How much TDS should be deducted on a salary more than ₹1 lakh?

We look into how TDS is calculated on salaries and examine how much TDS is deducted from salaries exceeding ₹1 lakh.

Introduction

Tax deducted at source or TDS on salaries is an approach of tax collection in which tax is collected at the source of an income before the payment is made to the person earning the income. The source of the income depends on the nature of the income. For rental income, the source is the person who has taken the property on rent. In case of income from professional fees, the client is the source of income. In case of interest on deposits, the bank or the financial institution where the deposit has been made is the source. In the case of salary income, the employer is the source of the income.

The purpose of TDS differs on the frequency and consistency of the income. For instance, certain incomes are frequent but not consistent, such as sales of goods. So here the purpose of TDS is to collect taxes from only those sales that achieve a certain level of consistency in terms of volume because incomes with low consistency in terms of volume are not taxable. So when a buyer has made a high-value purchase, he or she must deduct TDS as per the provisions of section 194Q before making the payment and depositing the deducted amount with the income tax authorities by making the TDS payment online.

What is TDS?

Tax Deducted at Source (TDS) is a means of collecting income tax in India, under the Indian Income Tax Act of 1961. TDS is a method where tax is deducted from the income at the source of its generation, which could include salaries, interest payments, commissions, rent, or other various earnings. The entity making the payment deducts a certain percentage of the amount before making the payment to the receiver and remits it to the government on behalf of the payee. The rate of TDS depends on the nature of the payment and is prescribed by the tax department.

The primary objective of TDS is to collect tax from the very source of income, thereby minimizing tax evasion and ensuring a steady flow of revenue to the government. It also distributes the responsibility of tax collection between the deductor (who deducts the tax) and the tax administration. For the deductee, the amount deducted at source is credited against their total tax liability, and they can claim the benefit of the TDS amount against their total tax due when filing their annual income tax return. This system simplifies and streamlines the process of tax collection and compliance for both the government and the taxpayer.

TDS on salaries 

How to Calculate TDS on Salary?

To calculate TDS on salary, determine your annual income, and applicable deductions. Then apply the TDS rate corresponding to your income level.

The provisions of TDS deduction on any payment towards the salary of an employee have been detailed under section 192 of the income tax act. The TDS deductions for other incomes such as rent, commission, sale of property, professional fees etc., the rate of TDS deduction is usually standard. This is because the sources of such incomes are multiple and vary from month to month. So it is impossible for the person making the payment to assess what the annual income of the payee would be in order to arrive at the exact tax amount for the purpose of TDS. And hence a blanket rate is applied to all such transactions. At the end of the year, the deductee has to compare the total number of deductions made against his or her income and compare it to the actual tax liability. If the total TDS payment online is more than the actual tax liability then he or she can claim a refund to that extent. And if the total TDS payment online is less than the actual tax liability, then he or she has to pay the difference as income tax. 

 Method of TDS Calculation

Identify the Nature of Payment: First, determine the type of payment being made, such as salary, interest, commission, professional fees, rent, etc. Each category has its own specific TDS rate prescribed by the tax laws.

Determine the Applicable TDS Rate: Check the current TDS rate for the specific type of payment from the Income Tax Department’s guidelines. Rates can vary each financial year and may have different thresholds for deduction.

Check for Threshold Limit: Some payments have a threshold limit, and TDS is applicable only if the payment exceeds this limit during the financial year. For instance, TDS on interest from a bank is deducted only if the interest exceeds a certain amount in a financial year.

Calculate the Gross Amount: Calculate the total amount of the payment before any deductions. This is the amount on which TDS will be calculated.

Deduct Exemptions, if Any: Certain payments may have exemptions or deductions allowed under the Income Tax Act. Deduct these amounts from the gross payment amount, if applicable.

Apply the TDS Rate: Apply the applicable TDS rate to the amount obtained after deductions (if any) to calculate the TDS amount to be deducted.

Submit TDS: The entity making the payment (deductor) has to deposit the deducted TDS amount with the government by the specified due date and provide a TDS certificate to the payee (deductee).

For example, if a professional fee payment of ₹50,000 is subject to a TDS rate of 10%, and there is no threshold limit applicable, the TDS to be deducted would be ₹5,000 (10% of ₹50,000). The payee would then receive ₹45,000 after TDS deduction.

TDS on salaries Calculation Formula and Steps:

TDS = (Taxable Income * TDS Rate) – Rebates and Deductions

1. Calculate your annual income.
2. Apply the TDS rate applicable to your income.
3. Subtract any eligible rebates and deductions.

But salary income is one of those unique incomes where there is only one source for the income throughout the year. Also, in the other forms of income, it is the person charging the fees, rent or commission has the final say in the amount of payment. As far as salary income, the person paying the salary decides how much will be paid during the year. And hence the person paying the salary is in a position to know exactly how much the annual income will be and can calculate the exact amount of tax as per the annual slab rate. So TDS on salary involves calculating the exact amount of tax on the salary, deducting that amount before payment and then making the TDS payment online.

TDS on Salaries Exceeding One Lakh:

TDS on salary is the same as the Normal Slab Rate (or) New Tax Regime Slab Rate as opted by the employee. Find the applicable TDS rates under the new tax slab below – 

 Items Eligible for TDS Exemption

Deductions allowed under Section 10A of the Income Tax Act cover various allowances and savings instruments aimed at reducing taxable income. For instance, a House Rent Allowance (HRA) is granted if an employee rents accommodation, with a maximum deduction of ₹ 180,000 annually. Transport Allowance, provided by the employer for commuting, allows an annual deduction of up to ₹ 19,200. Additionally, Section 80C offers tax savings through investments like the Public Provident Fund, Life Insurance premiums, and Home Loan principal repayment, with a maximum deduction of ₹ 50,000. Contributions to pension schemes under Sections 80CCC and 80CCD are also eligible for deductions, capped at ₹ 200,000 including a special provision for National Pension Scheme (NPS) contribution.

Further tax deductions are available under different sections for medical expenses, education loan interest, and donations. Medical Allowance and insurance premiums qualify for deductions, with specific limits based on age. Sections 80D, 80U, 80DD, and 80DDB cover medical and disability-related deductions, with varying limits based on circumstances. Education loan interest payment qualifies for deduction under Section 80E without an upper limit, while interest on home loan under Section 80EE allows a deduction of up to ₹ 50,000 annually. Contributions to charitable organisations under Sections 80G, 80GGA, 80GGB, and 80GGC also offer tax benefits. These deductions not only reduce tax liabilities but also encourage savings, investments, and philanthropy, contributing to overall financial well-being.

To summarise, these are the items that have TDS exemption:

• HRA: Rent Exemption
• Conveyance Allowance: Travel Exemption
• LTA: Leave Travel Exemption
• Children’s Education Allowance: Education Exemption
• Medical Allowance: Health Exemption
• Interest on Savings Account: Savings Exemption
• Interest on Fixed Deposits: FD Exemption
• Agricultural Income: Farm Exemption
• Pension Income: Pension Exemption

Calculating your taxable income and taxes to determine if you are eligible for a TDS refund:

To calculate your taxable income and determine if you are eligible for a TDS (Tax Deducted at Source) refund, follow these steps:

Compute Total Income: Start by calculating your total income for the financial year. This includes your salary income, income from house property, income from other sources (such as interest and dividends), and any other applicable income.

Apply Exemptions: Subtract any exemptions under Section 10 of the Income Tax Act. These exemptions may include HRA (House Rent Allowance), Conveyance Allowance, and other allowances.

Calculate Gross Total Income: After applying for exemptions, you’ll have your gross total income. This is the sum of your income from various sources.

Claim Deductions: Deduct eligible deductions under Chapter VI-A of the Income Tax Act. Common deductions include Section 80C (for investments like PPF, EPF and insurance premiums), Section 80D (for medical insurance premiums), and other applicable deductions.

Arrive at Taxable Income: Subtract the total deductions from your gross total income. The resulting figure is your taxable income.

Determine Tax Liability: Calculate your tax liability based on the applicable income tax slabs for the financial year. Use the current tax rates to compute the amount you owe to the government.

Check TDS Deducted: Review your Form 16, which your employer provides, to see the amount of TDS deducted from your salary. This is the tax pre-paid on your behalf to the government.

Assess TDS vs. Tax Liability: Compare the TDS amount deducted with your calculated tax liability. If the TDS amount exceeds your tax liability, you may be eligible for a TDS refund. This means you’ve overpaid in taxes, and the excess can be claimed as a refund.

File an Income Tax Return: To claim a TDS refund, you must file an income tax return.

Receive TDS Refund: After filing your income tax return, if you’re eligible for a refund, the Income Tax Department will process your claim, and the excess amount will be refunded to your bank account.

Remember that eligibility for a TDS refund depends on various factors, including your deductions, exemptions, and investments. It’s crucial to accurately calculate your income and taxes. Consider consulting with a tax professional from Vakilsearch for guidance in the ITR filing process.

Conclusion

The provisions of TDS on salaries  are laid down after taking many assumptions and considerations into account in order to ensure equitable taxation. That is why they are so complex and difficult to understand sometimes. So it is best to take the advice of a tax expert in order to understand the different provisions of TDS: https://incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx on salaries so that you can keep your tax liability to a minimum.

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