:
For co-operative societies, an INR 3 crore limit per year, has been proposed for TDS when cash is withdrawn.
- Exemption on specified debentures:
The Finance Minister also prospered to withdraw the exemption from TDS presently available on interest payments on specified debentures.
If, however, your taxable salary is below the threshold limit of tax, TDS would not be deducted from the salary income. The threshold limit for the current financial year, i.e. FY 2021-22 is as follows
- Individual taxpayers and HUFs below 60 years of age – INR 2.5 lakhs
- Senior citizens aged between 60 and 79 years – INR 3 lakhs
- Super senior citizens aged 80 years and above – INR 5 lakhs
How TDS on salary is computed?
To compute TDS, the employer estimates the net taxable salary and deducts TDS on the same. For this, the tax-free allowances and exemptions are deducted from the gross salary to find the net salary income. Thereafter, if you declare tax-saving investments and expenses that qualify under Section 80C, 80D, or other sections would be deducted from the salary income. Any other income is added to the salary if you declare the same. Thereafter, depending on the slab into which your net taxable income falls, the TDS is deducted.
Consider the following example to understand how TDS is calculated –
- Basic salary – INR 7 lakhs
- Dearness allowance – INR 2 lakhs
- HRA – INR 1 lakh
- LTA – INR 1 lakh
- Bonus – INR 2 lakhs
Gross salary would be equal to the summation of all of the above and would amount to INR 13 lakhs. For TDS computation, the net salary would be determined as follows
|INR 13 lakhs
|Less: Tax-exempted HRA (assuming the entire amount)
|INR 1 lakh
|Less: Tax-exempted LTA
|INR 1 lakhs
|Less: Standard deduction
|Less: Section 80C deductions declared by the employee
|Less: Section 80D deductions declared by the employee
|Net taxable salary
|Up to INR 5 lakhs – 5% of 2.5 lakhs = INR 12,500
INR 5 lakhs to INR 8.5 lakhs – 12,500 + 20% of 3.5 lakhs = INR 82,500
|TDS deduction rate
|Tax liability / gross total income *100
= 82500 / 13 lakhs * 100
So, every month, the employer would deduct tax at 6.35% on the salary income and then credit the salary to the employee.
Why should you file the correct tax return?
There are different ITR forms for filing your income tax returns. Depending on your income level and the sources of income, you should select the right ITR form. It is imperative to file your taxes in the correct ITR to avoid possible delays in tax filing. Moreover, when you make mistakes in selecting the right form, you might incur considerable penalties in taxes which would prove to be an added financial burden. Thus, make sure that you file the correct tax return on your income every financial year.
TDS implication in the case of multiple employers
During a financial year, you might switch jobs and receive salary income from two or more employers. In such a case, each employer would calculate and deduct the TDS based on your income and investment declaration. However, if you submit Form 12B to the new employer, the employer would calculate the TDS taking into consideration the TDS deducted by the previous employer. This would prevent any ambiguity in TDS rates and ensure a smoother TDS deduction on your income. Form 12B contains the details of your salary from the previous employer and the TDS deducted thereon.
Reducing the rate of TDS on your salary income
Chapter VI A of the Income Tax Act, of 1961 allows you various deductions that can help lower the TDS rate deducted by the employer. You can claim these deductions by declaring them so that the employer records the deductions when calculating the net taxable salary. The deductions popularly claimed by many employees are as follows
- Section 80C
A popular section of the Income Tax Act, Section 80C allows deductions up to INR 1.5 lakhs if you invest in eligible avenues or incur qualified expenses during a financial year. Some of the eligible deductions under 80C are as follows
- Life insurance premiums
- ELSS investments
- Sukanya Samriddhi Yojana
- Senior Citizen Saving Scheme
- Tuition fee paid for children
- Home loan repayment
- Stamp duty paid on a property
- NSC, etc.
- Section 80D
If you invest in health insurance plans, the premiums that you pay can be claimed as a deduction under this section. The maximum limit of deduction is INR 25,000 for individuals below 60 years and INR 50,000 for senior citizens. An additional deduction of INR 25,000 or INR 50,000 can be claimed if you pay premiums for the health plans of parents.
- Section 80CCD (1B)
The National Pension System allows an additional deduction of up to INR 50,000 under this section if you invest in the scheme.
- Section 80TTA
If you have a savings account, interest income earned on it, up to INR 10,000, would be allowed as a tax-free income.
The deduction is available under Section 89
Section 89 of the Income Tax Act, 1961 allows a reduction in tax liability through marginal relief. You can claim a benefit under Section 89 if you are an employee of a company, Government, university, local authority, co-operative society, association or body, etc. Under Section 89, if your salary or outstanding salary is being charged at a higher slab rate because the tax slab rates have changed, you can claim a marginal relief on tax. To do so, you should fill and file Form 10E on the website of the income tax department.
After deducting the applicable TDS from your salary, the employer is required to offer TDS statements that show the TDS deductions in detail. These statements are given out in Form 16 which the employer issues after the end of the financial year but before the tax filing deadline. Form 16 might also come attached with Form 12BA if you have received any type of perquisites or profits instead of your salary income.
When should the TDS deducted under Section 192 be deposited?
After deducting TDS from your income, the employer is also required to submit the same to the income tax department on your behalf. Moreover, there are timelines for the deposit of the TDS. These timelines are as follows
- Government employer – on the same day when the TDS is deducted
- Other employers
- If the salary is paid and TDS is deducted in March – within the 30th of April
- If this is paid and the TDS is deducted in other months – within 7 days from the end date of the month within which the TDS was deducted. For example, if the employer deducts TDS on 15th September, the same should be deposited within 7th October.
So, if you are a salaried employee, understand what TDS is on salary, how it is deducted, and when it is submitted to the income tax department.
- Section 115BAC of the Income Tax Act
- Section 194H of the Income Tax Act
- TDS on life insurance policies
Yes, you are required to furnish your PAN Card details to the employer for TDS deductions and deposits. If, however, you do not furnish the PAN Card details, TDS would be deducted at a flat rate of 20%.
The employer calculates the applicable TDS rate at the start of every financial year taking into consideration the employee’s salary and available deductions and exemptions. Moreover, if you switch jobs, the employer would calculate the TDS from the date you join the organisation.
If the TDS deducted is higher than your actual tax liability, you can file for an income tax refund. The income tax department would refund the excess TDS deducted from your income.
Yes, even though the employer deducts TDS on your salary, you should file your income tax returns if your income is above the threshold limit. TDS deduction is done on an estimation basis. However, when you file your income tax returns, you can calculate the actual tax liability and pay your taxes. You can, however, claim the credit for the TDS already paid on your behalf.
Yes, TDS would be applicable on the bonus that you receive from the employer.
TDS allows you to fulfil your federal duty of paying taxes. Moreover, it helps prevent the evasion of tax and reduces the tax liability. Instead of paying a high amount of tax at one outgo, you can stagger the tax payments over months through TDS and make it more pocket-friendly.
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