TDS on Salary

Most of the companies and organizations often ask their salaried employees to send their investment plans and declarations when the new financial year begins. these investment declarations are called, so that tax deductions can be made in accordance with them. Based on these investment declaration statements, the employer estimates the taxable income and starts deducting tax on a monthly basis known as Tax Deducted Source before paying the monthly salary to the employee.

What is TDS?

TDS is basically a medium of collecting Income Tax in India under the 1961 Income Tax Act. TDS is applicable on salaries, commissions, royalty payments, brokerages, contract payments, interest earned on several financial investments, earnings from lotteries, rental income, professional fees, etc. The TDS is managed by the CBDT( Central Board for Direct Taxes)and is part of the Revenue Department, which is managed by IRS known as Indian Revenue Services. This amount is evenly collected to keep the revenue source for the Government stable throughout the year. This prevents people from avoiding taxes.

How do you actually define salary?

A Salary is basically a form of payment that an employee receives from his employer, which may be specified within the employment contract of the employee. Or you can also define salary as earnings of a person that he or she receives on a monthly basis by the company or the organization for whom he or she is working. Therefore, in that case, posses an employee-employer relationship, and hence belong to the category of salaried individuals. 
A great point to be taken into consideration is that not every kind of income is categorized under the class of Salary. For the sake of example, if a professional is being paid for providing his/her services in a professional capacity, and then it is termed as ‘Professional/Technical Fee.’ Or if a partner earning salary from his/her company is charged under Profits and Gains from any profession or a business.
As per the 1961 Income Tax Act, a salary includes wages, perquisites on salary, commission or fees profits on salary, annuity or pension, advance salary, etc.

On what basis is the TDS calculated?

If you firmly take into your notice, the CTC which is the cost to the company that was mentioned to you at the time when you joined a particular firm or a company includes components like the basic wages/salary, medical allowance, house rent allowance, travel allowance, and other allowance as well. Also, your salary is divided into two broad categories, i.e. Perquisites. The Perks include facilities provided to the employee by the employer such as fuel expenses, traveling expenses to name a few.

How is TDS calculated?

As per Government rules and policies Tax deductions are allowed under section 80C and section 80 D of the Income Tax Act 1961. This, in turn, allows a person to look for various investment options for a running financial year.

TDS on the salary of an individual is calculated by reducing the exemption from total yearly earnings as speculated by the Department of the Income Tax. In the case of Tax absolution, the employer is required to obtain a declaration and proof from the employees to approve a tax declaration.
One can go through the following categories for the tax absolution.
House Allowance: An employee can give declaration for a House Rent Allowance from the employer if he/she is paying for accommodation as rent.
Medical Allowance: In case if the employer provides you with a medical allowance, he/she is required to produce medical bills for the tax absolution.
Travel Allowance: In case if the employer provides you with the above-mentioned allowances, he or she can declare them for the declaration of tax.

Calculation of  TDS on Salary:

As we know that the basic salary is fully taxable under the respective tax limit, there are some absolutions available for payments being made, allowances and perks.

The following steps can be taken into consideration to calculate the TDS on your income:

1. Firstly calculate the total monthly wages as a sum of the basic income, allowances and other perquisites.
2. Secondly, calculate the absolutions under the Income-tax Act (ITA) section 10. Absolutions are applicable on allowances such as HRA, travel, medical, etc.
3. Then you need to reduce absolution as followed by step (2), for the total monthly income that was calculated in step (1).
4. As the TDS is calculated on annual income, you need to multiply the corresponding figure from the above calculation by 12, and this will be the annual taxable income from your salary.
5. Also if you do not possess any other income source, such as income from house rent or if you have incurred losses from paying house loan interests to add or deduct this amount from the figure referring to the step (4)
6. Then you need to calculate your investments if you hold any, for the year that falls under Chapter VI-A of the ITA, and subtract this amount from the total calculated income in the previous step(5). 
For example Absolution of up to Rs 1,50,000 under Section 80 C, which includes investment avenues such as PPF, ELSS mutual funds, life insurance premiums, Sukanya Samriddhi account, NSC, etc.
7. Now deduce the maximum allowable income tax absolutions on a salary. In the current financial setup, income up to Rs 2,50,000 is fully exempted from paying taxes, while the income ranging from Rs 2,50,000 to Rs 5,00,000 is taxed at 5 percent and Rs 5,00,000 to Rs 10,00,000 income slot is taxed at 20%. Any other income coming above the following slots is taxed at 30 percent interest rate.
8. A fact to be noticed is that Senior citizens have different tax-slabs and also receive absolutions than those mentioned in the above income slots.
 
Here is an example discussed based on the above-mentioned steps:
Step 1&2: We have Sachin who is a salaried employee receiving a monthly gross income of Rs80, 000 with the following salary divisions:
Basic Salary: Rs 50,000
HRA: Rs 20,000
Travel Allowance: Rs 800
Medical Allowance: Rs 1,250
Child Education Allowance (CEA): Rs 200
Other Allowances summing up to Rs 12,750
Step 3&4: He stays in his own property, with monthly absolution from the allowances being offered to him is Rs 2,250(Medical+Travel+CEA). Therefore Sachin’s yearly due amount comes to be (Rs 80,000 – Rs 2,250)*12, which comes out to be Rs 9, 33,000.
Step 5: Sachin experienced a loss of Rs 1, 50,000 on his house loan interest repayments over the year. Subtracting this absolute amount from the taxable income, his taxable income came out to be Rs 7, 83,000.
Step 6: He also invested Rs1, 50,000 in various other categories that fall under section 80 C exemptions and invested Rs 30,000 in categories falling under Section 80 D. Therefore, subtracting this amount that he invested to Rs 1, 20,000 in various other categories that fall under the Section 80 C absolutions and made another investment of Rs 30,000 in the categories falling under the Section 80 D.
Step 7: In the last and the final step we find Sachin’s Tax Slab.
 
INCOME TAX SLAB TDS DEDUCTIONS TAX PAYABLE
Up to Rs 2,50,000 NIL NIL
Rs 2,50,000-Rs 5,00,000 5% of (Rs 5,00,000 to Rs 2,50,000) Rs 12,500
Rs 5,00,000- Rs 6,33,000 20% of(Rs 6,33,000 to 5,00,00) Rs 26,600
 

Hence, the final TDS to be deduced from Sachin’s annual income is Rs 12,500 + Rs 26,600 which comes out to be Rs 39,100 for the current year’s income.

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Income Tax Slab 2019-2020