How is TDS Calculated on Salary?

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.

What is TDS?

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.

• It makes sure you don’t evade taxes
• The Government receives stable revenue throughout the year.

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See Also: TDS on Salary?

How is TDS calculated 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.

Income Tax Slabs for FY 2019-20

Income Tax Slabs for Individuals:

Income Tax Slabs For Senior Citizens:

Income Tax Slabs For Super Senior Citizens:

How to Calculate TDS on Salary?

• Let’s say your salary income is Rs 10 Lakhs. You then deduct Rs 1.5 Lakhs under Section 80C.
• The net taxable income is Rs 10 Lakhs – Rs 1.5 Lakhs = Rs 8.5 Lakhs.
• You then calculate tax payable.

See Also: How TDS Deducted on Salary?

You are 50 years of age. What is the tax you pay?

• You have a tax exemption from 0 to Rs 2.5 Lakhs a year. You pay a 5% tax on income between Rs 2.5 Lakhs to Rs 5 Lakhs. This is Rs 2.5 Lakhs @ 5% = Rs 12,500. You have to pay 20% on Rs 3.5 Lakhs = Rs 70,000. The total tax payable = Rs 70,000 + Rs 12,500 = Rs 82,500.
• You then add Health and Education Cess at 4% = Rs 82,500 @ 4% = Rs 3,300.
• Your total tax liability is Rs 82,500 + Rs 3,300 = Rs 85,800.
• Average rate of income tax = Tax Liability / Total Income = Rs 85,800 / Rs 10,00,000 = 8.58%.

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.

Why is Your TDS Revised?

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:

• If you have received a bonus during the year, this is an increase in income. There are more taxes payable.
• You submit tax-saving investment proofs, which were not submitted earlier.
• You switch jobs.
• The actual tax-saving investment is lower than the declarations you made at the beginning of the year.

See Also: How To Calculate Tax On RD Interest?

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