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How to calculate TDS on salary

If you are paying salary, tax laws require you deduct TDS before you pay your employee. The taxes are deducted at the source of payments such as salary paid to an employee or commission earned by a broker. TDS provides a way for the government to ensure steady collection of taxes throughout the year, while a taxpayer’s year-end tax calculations become simpler.

Calculation of TDS on salary

If you are in an employee-employer relationship, you belong to the salaried class of individuals.

However, not all income is termed as salary. If a professional is being paid for his/her expertise in a professional capacity, it is termed as ‘Professional/Technical Fees’. Similarly, a partner earning salary from his/her company is charged taxes under ‘Profits & Gains from Profession or Business’.

According to the Indian Income Tax Act (ITA), 1961, salary includes pension or annuity, wages, commission or fees, gratuity, profits or perquisites on salary, salary advance etc.

You can calculate TDS on your income by following the below steps:

  • Calculate gross monthly income as a sum of basic income, allowances and perquisites.
  • Calculate available exemptions under Section 10 of the Income Tax Act (ITA). Exemptions are applicable on allowances such as medical, HRA, travel.
  • Reduce exemptions according to step (2) for the gross monthly income calculated in step (1).
  • As TDS is calculated on yearly income, multiply the corresponding figure from above calculation by 12. This is your yearly taxable income from salary.
  • If you have any other income source such as income from house rent or have incurred losses from paying housing loan interests, add/subtract this amount from the figure in step (4).
  • Next, calculate your investments for the year which fall under Chapter VI-A of ITA, and deduct this amount from the gross income calculated in step (5). An example of this would be exemption of up to Rs.1.5 lakh under Section 80C, which includes investment avenues such as PPF, life insurance premiums, mutual funds, home loan repayment, ELSS, NSC, Sukanya Samriddhi account and so on.
  • Now, reduce the maximum allowable income tax exemptions on a salary.

Note:

  1. Currently, income up to Rs.2.5 lakhs is fully exempt from paying taxes, while income from Rs.2.5 lakhs to Rs.5 lakhs is taxed at 10%, and Rs.5 lakhs to Rs.10 lakhs income bracket is taxed at 20%. All income above this amount is taxed at 30%.
  2. Senior citizens have different tax slabs and receive higher exemptions than those discussed above.
  3. TDS should be deducted at applicable rates as above along with surcharge and Education Cess.
  4. Surcharge at the rate of 12% applicable where the taxable income exceeds Rs.1 Crores. Education Cess at the rate of 3% (without any limit in taxable income) on income tax plus surcharge will be levied.

Salary from more than one employer:

  • Section 192(2) deals with situations where an individual is working under more than one employer or has changed from one employer to another.
  • In Such circumstances it provides for deduction of tax at source by such employer (as the taxpayer may choose) from the aggregate salary of the employee who is or has been in receipt of salary from more than one employer.
  • The employee is now required to furnish to the present/chosen employer details of the income under the head “Salaries” due or received from the former/other employer and also tax deducted at source therefrom, in writing and duly verified by him and by the former/other employer
  • The present/ chosen employer will be required to deduct tax at source on the aggregate amount of salary (including salary received from the former or other employer).

This article was originally published by Alok Patnia on Taxmantra.com.

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