Knowing how to calculate TDS on your salary is a crucial aspect of managing your finances. Understanding the calculation process ensures you meet your tax obligations while optimizing your take-home pay. Whether you're an employee or an employer, comprehending how TDS on salary works is essential.
In this blog, we'll delve into TDS calculation on salary and provide a practical example along with the TDS calculation formula.
TDS stands for Tax Deducted at Source, a provision under the Indian Income Tax Act where a percentage of your income (such as salary, consulting fees, or bank interest) is taken out before you receive it. The deducted amount is deposited with the Income Tax (IT) department.
TDS applies to individuals and businesses. It is important for employers to deduct tax when paying out salaries to their employees.
TDS deduction on salary can be done if the said employee’s salaried income is taxable. If the pay is equal to or less than Rs.2,50,000, then TDS on salary will not be deducted.
Under Section 192, the TDS deduction on salary can be done by the following entities:
According to Section 192, the employer deducts TDS from the employee's salary when making the payment. Since employees receive their salaries on a monthly basis, TDS on salary is deducted each month. If the employer fails to deduct TDS, they may incur penalties and interest charges.
An employee can be exempted from TDS deduction on their salary only if their estimated annual income falls below the basic exemption limit. Otherwise, TDS on salary is obligatory for all employers, even for employees without a PAN card.
TDS on salary is eligible for a refund when the deducted amount exceeds the employee's actual tax liability. Often, the declared investment details at the beginning of the financial year do not align with the actual investments made by year-end. In such cases, excess TDS on salary is refundable.
To understand the TDS calculation formula, knowing what makes up your salary is important. This includes:
Let’s consider Manmeet’s gross salary of ₹13 lakhs as an example:
For TDS computation, the net salary would be determined as follows:
So, every month, the employer would deduct tax at 6.35% on the salary income and then credit the salary to the employee.
To calculate your TDS, visit this TDS Calculator available on the Income Tax website: https://incometaxindia.gov.in/pages/tools/tds-calculator.aspx
The new default tax regime allows taxpayers to choose between the new and prior regimes.
The Revised tax rates are as follows:
The exemption limit for non-government employees' leave encashment has been increased to ₹25 lakhs.
Need help with which income tax regime to go with? Give this blog a read to choose the suitable tax regime based on your income.
If you’ve applied for a TDS refund, here are some steps to check your TDS refund status:
We’ve got a whole article on claiming and checking your TDS refund status. Make sure to read it and share it with your friends.
The issuance of a TDS certificate is the employer's responsibility, detailing the tax deducted from the employee's salary. Once the TDS return has been filed, a TDS certificate (Form 16) can obtained from the TRACES utility website.
To learn more about Form 16, click here.
TDS is a way to collect taxes from the source of income in India. It applies to both individuals and businesses and can be complicated to calculate. However, accurate calculations can be made by understanding the formula and the different components of income, deductions, and exemptions. The Indian government has introduced new tax regimes, revised tax rates and limits for LTA, and increased tax rebate limits and standard deductions.
Now that you've understood TDS, it's time to take a closer look at your salary account too. Fi and its licensed partner Federal Bank offer a salary program with numerous benefits.
You can get 2% cashback when you shop using Fi, and 4x Fi-Coins on all your spends via Fi, which you can redeem for vouchers, cool merch, and more. Plus, you'll enjoy other perks like flat 20% of your Debit Card spends as Fi-Coins, no minimum balance, a free VISA Platinum debit card with zero forex charges, priority customer service, and more. And if you're a new user, you'll receive a ₹500 Amazon voucher as a joining bonus. P.S. Salary users on Fi can now top-up their Health Insurance up to ₹20L!
To calculate TDS on salary, follow these steps:
For a detailed example, please refer to an earlier section of the article.
The TDS rate on salary depends on your net income tax amount and the slab it falls under. Under the new tax regime, the tax slabs for individuals under 60 years old range from 0-30%, while the old regime's tax slabs range from 0-30% for those earning above 2.5 lakh.
The employer deducts TDS from the employee's salary using their 'average rate' of income tax. This rate is calculated by dividing the income tax payable, which is calculated using slab rates, by the employee's estimated income for the financial year.
The formula for calculating TDS in salary is - Average Income Tax Rate = Income Tax Payable (computed through old/new slab rates) / Estimated Income for the year.
As an individual, you cannot deduct TDS from your salary. As per Section 192, the employer will deduct TDS from the salary when paying the employee.