Employers pay a fixed salary at predetermined intervals, usually monthly, for services rendered under a contract with an employee. According to the Income Tax Act, salary income is taxable, and employers deduct tax at source (TDS). They calculate TDS based on applicable tax slabs and available exemptions under the Income Tax Act. Understanding TDS on salary is essential for salaried individuals to ensure compliance and optimize tax benefits.
Section 192 of the Income Tax Act governs TDS on salary, requiring employers to deduct tax at source from employees’ salaries. Since salary qualifies as taxable income, employers must withhold a portion and remit it to the government.
TDS is deducted based on the income tax slab rates applicable to the employee. The tax amount depends on the employee’s income and eligible exemptions. It is important to note that TDS is deducted only if the employee’s salary exceeds the exemption limit set by the government.
The formula to calculate TDS on salary is:
Income Tax Rate = Income Tax Payable (computed with applicable slab rates) ÷ Estimated Income for the year
Employers are entrusted with the responsibility of deducting TDS on salary and depositing it with the government. Any of the following entities can deduct TDS on salary under Section 192:
TDS on salary is deducted every month. It is typically withheld when the salary is paid, not when it accrues. If an employer fails to deduct the TDS, they are liable to pay penalties and additional interest. Additionally, salary paid in advance or arrears will also be subject to TDS.
If an employee’s salary falls below the minimum exemption limit, the employer does not deduct TDS. Additionally, TDS is not deducted if the employee lacks a PAN card.
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The following tax slabs apply to the salary income for the financial year (2024-25):
| Income Range | Tax Rate |
| Upto Rs. 2.5 Lakhs | Nil |
| Rs. 2,50,001 – Rs. 5 Lakhs | 5% |
| Rs. 5,00,001 – Rs. 7.5 Lakhs | 10% |
| Rs. 7,50,001 – Rs. 10 Lakhs | 15% |
| Rs. 10,00,001 – Rs. 12.5 Lakhs | 20% |
| Rs. 12,50,001 – Rs. 15 Lakhs | 25% |
| More than Rs. 15 Lakhs | 30% |
Employers generally compute TDS based on the CTC (Cost to Company), which includes the basic salary, allowances, perquisites, and additional benefits. Perquisites may include things like travel expenses, fuel subsidies, medical expenses, and others.
Employees can claim exemptions from TDS on the following:
You may also want to know Section 80CCD(1B)
Follow these steps to calculate TDS on salary:
Salaried individuals can reduce their taxable income by declaring certain investments. Here are the key exemptions that employees can avail:
Employees can use Form 16 to verify their TDS deductions. This form contains details of both the employer (deductor) and the employee (deductee), the amount of TDS deducted, and the tax deposited with the government. It serves as proof of TDS deductions and is essential for filing Income Tax Returns.
Employees must understand TDS on salary to manage their tax liability and avoid over-taxation. By properly declaring investments and exemptions, employees can optimize their tax deductions and avoid penalties. Form 16 is a valuable tool to track TDS and ensure compliance with tax laws.
If your salary is below the exemption limit of Rs. 2.5 lakh, no TDS will be deducted.
Yes, you can claim tax deductions on HRA if you live in rented accommodation. The amount is subject to conditions like the rent paid, the salary, and the city of residence.
If the TDS deducted is more than your actual tax liability, you can claim a refund by filing your Income Tax Return (ITR).
Yes, you can reduce your taxable income by investing in tax-saving schemes under sections like 80C, 80D, and 80G, among others.
Yes, you need to submit proof of your investments at the end of the financial year or as required by your employer to claim exemptions.
TDS is calculated based on your total taxable income, including salary and perks, and applying the applicable income tax slab rates. You can use online TDS calculators to get an accurate figure.
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