TDS on Salary: How to Calculate Deductions & Exemptions

As a salaried individual, you are obliged to pay taxes to the government; TDS is one of the major components. Usually, the employer deducts TDS (Tax Deducted at Source) from your paycheck before remitting your salary to the bank account. But knowing how to calculate TDS on salary will just make you wise at handling your finances.

This article will inform and guide you on how to save TDS on salary and more. But let’s first understand how salary is defined.

What Constitutes A Salary?

In layman’s terms, a salary is the amount of money that your employer pays you for your services. Your salary consists of the following components:

• Basic compensation
• Dearness allowance
• Other benefits provided by the employer, such as HRA, LTA, EPF
• Contributions to EPF
• Additional commissions
• Gratuity 
• Retirement benefits, etc.

What Is TDS on Salary?

Under Section 192 of the Income Tax Act of 1961, employers are eligible to deduct TDS from the salary payable. The employer will deduct TDS and transfer it to the Department of Income Tax based on your total taxable salary. The annual Form 16 issued by the employer includes details on the TDS deducted. At the end of each fiscal year, you can calculate your tax liability and either file a TDS refund or compensate for the differential liability.

Employers must register for a TAN before deducting tax from a worker’s salary at the source. The Tax Deduction and Collection Account Number, or TAN number, is a 10-digit alphanumeric code used by the Income Tax Department to track TDS deductions and remittances.

How to Calculate TDS on Salary under Section 192

Salaried individuals’ basic salary is taxable as per the applicable tax bracket. However, other allowances and benefits are subject to some exemptions. You can determine TDS on salary by following the steps mentioned below:

• Calculate the monthly gross earnings as the total of your basic salary, benefits, and allowances.
• Determine the exemptions that may be claimed under Section 10 of the Income Tax Act (ITA). For example, travel, HRA, and other allowances are all subject to exemptions.
• Reduce the exempted amount from the gross monthly income.
• Multiply the above calculation result by 12 since TDS is calculated on annual income. This shows your taxable yearly salary income.
• Add this amount to your annual taxable salary income.
• If you have additional revenue sources, such as interest income, rental income, etc., you need to add them to your yearly income. 
• Then deduct your annual investment amounts from the gross income. Your annual investments fall under Chapter VI-A of ITA. For instance, the exemption of up to INR 1.5 lakh under Section 80C is permitted, which covers investment options like PPF, mutual funds, life insurance premiums, home loan repayment, ELSS, NSC, and more
• Reduce the maximum salary-based income tax exemptions now. Here is an overview of the exemptions: 
  • Income up to INR 3 lakh is entirely tax-free.
  • Income between INR 3 lakh and INR 6 lakh is subject to a 5% tax.
  • Income between INR 6 lakh and INR 9 lakh is subject to a 10% tax
  • Income between INR 9 lakh and INR 12 lakh is subject to 15% tax 
  • Income between INR 12 lakh and INR 15 lakh is subject to a 20% tax. 
  • Taxes are levied at 30% on all income over this level

Formula to Calculate TDS on Salary

TDS on salary is calculated by using a simple formula:

Income Tax Rate = Income Tax Payable according to slab rates) / Total estimated income for the fiscal year

If you want a clear idea of deductions from salary income, you can also use an online TDS calculator.

Salary TDS calculator can help you determine the TDS amount deducted from your salary. If you want to know the TDS amount immediately, submit your basic details, such as the recipient type, transaction type, and payment amount in an online TDS calculator to get the results. 

Also Read: New Income Tax Slab Rates for FY 2023-24

Multiple Employers and the Impact of TDS

You might switch jobs multiple times throughout a fiscal year and get salaries from two or more companies. Each employer would determine and deduct the TDS according to your income and investment declaration. However, if you provide the new employer with Form 12B, they will compute the TDS while considering the TDS deducted by the previous employer. 

The TDS deduction from your income would proceed more smoothly, and there would be no ambiguity regarding TDS rates. Your previous employer’s payment details and the TDS deducted can be found in Form 12B.

How to Reduce TDS on Salary?

You are entitled to multiple deductions under Chapter VI A of the Income Tax Act 1961. This can help reduce the employer’s TDS deduction rate. If you are wondering how to save TDS on salary, the following are the deductions that employees usually claim:

• Section 80C

Section 80C of the Income Tax Act permits deductions of up to INR 1.5 lakh for eligible investments made within a fiscal year. The following are a few examples of 80C deductions that are allowable:

• Premiums for life insurance
• Investments in ELSS
• Sukanya Samriddhi Yojana
• Senior Citizen Savings scheme
• NPS, PPF, EPF, etc

• Section 80D

The premiums you pay for health insurance plans can be deducted from your taxable income under this clause. The maximum deduction is INR 25,000 for people under 60 and INR 50,000 for people over 60. If you pay your parent’s health insurance premiums, you can deduct an additional INR 25,000 or 50,000.

• Section 80CCD (1B)

Investment in the National Pension System permits a further deduction of up to INR 50,000 under this clause.

• Section 80TTA

Interest income from savings accounts is permitted as a tax-free source of income up to INR 10,000.

Conclusion

Your employer must submit TDS to the income tax authority after deducting it from your pay. There are deadlines for the TDS deposit as well. Thus, if you are a salaried employee, you should know what TDS on salary is, how it is deducted, and its exemptions. It will help in your financial planning and make way to save more.

FAQs

I got a bonus from my company. Would TDS cover it?

TDS would apply to the bonus you receive from your employer.

What function does TDS perform?

TDS enables you to satisfy your annual tax-payment obligation. Furthermore, it lowers tax liability and aids in preventing tax evasion. By spreading the tax payments over several months using TDS, you can make it more affordable rather than paying a large sum of taxes all at once.

When is TDS taken from the salary under Section 192?

When an employee’s taxable income exceeds the basic exemption limit, the employer must deduct TDS.

Can HRA be deducted while determining TDS on a salary?

Employees must disclose rent payments so they can claim an exemption. You can use a TDS calculator for further clarification.

Sonakshi Patel