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What Is TDS And How Is TDS On Salary Calculated

17 Jul 2023

What Is TDS On Salary?

TDS on a salary denotes the employer's deduction of tax at the time the pay is deposited into the worker's account. The employer deposits the sum taken from the worker's account with the government. An operator must register for a TAN before deducting tax at source out of an employee's pay. The TAN number is simply a 10-digit alphanumeric code that is used by the Income Tax Department to monitor TDS deduction and remittance.

How Is TDS Calculated On Salary?

Although payments were made as allowances and benefits are subject to various exclusions, the basic wage is completely taxable in accordance with the applicable tax band. 

The procedures listed below can be used to calculate TDS on your salary:

  • Step 1: Determine your gross monthly income by adding your base pay, benefits, and allowances.
  • Step 2: Determine the exemptions that can be claimed under Section 10 within the Income Tax Act. These exemptions are available for benefits including travel, HRA and medical.
  • Step 3: For the gross monthly income determined, reduce exemptions in accordance with Step 2.
  • Step 4: Multiply the relevant result from the preceding calculation by 12 since TDS is based on annual income. This is the amount of your salary that is taxed each year.
  • Step 5: Add or deduct this amount from the number in step 4 if you have any other revenue sources, like rent losses or income from paying housing loan interest.
  • Step 6: Subtract that amount from the gross income determined in step 5 of your investments for the year that are subject to Chapter VI-A of the ITA (5). A good illustration of this is the up to ₹1.5 Lakhs exemption provided by Section 80C, which covers a variety of investment options including mutual funds, PPF, home loan repayment, life insurance premiums, Sukanya Samriddhi accounts, ELSS, NSC, and others.
  • Step 7: Next, lower the maximum income tax exemptions that can be applied to a paycheck. Taxes are now not due on income up to ₹2.5 Lakhs, 10% on income ranging between ₹2.5 Lakhs and ₹5 Lakhs. There is 20% of income varying between ₹5 Lakhs and ₹10 Lakhs. The tax rate on all income beyond this threshold is 30%.
  • Step 8: Keep in mind that seniors have distinct tax brackets and are eligible for larger exemptions than those previously mentioned.

Examples

In order to better grasp these processes, let's think about a numerical example:

  • Steps (1) and (2): Assume you make ₹80,000 per month in gross revenue. This sum can be broken down into the following components: a travel allowance of ₹800, a base salary of ₹50,000, a child education allowance of ₹200, an HRA of ₹20,000, a medical allowance of ₹1,250, and additional allowances totaling ₹12,750.
  • Steps (3) and (4): Given that you reside on your own property, your allowance per month is exempt up to ₹2,250 (transport+medical+CEA). As a result, your annual taxable income is (₹80,000 - ₹2,250)*12, or ₹9,33,000.
  • Step (5): Let's imagine you have suffered a loss of ₹1.5 Lakhs due to annual housing loan interest obligations. Your taxable income drops to ₹7,83,000 after deducting this sum from your taxable income.
  • Step (6): Assume you have made investments totaling ₹1.2 Lakhs in a variety of Section 80C-eligible categories and ₹30,000 in Section 80D-eligible categories. As a result, Chapter VI-A exempts the resultant ₹1.5 Lakhs from taxes. Your taxable income is reduced by this sum out from gross taxable income determined before, which is now ₹6,33,000
  • Step (7): Determine your tax bracket.The following is your final tax breakdown based on the income slabs that the IT department has provided: The total TDS that must be taken out of your annual income is thus ₹25,000 + ₹26,600, which equals ₹51,600 for the income for the present year, or ₹4,300 a month for the current fiscal.
Income Tax Slabs Tax Payable TDS Deductions
Up to ₹2.5 Lakhs Nil Nil
₹2.5 Lakhs to ₹5 Lakhs ₹ 25,000 10% of(₹5,00,00-₹2,50,00
₹5 Lakhs to ₹6.33 Lakhs ₹ 26,600 20% of(₹6,33,00-₹5,00,00)

How Is TDS Determined?

Sections 80C and 80D of the tax code provide for tax exemption. This enables a person to apply for a tax exemption depending on the different sorts of investments that person is making for that specific fiscal year. By subtracting the exemption from the total yearly earnings as determined by the Income Tax authorities, it is possible to compute the TDS on pay. To grant a tax exemption, the employer has to see a statement and supporting documentation from the people. 

The following groups are taken into account for exemption:

  • Travel Allowance - If a worker receives a conveyance allowance, they can claim it as a tax deduction.
  • House Rent Allowance (HRA) - If an individual pays rent for housing and is also eligible to HRA from their employer, they can report this money as a tax-exempt expense.
  • Medical Allowance - If a worker qualifies for a medical allowance, they can declare it and provide supporting documentation for a tax exemption.

 

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