TDS on Salary – Calculation, Rules and How Reduce Deduction?
If you check your salary slip, you will find a segment that mentions TDS deduction. TDS on salary varies depending on the income tax slabs. But what is TDS and why is it deducted from your salary? This article helps you understand what is TDS on salary, how to calculate it, how to reduce TDS and how to claim a TDS refund in simple terms. Read on!
What is TDS?
TDS (full form -Tax Deducted at Source) is simply tax levied on the income and deducted at the source level. Every salaried employee has to pay tax against the income earned. To make it hassle-free for the employees, the Government introduced TDS on salary under Section 192 of the Income Tax Act. Under this section, TDS is deducted by the employer (at source) before paying the salary to the employees. This TDS deduction is reflected on your salary slip.
The employer provides the TDS certificates to its employees, commonly known as Form 16/16A. This form furnishes all the details related to TDS payment by the employees.
How to Calculate TDS on Salary?
Finding your TDS on salary is easy. Keep the payslip handy to understand how to calculate TDS on salary following this step-by-step guide:
Step 1: Write your CTC
Step 2: Deduct perquisites or perks such as house rent allowance, leave travel allowance, fuel allowance, etc. from your CTC
Step 3: Reduce standard deduction (Rs.50,000)
Step 4: Reduce investments under Section 80C of the Income Tax Act, 1961 (maximum limit is 1.5 lakh). This gives your taxable income
Step 5: If it is above Rs.2.5 lakh, then calculate tax as per the below tax slabs
| 0-2.5 Lakh | Nil |
| 2.5 – 5 Lakh | 5% |
| 5-10 Lakh | 20% |
| Above 10 lakh | 30% |
Step 6: Add 4% Cess and divide by 12. This gives your monthly TDS.
Let us understand this by a simple numerical example -:
| CTC | Rs. 8,00,000 |
| Reduce HRA, LTA, etc… | Rs. 1,00,000 |
| Reduce standard deduction | Rs. 50,000 |
| Reduce investments under sec. 80 | Rs. 1,50,000 |
| Taxable income | Rs. 5,00,000 |
Calculating Tax
| 0-2.5 Lakh | Nil |
| 2.5 – 5 lakh (5%) -: 5% of 2,50,000 | 12,500 |
| Cess (4%)-: 4% of 12,500 | 500 |
| Total TDS | 13,000 |
| TDS/ month (Rs. 13,000/12) | Rs. 1083.33 |
Note: This is a simplified version of the various provisions under the Income Tax Act, 1961. Do not forget to consult your chartered accountant for expert advice.
The Budget 2020 introduced a new tax regime that reduced the tax rates and introduced different slabs. The new system is applicable for income earned from 1 April 2020 (FY 2020-21), which relates to AY 2021-22. But, the taxpayer was not allowed to claim major deductions offered under the old regime.
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Let us understand the TDS calculation in the new regime:
The new tax rates and slabs are mentioned below:
| 0-2.5 Lakh | Nil |
| 2.5 – 5 Lakh | 5% |
| 5-7.5 Lakh | 10% |
| 7.5-10 Lakh | 15% |
| 10-12.5 Lakh | 20% |
| 12.5-15 Lakh | 25% |
| Above 15 Lakh | 30% |
Note: No deductions like HRA, Standard deduction, or section 80C, 80D, 80E, etc. deductions are allowed.
Taking similar numerical value:
| CTC | Rs.8,00,000 |
| Taxable income | Rs.8,00,000 (no deductions allowed) |
Calculating tax:
| 0-2.5 Lakh | Nil |
| 2.5 – 5 lakh (5%) -: 5% of 2,50,000 | 12,500 |
| 5-7.5 Lakh (10%) -: 10% of 2,50,000 | 25,000 |
| 7.5 -8 Lakh (15%) -: 15% of 50,000 | 7,500 |
| Total-: | 45,000 |
| Cess @4% of 45,000 | 1,800 |
| Total TDS | 46,800 |
| TDS/month | 3,900 |
Note: This is a simplified version of the tax regime application. Certain deductions are allowed subject to the Income Tax Act & rules. Please, consult your financial adviser for any specific advice.
Who is Liable for TDS Deduction on Salary?
Under Section 192, employers belonging to the following categories are liable to deduct TDS from an individual’s salary:
- HUF (Hindu Undivided Family)
- Companies
- Cooperative Societies
- Trusts
- Individuals
- Partnership firms
TDS Based on Salary and Age
If you are a salaried employee, your employer deducts your salary (which is your source of income) and pays the government. It is deducted as per the respective tax slabs. If your income is below Rs.2.5 lakh p.a., you do not have to pay TDS. Here’s a table showing the income slab corresponding to an employee’s age when TDS is not deducted:
| Minimum Income | Age |
| Rs.2.5 Lakh | Indian resident below 60 years |
| Rs.3 Lakh | Senior Citizen between 60-80 years |
| Rs.5 Lakh | Super Senior Citizens over 80 years |
TDS Deduction Rules
The Finance Act of 2021 introduced the following two important changes:
- Higher TDS for those who do not file IT Returns (under Section 206AB of the Income Tax Act)
Suppose an individual did not file Income Tax Returns for two consecutive assessment years. Also, the total on their tax deduction exceeded Rs.50,000 in two years. These two factors will make a person liable for higher TDS deductions. In this case, the TDS rate would be double the normal TDS rate or 5%, whichever is higher.
One should note that Section 206AB will not be applicable to salary, withdrawal from Provident Funds (PF) and some other incomes.
- TDS deduction for an amount of Rs.50 lakh or more (under Section 194Q of the Income Tax Act)
If payment or credit amounts to Rs.50 lakh or more, buyers must consider a TDS deduction of 0.1% on a given amount. It is applicable only on the purchase of goods. The TDS would be applicable on the extra sum above Rs.50 lakh.
How to Reduce TDS Deduction?
An employee can reduce their TDS burden with the help of the following points.
- Medical Allowance
Employees can claim an 80D certificate from insurance companies for tax exemption for having medical allowances. To do so, applicants must provide bills and receipts for routine health checkups as proof.
- Tuition Fees
Section 80C of the IT Act allows an individual to claim tax deductions on tuition fees for up to 2 children. Taxpayers must submit duly signed copies of tuition fee receipts from educational institutions to claim it.
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- National Pension Scheme
Employees can provide copies of deposit receipts in the National Pension Scheme for amounts deposited during an ongoing financial year.
- House Rent Allowance
Employees can also choose to reduce the TDS burden by providing documents on the amounts they pay for home rent. For this, they must provide proof of accommodation, such as rent receipts and the PAN of their landlord/lady. Employees must obtain a declaration in Form 60 D if their PAN is unavailable.
- Donations
Donations to the Prime Minister’s National Relief Fund, National Defence Fund and other charitable temples can also reduce TDS deduction burden. If you donate to funds or charitable trusts, submit proof, like a donation receipt. This receipt must clearly state the donor’s name, registration number, validity, name, address and PAN of trust.
What Could Happen if TDS is Not Deposited?
What if the employer did not deposit TDS to the Income Tax Department on your behalf? Such discrepancies can happen owing to several factors. For example, an incorrect PAN or TAN number, a system error, or entering an incorrect assessment year can cancel your TDS returns.
When the employer does not deposit the TDS, it is reflected in Form 26AS. Also, you cannot take tax credits for such missing TDS. If you file a tax credit for this TDS amount, the Income Tax Department will issue a notice addressing the mismatch in Form 16 and 26AS. You can check your payslips if your employer does not issue Form 16.
If such a situation arises, taxpayers are stuck between employers and the Income Tax Department. Unfortunately, amidst this tussle, they end up losing their TDS refund.
Final Word
Every employer needs to deduct TDS on salary of their employees. Depending on your annual income, TDS will be deducted every month from your salary. This is also beneficial for the salaried employees as it reduces the burden of paying a lump sum amount of tax at the end of a financial year. You can also claim a TDS refund if excess amount has been deducted from your salary.
FAQs
Ans: Yes, your employer will calculate the TDS and deduct the amount from your monthly salary. You can find all the information regarding TDS payments in form 16 provided by your employer.
You can also check your TDS payments and all other details by viewing form 26AS from the income tax portal here.
Ans: TDS rates are different for various incomes. IT Act, 1961 prescribes TDS rates for various incomes. TDS on salary is calculated as per respective tax slabs.
Ans: One can download Form 26AS from the Income Tax portal to know about all the details related to TDS.
Ans: If your taxable income is below 2.5 lakh, you need not pay TDS.
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