TDS Calculation & Deduction on Salary For FY 2018-19

As the new F.Y. is arriving on 1st April, all the salaried employees of almost all the organizations are asked to send their investment declaration by their employers. Why is it so?

Their investment declarations are called, so that tax deductions can be done accordingly.

On the basis of investment declaration statement, the employer estimates the taxable income and starts deducting the tax from the monthly basis as tax deducted at source (TDS) before paying it fully to the employee.

What is TDS?

TDS is the tax which is applicable to the various incomes received in the form of salaries, interests, commissions, royalty, etc and deducted as soon as the income is generated. The amount so collected goes to the revenue source of the Government and prevents tax evasion.

TDS is a medium of collecting Income Tax in India under the Indian Income Tax Act of 1961. Different rates of TDS have been prescribed by the Income Tax Act for different payments and different categories of recipients while excluding some incomes and people from the TDS applicability.

TDS is is a part of the Department of Revenue, comes under Indian Revenue Service (IRS) managed by the Central Board for Direct Taxes (CBDT).

How do you define Salary?

Salary is a fixed regular form of payment, typically paid on a monthly basis but often expressed as an annual sum, paid by an employer to an employee as specified in an employment contract.

For the employee, Salary is the earnings he receives periodically based on contract for rendering services to an organization.

As per the Income Tax Act, 1961 a salary encompasses wages, commission or fees profits or perquisites on salary, pension; any gratuity, salary advance, etc.

Note: All the income cannot be referred to as Salary. For example, if a professional takes the fee for his/her expertise in a professional capacity, it is termed as ‘Professional/Technical Fees’.

Or when partner earning a salary from his/her company is charged taxes under ‘Profits & Gains from Profession or Business’.

What is TDS calculated on?

The CTC is your total annual Cost To Company and includes pre-tax direct benefits, indirect benefits and savings contributions. Basic salary, travel allowance, medical allowance, house rent allowance, and other allowance are the components of CTC.

Salary also includes perks i.e. the facilities extended by the employer to the employee such as the traveling expenses, fuel expenses and so on.

Income Tax Rate AY 2019-20 | FY 2018-19

Income Tax Rate AY 2019-20 | FY 2018-19: Individuals below 60 years

Income Tax Rate AY 2019-20 | FY 2018-19: Individuals between 60 years and 80 years

Income Tax Rate AY 2019-20 | FY 2018-19 Individuals above 80 years

After the calculation of Income Tax amount on the basis of the above-mentioned tax slabs, individuals are supposed to pay Surcharge and Cess in addition to it:

• When total income is between Rs.50 lakh up to Rs.1 crore, Surcharge is 10% of income tax
• When the total income exceeds Rs.1 crore, Surcharge is 15% of income tax
• Health & Education Cess is 4% of Income Tax.

How is TDS calculated?

TDS on salary can be calculated by deducting the exemption from total annual earning as mentioned by the Income Tax department. In the case of tax exemption, the employer has to collect an attested declaration or evidence from the employees to approve a tax declaration.

The following categories can be considered for tax exemption:

• House Rent Allowance: Salaried individuals who live in a rented house are eligible to claim the House Rent Allowance (HRA) to lessen taxes.

• Conveyance or Travel Allowance: If the employer provides such travel allowance, the exemption can be claimed by an individual salaried employee.
• Medical Allowance: In case the employer provides you with medical allowance, you can claim the medical bills for tax exemption.

Note: There are certain maximum limits to the amount that can be attested for tax exemption.

How to calculate TDS on Salary? 

As the basic salary is entirely taxable under the respective tax bracket, yet some of the exemptions are still available for payments made, allowances and perks. There are a certain number of TDS solution in the market which is used for multiple purposes, such as deduction on salary via GenTDS. Or else you can calculate TDS on income by following the below mentioned steps:

Step 1: Calculate gross monthly income by summing up the basic income, allowances, and perquisites.

Step 2: Calculate exemptions under section 10 of the Income Tax Act (ITA). Exemptions are applicable on allowances such as medical, HRA, travel, etc.

Step 3: Subtract the exemption as calculated in step 2 from the gross monthly income as calculated in step 1.

Step 4: As the TDS is applicable on annual income, multiply the figure (answer) obtained in step 3 by 12 and you will get your yearly taxable income from salary.

Step 5: Further, if you have any other income source as well such as income from house rent or have incurred losses from paying housing loan interests, add/subtract the respective amount from the figure obtained in step (4).

Step 6: After that calculate the total of your investments for the year which falls under Chapter VI-A of ITA, and deducts the obtained amount from the gross income which was calculated in step (5).

For Instance: Exemption of up to Rs.1.5 lakh under Section 80C, involves investments like life insurance premiums, ELSS mutual funds, home loan repayment, NSC, PPF, Sukanya Samriddhi account, etc.

Step 7: Now deduct the maximum allowable income tax exemptions from a salary.

At present, the income up to Rs.2.5 lakhs is completely tax-exempted. However income between Rs.2.5 lakhs & Rs.5 lakhs is taxable at 5%, and between Rs.5 lakhs & Rs.10 lakhs is taxable at 20%. All the income above Rs.10 lakhs is taxable at 30%.

Note: There are different tax-slabs for senior citizens & they receive more exemptions than the mentioned above.

Example: The below-given example will make you understand the process of calculating TDS clearer and better:

Step 1: Assume your monthly gross income as Rs. 90,0000 after adding up several divisions like the basic salary of Rs. 60,000, HRA of Rs. 20, 000, travel allowance of Rs. 800, medical allowance of Rs. 1,250, child education of allowance (CEA) of Rs. 200 and other allowances that sum up to Rs. 12, 750.

Step 2: Assume the exemptions under section 10 of the Income Tax Act (ITA) are calculated as Rs. 2,250 (medical + travel + CEA)

Step 3: The exemption of Rs. 2,250 will be subtracted from the gross monthly income of Rs. 90,0000.

Step 4: Suppose you stay at your owned property,now your annual taxable income would be (Rs.90,000 – Rs.2,250)*12 = Rs. 1,053,000.

Step 5: Suppose that you experienced a loss of Rs. 1 lakh on your house loan interest repayments over the year. So after deducting this exempted amount from the taxable income, your taxable income would be (1,053,000 – 1,00,000) Rs. 953,000.

Step 6: Now, Assume that you have invested Rs. 1.5 lakhs in various categories that are exempted under Section 80C and made another Rs.30,000 investment in categories which comes under Section 80D. Hence, deducting the amount invested Rs.1.5 lakhs in various categories comes under Section 80C exemptions and another Rs.30,000 investment in categories comes under Section 80D.