How TDS is Calculated and Deducted on Salary?

5 min read

What is TDS?

The term TDS on salary stands for taxes deducted at source. This is basically the amount that is taken away from your salary by authorized deductors and deposited with the IT (income tax) department.

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How to calculate TDS on salary?

Following are the steps that you need to follow in this context:

  • Calculate your gross monthly income by adding your basic income, perquisites, and allowances.
  • Calculate the exemptions that are available to you as per Section 10 of the ITA (Income Tax Act). Some examples of such exemptions are the likes of medical, travel, and house rent allowances or HRAs.
  • Now subtract the exemptions from your gross monthly income.
  • You now need to multiply this figure by 12 to arrive at your yearly TDS. This is because it is calculated for an entire year.
  • After this make necessary additions such as money from house rent or losses such as the interest of housing loan.
  • After this calculate your tax-exempt investments and subtract them from your gross income. The tax exemptions, in this case, are mentioned in Chapter VI-A of the ITA.
  • Now subtract the maximum tax exemption that you get on your salary.
  • Keep your age in mind in this regard as senior citizens have separate tax slabs.

Also Read: How To Avoid Excess TDS On Salary?

Investment Options to Get the Tax Exemption

Following are the investment options where you get the tax exemption that we have referred to above:

  • PPF (Public Provident Fund)
  • premiums of life insurance policies
  • mutual funds
  • installments of home loans
  • ELSS (equity-linked savings scheme)
  • NSC (National Savings Certificate)
  • Sukanya Samriddhi

Income Tax Slabs for 2022-23

Following is the income tax slab that is applicable for the 2022-23 fiscal:

Amount earned in a year in rupees Latest tax rate
2,50,000 and less 0%
between 2,50,001 and 5,00,000 5% of the aggregate income which is over the minimum threshold and cess of 4%
between 5,00,001 and 7,50,000 10% of the aggregate income which is over the minimum threshold and cess of 4%
between 7,50,001 and 10,00,000 15% of the aggregate income which is over the minimum threshold and cess of 4%
between 10,00,001 and 12,50,000 20% of the aggregate income which is over the minimum threshold and cess of 4%
between 12,50,001 and 15,00,000 25% of the aggregate income which is over the minimum threshold and cess of 4%
over 15,00,000 30% of the aggregate income which is over the minimum threshold and cess of 4%

How much TDS is deducted on salary?

The answer to this question depends on the tax bracket that you belong to.

What does TDS on salary mean?

The term taxes deducted at source on salary implies that your employer has deducted the same when they were depositing the money in your account. In this case, your employer would deposit the money that they have deducted from your salary with the national government itself. However, before your employers can make such deductions they need to get TAN (Tax Deduction and Collection Account Number) registration.

This happens to be an alphanumeric number of 10 digits and is extremely important in the context of TDS deduction on salary. The number comes in handy for tracking the TDS deduction along with the remittance being made to the IT department.

The basis of TDS calculation 

You can use as much TDS on salary calculator as you want to. However, it is also important for you to know what your TDS is being calculated on. The CTC (cost to company) that the company quotes to you while employing your services has several components. They may be enumerated as below:

  • basic salary
  • medical allowance
  • travel allowance
  • dearness allowance
  • house rent allowance
  • special allowances

There are two major categories into which your CTC gets divided – perquisites and salary. The perquisites are also referred to popularly as perks.

They include all the benefits and facilities that your employer is providing you with. This includes the likes of travel expenses, fuel and canteen subsidies, and hotel costs, to name a few. You need to know all these things so that you have a better picture of the TDS on salary applicable for you.

The way TDS is calculated 

A good way to reduce the TDS deduction on salary is to invest in the various tax-exempt investment options that are backed by sections 80C and 80D of the ITA. In these cases, the TDS to be deducted from your salary would be computed by subtracting these from the total salary you are earning in a year. The IT department has some rules and regulations in this regard and you have to follow them to the letter.

As per these rules, you – the employee – have to provide your employer with proof of your investment and a declaration of the same. This way, you can get the tax exemption you are seeking and thus reduce the TDS on salary that you have to pay in that financial year. Apart from these, you can also get an exemption for allowances such as HRA, medical allowance, and travel or conveyance allowance. However, please understand that there are certain limits to the extent of exemptions that are provided in these cases. Also, in these cases, you have to be entitled by your employer to claim such deductions.

How do the employers deduct the TDS?

The process of TDS deduction on salary is a rather detailed one that may be enumerated as below:

  • They first calculate the entire money you are earning in a year.
  • After that, they calculate the entire amount that can be claimed as an exemption from your taxable income.
  • Following this, they get a declaration and proof of investment from you.
  • In the final stage, they deduct the TDS, if any, and deposit it with the appropriate authorities of the government of India.  

Also Read: Section 115BAC of Income Tax Act

The exemptions provided by the various sections of the ITA?

We already know that you can reduce your TDS on salary by investing in various instruments that have been granted tax exemption to the tune of 1.5 lakh rupees a year by Section 80C. Section 80CCG provides you a maximum tax exemption of 25,000 in a year for investing in certain equity-saving schemes. As per Section 80D, you get tax exemptions for the premiums of medical insurance for yourself and your dependents.

FAQs on How TDS is Calculated and Deducted on Salary?

On what items can deductions be claimed under section 80C of Income Tax Act?

Tax deductions under Section 80C are available for expenses such as:

# Premium payments made towards Life insurance policies
# Tuition fees for children's education
# Repayment of principal amount on home loan
# Registration fees and stamp duty for house property, etc.

Can I claim HRA as deduction while calculating TDS on Salary?

Yes, you can have partial or complete exemption of HRA from income tax. However, there are certain parameters to calculate HRA for tax benefits:

The house rent that you pay should be less than 10% of your basic salary. For metropolitan cities, it is 50% of your basic salary, while for non-metro cities, it is 40% of your basic salary.

Is TDS deducted on gross salary or net salary?

Employer deducts TDS on the net taxable income of the employee. Thus, it is gross taxable income minus tax-saving deductions (as declared by the employee) under the old tax regime of sections 80C to 80U.

Is it mandatory to deduct TDS on salary on a monthly basis?

Yes, TDS is deducted every month on salary. Section 192 states the employer must deduct TDS on employees' salary at the time of paying salary.

How is Tax calculated in case the person is employed with multiple employers?

Where an employee is employed with more than one employer, he/she is required to furnish Form No. 12B to one of the employers with the details of salary due/received by the employee from the other employer/employers. The employee can select the employer whom he/she wants to furnish the information of other employers.

Once the submission of information in Form No.12B is done, the employer deducts tax at source taking into considertion the information offered by the employee.

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Gayatri Prabhu, Head-Digital Business at Mahindra Insurance Brokers Limited (MIBL) is one those few digital leaders who has the width and depth that is required to execute an ROI driven holistic digital strategy. She cuts through the noise, identifies the critical levers and leads her team to successful execution of the defined strategy. Her core mantra to win new and retain existing customers is: understand the consumer behavior and craft experiences around it.

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