How to calculate TDS on salary
When you receive a payment – as salary from an employer, as a fee for professional services or as interest from the bank – you may notice that a certain percentage of the total sum has been deducted as TDS. This is tax deducted at source. According to Indian tax laws, payers are expected to deduct a percentage of the total payment as tax and deposit it with the government.
What is TDS?
Tax Deducted at Source (TDS) is exactly what the name suggests. It is the amount of money deducted as tax by the payer before making a payment for any kind of service or job done. TDS has to be paid by individuals as well as businesses.
For example, when an employer gives a salary to his employee, he has to cut a certain percentage of the amount as TDS before making the payment. The employer must then deposit the money with the government.
TDS applies to other types of payments as well – such as rent, commission, interest payment by banks, professional fees, consultation fees, etc. It is mandatory for companies and institutions to deduct this tax and deposit it with the Income Tax Department within the stipulated time.
Individuals do not need to deduct tax at source when making rent payments or giving fees to professionals like doctors and lawyers.
TDS is a form of advance tax, which is paid to the central government regularly. The responsibility of making the payment lies with the payer. If TDS is deducted from a payment made to you, you can claim it while filing your annual returns.
What is salary income?
Salary is the compensation you receive at regular intervals (mostly monthly) for providing a service or a set of skills to a company or business. You will usually have a written or verbal contract with your employer, which stipulates what you must do and how much you will receive.
Under the Indian Income Tax Act (ITA), 1961, a salary includes wages, pension, annuity, gratuity, profits or perquisites as well as commissions, fees, etc.
However, not all kinds of remuneration can be termed as salary. You may also receive payments such as:
- Professional/ technical fees: Payments made to professionals for services rendered – an interior decorator or a plumber. This can be a one-time payment or a regular payment over a period.
- Profits or gains from profession or business
- Interest income on savings and deposits
- Rental income
- Payments received as commission
What is TDS calculated on?
In India, salary is usually calculated as the Cost To Company (CTC), which covers both salary and perquisites. Perquisites, privileges or perks include facilities and benefits provided by the employer such as travel expenses, fuel subsidy, hotel expenses, etc.
CTC includes:
- Basic salary
- Travel allowance
- House rent allowance
- Medical allowance
- Dearness allowance
- Special allowances
- Other allowances
From the above, an employee can claim tax exemptions on the following:
- House Rent Allowance – You can claim an exemption for HRA if you are paying house rent
- Conveyance or Travel Allowance – You can claim tax exemption for the amount spent on travel or commuting etc.
- Medical Allowance – You can claim medical allowance by producing bills as evidence
Besides these, the government allows you to claim tax exemptions under Sections 80C and 80D for specific investments, amounts spent on repaying home loans or expenses such as insurance premium. The TDS is, therefore, calculated on your total income less the exemptions that you can claim.
Before making any tax deductions at source, an employer must obtain a declaration and proof of investment from employees. There are maximum limits to the amount that can be declared for exemption.
These exemptions and other tax deductions are available to all taxpayers in FY 2019–20. However, those who are liable to pay income tax in FY 2020–21 have an option:
- 1. They can stick with the old taxation regime, which comes with a slew of tax exemptions and deductions.
- 2. They can opt for the lower tax rates of the new regime. But this would mean giving up many income tax exemptions and deductions—including those under Sections 80C and 80D.
How to calculate TDS
Employers can calculate TDS using the following method:
- Calculate total earning: Calculate the total earning of an employee over the year (including perks, commission, bonus etc)
- Collect declaration: Collect declaration from employees about the investments they plan to make. At the end of the year, collect proof of investment. Without it, the employer cannot approve tax exemptions.
- Calculate total amount eligible for tax exemption: Consider all exemptions that an employee is eligible for. Reduce allowable exemptions from the gross annual salary. This is the taxable income. Based on the tax slab, the employer must deduct tax at source appropriately.
- Deposit TDS collections: Deposit the collected TDS with the central government within the stipulated time
The ‘basic salary’ component of the CTC is fully taxable, depending on the tax bracket an individual comes under. However, some exemptions for payments made as allowances & perks are available. Here’s how an individual can calculate TDS on income:
- Add basic income, allowances and perquisites to calculate gross monthly income
- Compute the available exemptions under Section 10 of the Income Tax Act (ITA)
- Subtract exemptions found in step (2) from the gross monthly income calculated in step (1)
- Multiply the number obtained from the above calculation by 12, as TDS is calculated on yearly income. This is your taxable income from salary
- If you have any other income (e.g. income from house rent or interest), then add this amount to the number obtained in step (4)
- Reduce investments made under 80C and 80D from the number obtained in step (5) (for e.g. you can get exemptions up to Rs 1.5 lakh under 80C for investments in ELSS, PPF, NSC, repayment of housing loan etc.)
- Now, for the number obtained in (6), check which income tax slab you come under .
For example, if you are under 60 and your total taxable income is Rs 5 lakh, you must pay 5% of Rs 2.5 lakh as tax (income up to Rs 2.5 lakh is not taxable). Please note, TDS is deducted every month by your employer. So, your expected tax liability over the year is divided by 12 and collected every month.
Frequently Asked Questions
- What are the tax rates for FY 2019-20?
Individuals below 60 years of age with an annual income of up to Rs 2.5 lakh need not pay income tax. The tax rate applicable on yearly income between Rs 2.5 lakh and Rs 5 lakh is 5%. For individuals earning between Rs 5 lakh and Rs 10 lakh per annum, the income tax to be paid stands at 20%. And if the income exceeds Rs 10 lakh, then the tax rate is 30%.
People between 60 and 80 years come under the ‘senior citizen’ category. For people in this age group, a yearly income of up to Rs 3 lakh attracts no income tax. For income between Rs 3 lakh and Rs 5 lakh, they are liable to pay 5% as income tax. The rate for earnings between Rs 5 lakh and Rs 10 lakh is 20%, and the tax rate for annual income that exceeds Rs 10 lakh is 30%.
Individuals above 80 years of age come in the ‘super senior citizen’ bracket. People in this age group are exempt from income tax if their annual earnings are up to Rs 5 lakh. Income between Rs 5 lakh and Rs 10 lakh attracts 20% income tax and income above Rs 10 lakh is charged at 30% tax.
Read more on? Income Tax Slabs for FY1617, FY1718, FY1819
Individuals earning an annual income above Rs 50 lakh are liable to pay a surcharge. The rates start from 10% and vary based on your income level.
All taxpayers have to pay a 4% cess (on tax plus surcharge).
- What are the tax rates for FY 2020-21??
In FY 2020–21, taxpayers can select between two tax regimes. One option is to go with the taxation regime of the previous financial year. Here, the rates differ based on the income level and the age of the taxpayer:
Age Group
Annual Income
Taxation Rate
Individuals under 60 years
Up to Rs 2,50,000
Rs 2,50,000-Rs 5,00,000
Rs 5,00,000-Rs 10,00,000
Above Rs 10,00,000NIL
5%
20%
30%Individuals aged 60 years and above but under 80 years
Up to Rs 3,00,000
Rs 3,00,000-Rs 5,00,000
Rs 5,00,000-Rs 10,00,000
Above Rs 10,00,000NIL
5%
20%
30%Individuals aged 80 years and above
Up to Rs 5,00,000
Rs 5,00,000-Rs 10,00,000
Above Rs 10,00,000NIL
20%
30%More than Rs 10,00,001
30%
NIL
If you prefer lower taxation rates and don’t mind missing out on some tax exemptions and deductions, there is also the new taxation regime:
Annual Income
Taxation Rate
Up to Rs 2,50,000
NIL
Rs 2,50,001-Rs 5,00,000
5%
Rs 5,00,001-Rs 7,50,000
10%
Rs 7,50,001-Rs 10,00,000
15%
Rs 10,00,001-Rs 12,50,000
20%
Rs 12,50,001-Rs 15,00,000
25%
Above 15,00,000
30%
Those with annual incomes above Rs 50 lakh have to pay a surcharge. The minimum surcharge is 10%, but the surcharge rates increase based on the person’s income level.
Taxpayers also have to pay a 4% health and education cess. This is applicable on the income tax payable plus the surcharge.
- Can an individual claim a deduction on HRA for TDS?
Yes, you can if you’re following the old tax regime! You must declare the amount paid as rent and provide evidence for it to be claimed as an exemption.
However, those choosing the new tax regime for FY 2020–21 cannot claim an exemption for HRA.
- How much can one claim as a deduction under Section 80C while calculating TDS?
You can claim up to Rs 1.5 lakh as exemption under Section 80C of the Income Tax Act of India.
- What investments or expenses can be claimed for deduction under Section 80C?
Deductions can be claimed under Section 80C on:
- Investment in Public Provident Fund
- National Savings Certificate
- Employee’s share of Provident Fund contribution
- Premium payment towards life insurance policies
- Tuition fees of children
- Home loan principal repayment amount
- Unit-linked insurance plans
- Equity-linked savings schemes (ELSS)
- Sukanya Samriddhi Account
- Deferred annuities
- Senior Citizens Savings Scheme
- 5-year tax-saving fixed deposit scheme
- Subscription to notified deposits scheme / notified securities
- Subscription to National Housing Bank’s Home Loan Account Scheme
- Contribution to LIC’s notified annuity plan
- Subscription to deposit scheme of companies involved in offering housing finance or public sector companies
- Contribution to notified Pension Fund set up by UTI or Mutual Fund
- Subscription to NABARD’s notified bonds
- Subscription to debentures / equity shares of approved eligible issues
- Under what circumstances can you request a payer not to deduct TDS?
You can ask your employer or client not to deduct TDS if you expect your taxable income for the year to be nil. You must furnish a declaration in Form No 15G/15H to the payer
Read more aboutForm 15G and 15H
- How can a person know the amount of tax deducted from his/her income by the payer?
To know the amount of tax deducted by the payer, you can ask the payer to provide a TDS certificate. You can also check Form 26AS in the “View Your Tax Credit” facility available at www.incometaxindia.gov.in
Read more about Form 26AS
- If the payer does not deduct TDS, can the receiver face any consequences from the Income-tax Department?
The responsibility to deduct TDS is entirely up to the payer. However, if the payer fails to do so, then the payee will not have to face any adverse consequences. Nevertheless, the payee will have to pay his or her tax liability while filing the returns. This means that though the payer failed to deduct TDS, the payee will still be eligible to pay tax.
- What to do if TDS credit is not seen in Form 26AS?
If tax has been deducted at source but the credit in Form 26AS is absent, then it may be due to one of two reasons:
- The payer may not have deposited the tax collected
- The payer may not have filed the TDS statement
- The payer may have quoted incorrect PAN of the payee in the TDS statement while filing
If you are unable to find TDS credit in Form 26AS, you can contact the payer and ask them to rectify any errors so that TDS reflects correctly in your account.
- Can you claim TDS in return of income if you have not received TDS certificate from the payer?
Yes, you can, as long as the tax credit reflects in your Form 26AS.