Tax Deducted at Source was established for collecting tax from the income sources according to the Indian Income Tax Act of 1961. TDS is helpful in minimizing tax evasion by taxing the income at the time than at an after date. The deductor who is responsible for making payment of income to the deductee shall deduct tax at income and pay the tax to the income tax department of the Central Government.
TDS rates deducted shall differ for different types of salaries. Income sources which are eligible for tax deduction include salaries, interest received, property sales, commission received, rent, bank interests, professional fees, consultation fees, dividends, amount from assets etc.
The taxes on salaries will be deducted at the tax rates applicable to the income including cess at 4%. The deducted income tax from source of deductee shall be qualified to get credit of the amount so deducted based on the Form 26AS or TDS certificate issued by the deductor. On the basis of Investment declaration form, the employer will calculate the taxable income and decrease some amount on tax on a monthly basis in the form of tax deducted at source (TDS) before paying the monthly salary to the employee. One can claim the amount while filing their annual returns.
Taxes shall be deducted at the specified rates according to the Finance Act. For non resident persons, tax rate withdrawal under the double taxation avoidance are also included. Based on the tax slab, the rate for TDS deduction on salaried persons will range from 10% to 30%. The Employer will deducts TDS on employee’s salary as per the income tax slab under the section 192 of Income tax act, 1961. The ‘average rate’ of income tax is estimated as follows:
Average Income tax rate = Income tax payable (calculated through slab rates) divided by estimated income of employees for the financial year.
TDS on salary:
The TDS on salary is calculated by subtracting the amount of exemption from the total annual salaried income of the employee. This limit is determined by the Income Tax Department. The proof and declaration from the employee is essential before approving the exemption amount. If their slab is 20%, the tax will be deducted at 20% accordingly.
The taxpayers have to consider the following categories for tax exemption.
However, there are limits to the maximum amount that can be considered for tax exemption.
|Income Source Type||TDS Rate|
|Salary||Based on the Regular slab rate.|
|Interest from securities||10%|
|Interest income up to Rs. 50,000||10%|
|Lottery, card games and other such sources||30%|
|Income from winning a horse race||30%|
|Payments for Contractor/ sub-contractors.||1% (Hindu Undivided Family/Individuals) 2% (Other Persons)|
|Commission from lottery tickets sale||5%|
|Commission or brokerage amount||5%|
|Payment upon the transfer of immovable property||1%|
|Amount paid for professional services/ technical services/ remuneration/ fee/ commission for directors/ royalty/ copyright||10%|
How to calculate TDS:
TDS can be estimated by using the TDS calculator provided in the website of Income tax department as follows:
By clicking on the above mentioned link, one can reach the TDS calculator. By entering the salary amount, Financial Year, Residential Status, PAN number, Recipient Type, Section/ Description,Payment amount, Surchange and Education Cess etc. Based on the entered information, TDS amount will be calculated.
Calculation of TDS:
The basic salary is fully taxable under some exemptions available for payments, allowances and perks. The TDS on income can be estimated by following the below steps.
1) Estimate gross monthly income as a sum of basic income, payments and benefits.
2) Calculate reductions under section 10 of the Income Tax Act of 1952. This can be applicable on allowances like medical expenses, HRA, travel expenses etc.
3) Reduce exemption from the gross monthly income calculated.
4) TDS is estimated for annual income. First multiply the respective amount from the above calculation by 12, since it is for 12 months. And this is the yearly taxable income from salary.
5) If the individuals have any other income source from the house rent or have incurred losses from paying housing loan interests, add/ less this amount from the calculated amount from the previous steps.
6) Then, estimate the investments, for the year which fall under Chapter VI-A of ITA, and subtract this amount from the gross income calculated.
If the exemption is Rs.1.5 lakh under Section 80C, including the investment avenues like PPF, ELSS mutual funds, home loan repayment, life insurance premiums, NSC, Sukanya Samriddhi account, etc.
7) Then subtract the maximum exemptions on a salary. For example, if an income up to Rs.2.5 lakhs is fully exempt from taxes, while income from Rs.2.5 lakhs to Rs.5 lakhs is taxed at 5%, and Rs.5 lakhs to Rs.10 lakhs income bracket is taxed at 20%.
The Tax breakup according to income slab framed by the Income Tax department is as follows:
|Income tax slab||TDS Deductions||Tax payable|
|Up to Rs.2.5 lakhs||NIL||NIL|
|Rs.2.5 lakhs to Rs.5 lakhs||5% of (Rs.5,00,000-Rs.2,50,000)||Rs.12,500|
|Rs.5 lakhs to Rs. 6.33 lakhs||20% of (Rs.6,33,000-Rs.5,00,000)||Rs.26,600|
It is recommended to consider tax treaties before determining the rate of withholding tax under Section 195. Monetary limit for TDS applicability should be considered while determining TDS liability.