TDS stands for Tax Deducted at Source. According to the Income Tax Act of India, whenever someone makes a payment to you that is treated as a source of income – salary, consultation fees, bank interest, etc. – they are mandated to deduct a percentage of the total amount and deposit it with the Income Tax (IT) department. TDS is applicable for individuals and businesses and is, ideally, the responsibility of the person making the payment.
In the case of TDS on salary, the employer is accountable for deducting tax while paying the due salary to the employee. The amount deducted is clearly stated in your payslip (usually in the right-hand column). Other relevant details such as the employer’s TAN number, registered address, etc. are also mentioned for ease of tracking by the IT department.
Before we get down to the TDS calculation formula, let us first know the important components of the equation. The standard components of salary are:
TDS exemption is applicable on HRA, TA, Medical, and LTA. So, these components can be ignored. There are also other exemptions available such as Sec 80C (up to a limit of ₹1.5 Lakhs per annum) and 80D. TDS is not levied on these voluntary investments or declarations.
Add all the components, allowances, and payments you receive in a month to calculate your monthly gross income. Multiply by 12 to get your annual gross salary.
Add all the above exemptions, like HRA, LTA, etc. Multiply by 12 to get the annual figure. Don’t forget to add your voluntary investments that offer tax benefits, like PPF, ELSS, Insurance, etc. This will give you the annual amount that is exempted from TDS.
Subtract the individual results from steps 1 and 2 to arrive at your annual taxable income.
As per the current tax structure, a standard deduction is applicable of ₹50K. Naturally, this amount should be deducted from the result of step 3.
The figure that you get is your net taxable income over which tax will be deducted as per the following slabs:-
* Tax rate is for individuals below the age of 60 under the old tax regime.
Did the steps confuse you? Don’t worry. We got you covered. Let’s see these steps in action through an example.
Let us assume your monthly gross salary (including all components) is ₹1 Lakh. Multiplying it by 12, your annual gross is ₹12 Lakhs.
Total tax to be paid is ₹38,500. Now, employers deduct TDS every month. So, ₹38,500/12 = ₹3,208. This is likely to be your monthly TDS on salary.
How TDS is calculated on salary with an example?
TDS is calculated using the following steps.
Please refer to the detailed example provided earlier in the article.
What is the TDS rate on salary?
The TDS rate on salary depends on your net income tax amount and the slab it falls under. In the old tax regime, the tax slabs for a person under the age of 60 are
