When it comes to tax, Tax Deducted at Source popularly called TDS, is one of the most talked about topics. This brings to mind a great saying, “Tax evasion is a crime. Tax avoidance is not.” So, what is TDS? TDS is a tool introduced by the Income Tax Department, where any person who makes specified payments to you like salary, commission, professional fees, interest, rent and so on, must deduct a certain percentage of tax, before paying you the money.
TDS on salary is compulsory for employers in India, who pay salaries to you and other employees. This is only if income tax is applicable. Your employer would deduct the applicable income tax, on your estimated income, and deposit this money with the Government.
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This is the month of April and the start of the new Financial Year 2018-19. If you are a salaried employee, your employer would have asked you to send your investment declaration statement. What is the investment declaration statement? Your boss/employer requires that you declare tax saving investments for the financial year, so that he can deduct tax according to your monthly income.
Take a look at some of the investment declaration proofs:
Section 80C: Life insurance premium receipts, passbook copy of PPF, For Sukanya Samriddhi Scheme and the tax-saving FD submit the bank certificate or the deposit receipt. A bank, NBFC, or HFC certificate showing principal paid on the Home Loan.
HRA: Rent receipts of each month and the rental agreement. Rent receipts should contain your landlords name, address and signature.
Section 80G: Receipts issued by charitable institutions for donations which enjoy Section 80G benefits.
Section 80E: Copy of loan certificate showing interest payments.
Section 80D: health insurance premium receipts.
SEE ALSO: How To Avoid TDS On Interest Income?
When your employer deducts TDS from your salary, he will issue the TDS certificate.
There are 2 types of TDS certificates:
Form 16: This is the TDS certificate issued to you and other employees by your employer, for a particular financial year at the end of that financial year. The form 16 shows the total salary paid and the amount of TDS deducted during the year.
Form 16A: This is the TDS certificate issued to you in all cases other than salary.
SEE ALSO: How To Calculate Your Salary?
2. TDS Calculations on Salary
Let’s first understand what is CTC (Cost To Company). This is the total cost incurred by a Company, when paying your salary.
Take a look at the formula of CTC = Gross Salary + PF + ESIC + Insurance + Leave Pay + Gratuity.
STEP 1: Calculate your total gross monthly salary
Your gross total monthly salary includes basic salary + dearness allowance + house rent allowance + transport allowance + special allowances + other allowances.
STEP 2: Make a note of exemptions to allowances
The allowances you get enjoy exemptions under Section 10. The portion of your salary which enjoys the exemption is exempt and the balance is taxed.
HRA Allowances: Section 10(13A)
Conveyance allowance: Section 10(14):
You get a conveyance allowance as part of salary. This is Rs 1,600 a month.
Hostel allowance of child :
You are exempted up to INR 300 per month per child for a maximum of 2 children.
Children’s education allowance: You are exempted up to INR 100 per month per child for a maximum of 2 children.
STEP 3: Calculate gross taxable salary for financial year
You deduct the allowable exemptions from gross monthly salary.
Gross monthly salary – allowable exemptions
This gives the monthly taxable gross salary. You have to project the annual taxable gross salary and for this you have to multiply the monthly taxable gross salary by 12. You now get the annual taxable gross income.
STEP 4: Add any income/loss
You have calculated the annual taxable gross income. You must now add any other income earned like income from house property, interest income on bank deposits. You can even deduct loss from house property. (Interest paid on home loan).
You have now calculated your gross total income.
STEP 5: Account for tax deductions under Chapter V1-A
You have Chapter V1-A deductions. You avail deductions under Chapter V1A which gives your total taxable income. These are deductions from Section 80C to Section 80U.
STEP 6: Calculate net taxable income:
Take a look at the income tax slabs.
Income Tax Slabs for citizens below 60 years
Income Tax Slabs for citizens between 60-80 years
Income Tax Slabs for citizens above 80 years
There is a 4% health and education cess. Be Wise, Get Rich.
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