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TDS on Salary under the Income Tax Act, 1961

TDS on Salary under the Income Tax Act 1961

A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals, for example, monthly payments.

Salary in common parlance means any amount paid by an employer to his employees in lieu of services rendered by them. However, the Income Tax Act, 1961 defines the term “salary” u/s 17(1) to include the following monetary as well as non-monetary payments.

• Wages;
• Annuity or pension;
• Any Gratuity;
• Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages;
• Any Advance of Salary;
• Leave Encashment;
• Employers contribution to provident fund in excess of 12% of Salary;
• The contribution by the central government or any other employer in the Previous year to the account of an employee under a pension scheme u/s 80CCD.

TDS on Salary [Section 192]:

• TDS refers to Tax Deducted at Source of income itself.
• In the case of TDS on salary, it relates to the tax deduction made by an employer on your salaried income.
• TDS on salary helps the government in collecting income tax accruing from an individual’s salary at the source.
• Section 192 of the Income Tax Act, 1961 deals with tax deducted at source (TDS) on salary.
• Your employer will deduct TDS from the salary payable to you. The salary you receive from your employer is categorized in ‘Income’ under the head ‘Salary’ and he/she will be responsible for deducting TDS on an average rate of income tax based on the current slab rate during the relevant financial year by considering your estimated income.
• The TDS deducted u/s 192 is reflected in Form 16, which is issued by the taxpayer at the end of the financial year.

Liability to Deduct TDS on Salary:

• Every employer is liable to deduct TDS from the salary paid to employees. Employer can be any of the following persons:

o Companies (Private or Public);
o Individuals;
o HUF;
o Trusts;
o Partnership firms;
o Co-operative societies;
o AOP/BOI;
o Local Authorities;
o Every Artificial judicial person.

• The important condition for TDS deduction under section 192 is the presence of Employer-Employee relationship (irrespective of the government employee, private or other).
• The employer’s status as a type of person does not matter under this section. Similarly, number of employees employed by such employer also does not matter under this section.

Time of Deduction of TDS u/s 192:

• Under Section 192, TDS shall be deducted from salary only when estimated annual salary of the employee is more than basic exemption limit. This rule is applicable even to those who do not have a PAN.
• If an employee is liable to TDS Deduction, then TDS is deducted at the time of actual payment of salary and not during the accrual of salary.
• Tax will also be deducted if your employer pays salary in advance to you or you receive arrears from him.
• The table below shows the basic exemption limit as per the age that does not require TDS to be deducted:

Age Income not chargeable to tax
Indian Resident below 60 years  
Resident Senior Citizens between 60 years and below 80 years  
Resident Super Senior Citizens above 80 years  

Rate of Deduction of TDS from Salary:

• There is no specific rate of TDS prescribed under this section. This is because deduction of TDS depends upon the total income of each employee. Hence, employer has to calculate TDS amount for each individual employee separately. TDS may be deducted at different rates for different employees having different income levels.
• The calculation for TDS on salary is done by reducing the amount of exemption/deductions as specified by IT department from the total annual salaried income of the employee.
• At the time of calculating TDS on salary; the employer needs to obtain proof and declaration from the employee before approving the exemption amount.

Computation of TDS on Salary:

• As mentioned earlier, there is no fixed rate for TDS deduction from salary. Hence, for each employee TDS amount needs to be calculated separately in following manner.

Step 1: Compute Gross Total Income of the employee:

• Gross Total Income of an employee includes total salary received by an employee during the financial year.
• Income other than salary like rent income, interest income etc. shall also be considered by the employer for calculation of TDS on salary if details of such income submitted by the employee.

Step 2: Provide for applicable Deductions/Allowances/Exemptions from Salary:

The Income Tax Act, 1961 provides for various deductions from salary. The employer must take into consideration such deductions to the extent applicable. Some of the important deductions are:

House Rent Allowance: An employee can claim House Rent Allowance (HRA) from the employer if he/she is paying rent towards accommodation.

Children Education Allowance: Children Education Allowance is allowed Rs.100 per month per child up to 2 children.

Leave Travel Allowance:

o Leave Travel Allowance (LTA) is a type of allowance provided by the employer/organisation to the employees.
o Using LTA, employees can travel on leave from work and cover his travel expenses and claim the same from the organisation.
o For this LTA should be a component of your salary. Also, as per Section 10 (5) of the Income Tax Act, 1961, the LTA received by the employee is not included in the net taxable income of the employee.
o Leave Travel allowance can only be claimed on either actual travel cost or component amount in your salary breakup, whichever is less. But, employees can avail LTA for 2 journeys in a block of 4 years.

Standard Deduction:

o Standard deduction is a flat deduction of Rs. 50,000/- to your “Income taxable under the head salaries”. This tax benefit can be claimed irrespective of actual amount spent on Transport Allowance and Medical Allowance.
o Note: From FY 2020-21 (AY 2021-22) the deduction can only be claimed by an individual if he opts for the old tax regime. Compare your tax liability under the old and new tax regime.

Interest on Home Loan:

o Interest on home loan (if any) up to Rs. 2,00,000/- will be set off from salary income to arrive at estimated income for the purpose of TDS calculation if evidence is given in Form 12BB by the employee.

Deductions under Chapter VI-A:

o There are many tax saving investment options in which an employee can invest money during the relevant FY and claim tax exemptions to the extent of investment. If an employee has made any such tax saving investment/expenses, he must declare the same to the employer along with proof of such investment/expenses.

o Section 80C: Deduction up to Rs. 1,50,000 on certain investments like PPF Contribution, NSCs, Life Insurance Premium, Principal repayment of Home Loan, Children’s tuition fees, and many more.

o Section 80D: Medical Insurance Payment:

Age limit of the insured Maximum Premium Allowed as deduction Maximum Deduction u/s 80D
Family (Self, Spouse, Children) Parents
Family and Parents below 60 years 25,000 25,000 50,000
Family below 60 years & Parents above 60 Years 25,000 50,000 75,000
Both Family and Parents above 60 years 50,000 50,000 1,00,000

 

• Similarly, all the relevant deductions/ exemptions, if any shall be taken into consideration before calculating TDS on Salary.

Step 3: Compute Tax Payable on Net Annual Salary:

• After providing applicable deductions/exemptions, the employer needs to compute tax payable on Net Annual Salary and Surcharge and Cess as may be payable on such tax amount.
• The computation of Tax should be done either as per old tax regime or new tax regime as per option chosen by the employee.

Step 4: Compute Amount of TDS deducted from Salary:

• Once we know the tax payable on annual salary, we need to divide the amount of tax by twelve months to get monthly TDS to be deducted from salary.

TDS Deduction in case of Multiple Employers:

There may be two situations:

Case 1: Change of job during the year:

• There may be a situation where there is more than one employer in one particular financial year.
• If the employee resigns and joins another employer during the FY then the details of his previous employment is required to be given in Form 12B to his new employer to deduct TDS properly.
• Accordingly, the next employer will consider his previous salary and TDS deducted while calculating TDS for the remaining months of the financial year.

Case 2: Engaged with two or more employers simultaneously:

• When an employee is engaged with more than one employer simultaneously, he should provide details about his salary and TDS in Form 12B to any one of the employers. One of the employers is required to deduct TDS on aggregate salary.

TDS in case Salary is payable in Foreign Currency:

• In such a case, first of all salary will be converted into Indian currency.
• The rate of exchange will be the last day of the month immediately preceding the month in which the salary is due, or is paid in advance or in arrears.
• For example, if salary is paid in the month of December in foreign currency then the rate of exchange shall be taken which prevail on 30th November.
• After conversion, calculate TDS as per normal provisions of TDS deduction.

Time Limit to deposit TDS under Section 192:

TDS deducted from salary by the employer is required to be deposited to the government within given below timeline to avoid interest:

Month of Deduction Due date of deposit of TDS
During any month from April to February 7th of Subsequent Month
During the month of March 30th April

Form 16 – The TDS Certificate:

  • Form 16 is essentially a certificate employers issue to their employees.
  • It provides a validation that TDS has been deducted and deposited with the government authorities on behalf of the employee.
  • It gives a detailed summary of the salary paid to the employee and the TDS deducted.
  • Form 16 contains the information you need to prepare and file your income tax return.
  • Employers must issue it every year on or before 15 June of the next year, immediately after the financial year in which the tax is deducted.
  • Form 16 has two components – Part A and Part B. In case you lose your Form 16, you can request for a duplicate from your employer.

Consequences of Non-Compliance:

  • Levy of Interest:
  • If the employer does not deduct the TDS on salary or deduct the TDS but not deposited to the government then interest is required to be paid on such amount.
  • In case of Non-deduction of TDS, either in whole or part à 1% per month or part thereof till actual deduction;
  • In case of Non-Payment of TDS after deduction à
  • Disallowance of Expenses: Also, the employer is not eligible to claim the deduction of salary expense from PGBP income if TDS is not deducted on time. The amount of disallowed salary expenses shall be:
  • 30% of Salary payment to Resident.
  • 100% of Salary payment to Non-Resident.

 

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