Tax Deduction at Source (TDS) or TDS on Salary is mandatory for employers in India paying salaries to employees on which income tax is applicable. For any income chargeable under the “Salaries” classification, the employer must deduct the applicable income-tax on the estimated income of the employee and deposit the same with the Government. In this article, we cover the procedure for TDS on salary and the computation of TDS on salary.

What is TDS Calculated on?

When you join any company then they tell you the CTC which includes components like your basic salary, travel allowance, house rent allowance, medical allowance, dearness allowance, special allowances and other allowances.

CTC has mainly two major categories

  • Salary
  • Perquisites- It includes facilities and benefits given by the employer to the employee expenses such as traveling, canteen and, hotel expenses, fuel subsidies etc.

TDS Deduction Rate for FY 2017 – 2018

Tax applicable for individuals below 60 years

Annual Income Tax Rates Education Cess Secondary and Higher Education Cess
Up to Rs.2,50,000 Nil Nil Nil
Rs.2,50,001-Rs.5,00,000 5% 2% of income tax 1% of income tax
Rs.5,00,001-Rs.10,00,000 Rs.12,500 + 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,12,500 + 30% 2% of income tax 1% of income tax

Tax applicable for individuals over 60 years and under 80 years

Annual Income Tax Rates Education Cess Secondary and Higher Education Cess
Up to Rs.3,00,000 Nil Nil Nil
Rs.3,00,001-Rs.5,00,000 5% 2% of income tax 1% of income tax
Rs.5,00,001-Rs.10,00,000 Rs.10,00 + 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,10,000 + 30% 2% of income tax 1% of income tax

Tax applicable for individuals over 80 years and above

Annual Income Tax Rates Education Cess Secondary and Higher Education Cess
Up to Rs.5,00,000 Nil Nil Nil
Rs.5,00,001-Rs.10,00,000 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,12,500 Rs.1,00,000 + 30% 2% of income tax 1% of income tax


Along with the surcharge and Education Cess, TDS should be deducted at applicable rates as above.

Calculation of TDS on salary

Under Section 80C and 80D, the government allows tax exemption which allows an individual to go for exemption on tax which is based on various types of investment he is making for that particular financial year. We can calculate TDS on salary by reducing the exemption from total annual earning.

It is necessary for an employee to get a declaration and proof from individuals to approve tax exemption. These are the following categories are considered for exemption:

  • House Rent Allowance – If an employee is paying towards accommodation as rent and entitled for HRA from the employer, the employee can declare this amount for tax exemption.
  • Conveyance or Travel Allowance – The employee can declare them for tax exemption if an employee is provided with the travel allowance.
  • Medical Allowance – If an employee is provided with medical allowance then he can declare and produce medical bills for tax exemption.

There are certain limits to the maximum amount that can be measured for exemption.

TDS Deductions

The following process is involved in the deduction of TDS:

  • Calculating total earning – The employer is required to calculate the total earning of the employee.
  • Calculating total amount eligible for the exemption – The employer is responsible for calculating the total amount that is measured for tax exemption and it is necessary to declare the type of amount that is eligible for exemption.
  • Obtaining declaration and investment proof – The employer is required to collect investment and proofs from employees
  • Depositing TDS deductions – It is necessary for an employee to depositing the collected TDS to the central government.

Section 80C

A maximum of Rs.1, 50,000 for tax exemption an employee can declare. The following investments schemes are considering for exemption under section 80C.

  • Investment in mutual funds and equity shares, such as ULIP, Linked Saving Scheme of a Mutual Fund/UTI
  • Life Insurance Premium paid
  • Contribution to Statutory PF, 15 years P.P.F., and superannuation funds
  • Payments subscription for NSS and Home Loan Account Scheme
  • Interest earned through few of the National Savings Certificates are eligible for a certain amount of tax
  • Fixed deposit scheme for a period of minimum 5 years

Section 80CCG

If the employee has made an investment under certain equity saving schemes then the employee is eligible for a maximum of Rs.25, 000 annual exemptions. The investment made for at least 3 years from the date of scheme purchase.

Section 80D

Section 80D offer exemption for the premiums paid for a Medical Insurance.

There are various other Sections that control many other types of exemptions.

Calculation of  TDS on salary

While the basic salary is fully taxable according to respective tax bracket, some exemptions are available for payments made as allowances and perks.

Calculate your TDS on salary by the Following steps below:

  • Step 1– Calculate gross monthly income as a sum of basic income, allowances, and perquisites.
  • Step 2– Calculate available exemptions under Section 10 of the Income Tax Act (ITA). Exemptions are applicable on allowances such as medical, HRA, travel.
  • Step 3 -In the 1st step decrease your exemptions for the total monthly income calculated in
  • Step 4– As TDS is calculated on yearly income, multiply the corresponding figure from above calculation by 12. This is your yearly taxable income from salary.
  • Step 5– Add your Income from house rent subtract if you incurred losses from paying housing loan interests from the figure in Step 4
  • Step 6– Under Chapter VI-A of ITA calculate your investments for the year and deduct this amount from the gross income calculated in the above step.
  • Step 7– Reduce the maximum allowable income tax exemptions on a salary.
  • Step 8– Do note that senior citizen has different tax slabs and receive higher exemptions than those discussed above.

Example

Mr. Saurabh is earning Rs. 70,000 per month. Therefore the total estimated income of Mr. Saurabh during the financial year 2013-14 would be Rs. 8, 40,000.

He has also claimed deductions of Rs. 1, 00, 000. Therefore, the income chargeable to tax after deductions is Rs. 7, 40,000. Total Tax on Salary payable for the year computed as per the slab rates would come out to Rs. 78,000 + Cess @ 3% i.e. Rs. 2340.

Tax on salary payable is Rs.80340

Average rate of Tax on Salary = Total Tax Payable = 80340 * 100

Total Income = 840000 = 9.56%

Therefore TDS on Salary would be 9.56% of Rs. 70,000 i.e. Rs. 6695 would be deducted every month as TDS on Salary.

Form 16 –TDS Certificate 

After TDS, the employer is required to remit the TDS amount through internet banking facility or credit or debit card. TDS must be remitted by the employer before the 7th day of the month; in April, TDS on salary must be remitted prior to the 30th day of the month.
Prior to 31st May of each year, the employer is required to provide to the Employee a TDS certificate, i.e., Form 16. Form 16 usually contains the PAN number of the employer, TAN number of the employer, TDS deposit details and details of all quarterly TDS statements, TDS on Salary.

Non-Compliance with respect

An employee cannot pay the tax himself if TDS on his  Salary deducted by the Employer but not deposited to the Government, the employer is defaulted, not the employee.
As per Section  191 if TDS on salary was NOT deducted by the Employer, then the employee would be liable to pay the Income Tax due. Further, when TDS is not deducted and remitted by the employer, the entire expenses relating to the salary payment would be disallowed as an expenditure for the Employer, increasing the income tax liability of the Employee.

In case you are confused about TDS Return Filing as a deductor, feel free to consult the experts at LegalRaasta. You can get comprehensive assistance with our TDS Return Filing Software which supports TDS on Salary payments (Form 24Q), Rent, Interest, Commission and other Non-salary transactions (Form 26Q), NRI (Form 27Q)and TCS (Form 27EQ).