Salaried employees are familiar with the term Tax Deducted at Source or TDS. The Company must have asked you and other employees to send investment declaration at the start of this Financial Year. The purpose of this is so that, tax deductions can be made accordingly. After going through the investment declaration statement, your employer estimates the taxable income. He then deducts tax on a monthly basis in the form of TDS and then pays your monthly salary.
TDS is deducted on salary, commission, brokerage, royalty payments, contract payments, earnings from lotteries, rent income, professional fees and so on. TDS is managed by the CBDT or Central Board of Direct Taxes. TDS serves a twin purpose.
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See Also: TDS on Salary?
Under current income tax laws, there is no specific TDS deduction from salary income. The TDS rate depends on applicable income tax slabs. Your employer then calculates tax liability based on ‘Average rate of income tax’.
How is the average rate of income tax calculated? It’s just the total tax liability, divided by the total income of the employee. However, your employer takes into account tax-saving investments before arriving at total tax liability.
See Also: How TDS Deducted on Salary?
You are 50 years of age. What is the tax you pay?
Now, from your monthly salary income, a TDS of 8.58% is deducted. You receive net monthly salary after TDS of 8.58% is deducted from it.
The average rate of income tax is calculated at the start of the financial year. This is done based on your salary paid during the year and also tax-saving investments made. This rate continues to remain same if you submit investment proof made during the financial year. Do remember that TDS deducted from salary income may undergo a revision.
Your employer deducts TDS based on net taxable income. This is gross taxable salary minus Section 80C to U deductions. The TDS calculation depends on your investment declarations and forecasted salary. Let’s have some examples:
See Also: How To Calculate Tax On RD Interest?
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