Tax Deducted at Source (TDS) is an important part of the Indian tax system, which collects taxes directly from your income. For people who earn a salary, understanding TDS is important because it affects their take-home pay and tax responsibilities. 

This guide will explain TDS on salary, especially under Section 192 of the Income Tax Act, 1961, to help you understand it better.

What is TDS on Salary?

TDS on salary refers to the tax deducted by an employer from an employee's salary before it is paid out. According to Section 192 of the Income Tax Act, 1961, employers are required to deduct TDS based on the applicable income tax slab rates. 

This mechanism ensures that taxes are collected regularly throughout the year rather than at the end of the financial year.

Key Terms and Concepts

  • Assessee: The individual who is liable to pay tax.
  • Deductor: The entity (employer) responsible for deducting TDS from the salary.
  • Deductee: The individual (employee) whose salary is subjected to TDS.
  • TAN (Tax Deduction and Collection Account Number): A unique identification number allotted to employers deducting TDS.
  • PAN (Permanent Account Number): A unique identification number allotted to all taxpayers in India.

Who can deduct TDS on Salary?

​Under Section 192 of the Income Tax Act, TDS on salary can be deducted by the following entities:

  1. Employers: Any employer who is paying a salary to an employee is required to deduct TDS if the salary income of the employee is above the basic exemption limit. This includes both private and public sector organizations.
  2. Government Entities: Government bodies, including central and state governments, as well as local authorities, are mandated to deduct TDS on the salary paid to their employees.
  3. Corporations and Companies: All companies, whether private or public limited, must deduct TDS from the salaries paid to their employees if the salary exceeds the threshold limit.
  4. Partnership Firms and LLPs: Partnership firms and Limited Liability Partnerships (LLPs) are also responsible for deducting TDS on the salaries paid to their employees.
  5. Individuals and HUFs (Hindu Undivided Families): Individuals and HUFs who are required to undergo a tax audit as per the Income Tax Act in the previous financial year are also liable to deduct TDS on the salaries paid to their employees.

In essence, any entity or individual with a tax audit requirement, or any employer paying salaries above the exemption limit, is obligated to deduct TDS on salaries. This ensures the proper collection of taxes and compliance with the income tax regulations.

Here is who doesn’t need to pay TDS on their salaries:

How to Calculate Tax Deduction at Source (TDS) of the Employee?

Step 1: The employer notes and calculates the salary of the employee for the relevant financial year including the basic pay, allowance, perquisites granted by the employer, and other allowances granted by the employer including the HRA, LTA, meal coupons, EPF contributions, bonus, commissions, etc.

Step 2: Then the employer calculates the deductions or exemptions under Section 10 of the Income Tax Act. These exemptions apply to allowances like HRA, travel expenses, uniform expenses, children’s education allowances, etc., and also reduce the amount of professional tax paid, entertainment allowance, and standard deduction of Rs 50,000. The employer reduces such exemption from the monthly income of the employee, and the net amount is treated as the taxable salary income.

Step 3: In the case of an employee’s other source of income such as rental income from house property or bank deposits, etc, such amounts should be added to the net taxable salary. This is applicable if he has provided information about these incomes. 

Step 4: After this, the employer will reduce the investments made in a year that are covered under Chapter VI-A of the Income Tax Act. These investments are made known by employees through their investment declarations which include investments like the Public Provident Fund (PPF), Employees Provident Fund, Equity Linked Savings Scheme (ELSS) mutual funds, National Savings Certificate (NSC), and Sukanya Samriddhi Account. These also include other expenses such as home loan repayments and life insurance premiums. Also, the employer makes additional deductions under other sections, such as Section 80D and Section 80G. 

Note that from the financial year 2023-24, the new tax regime will be applied. Your taxes will be calculated using the new tax regime announced by the government. You can choose between the old or new regime. For this, you have to inform your employer. Your employer will then deduct your income tax based on the tax regime you selected.

 TDS Rates for FY 2023-24 (AY 2024-25)

Payments That Are Exempt From TDS

Here is a list of the types of payments that are exempt from TDS:

Employer’s Responsibility Under Section 192

Employers play a crucial role in the TDS mechanism. Their responsibilities include:

  1. When to Deduct TDS: Employers must deduct TDS at the time of salary payment, ensuring timely compliance.
  2. How to Calculate TDS: Employers need to estimate the employee’s annual income, deduct applicable exemptions and deductions, and compute the TDS based on the remaining taxable income.
  3. Issuing Form 16: Employers must provide Form 16 to employees, which serves as a TDS certificate, detailing the salary paid and TDS deducted.
  4. Quarterly Returns Filing: Employers are required to file quarterly TDS returns using Form 24Q, reporting the TDS deducted and deposited.

Employee’s Responsibility

Employees must also actively participate in ensuring proper TDS management. Their responsibilities include:

  1. Ensuring Correct TDS Deduction: Employees should verify their payslips and Form 26AS to ensure that the TDS deducted by the employer is accurate.
  2. Providing Necessary Declarations and Proofs: Employees must submit proofs of investments, rent receipts for HRA, and other deductions to the employer to ensure accurate TDS calculation.
  3. Understanding Form 16 and Form 26AS: Employees should carefully review these forms to ensure that the details match and are correctly reported to the Income Tax Department.
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How to Reduce TDS?

According to the income tax law, the employer deducts the Tax Deduction at Source (TDS) from the employee. But only if the salary crosses the limit and then before the end of the year, employees are asked to report their ‘Income-Tax Declaration’. This includes their investments, and expenses details for a particular year. 

Here’s how to reduce TDS deduction:

  • House Rent Allowance: Many employers give accommodation or house rent allowance to their employees. You can claim tax exemption for house rent allowance by submitting the name, PAN, and address of the landlord with the receipts of the rent. 
  • Medical Allowance: If you are an employee, then you may receive a medical allowance from your employer for a medical emergency. You can claim a tax reduction or exemption by submitting the original medical receipts, and bank statements as proof.
  • Travel Allowance: You can request your employer to provide you with a travel allowance. This allowance can be provided when your company does not provide any transport services for work.
  • Donations to Trust and Charity: If you have made any recent donation or charity to charitable institutions, then you can provide receipts that have your details as well as details of the institution, registration number, etc., as proof.

Penalties and Consequences for Non-Compliance

​Non-compliance with TDS provisions can result in penalties and interest:

  • Penalties for Employers: Failure to deduct or deposit TDS can attract penalties and interest.
  • Penalties for Employees: Non-disclosure of correct income or discrepancies can lead to penalties and scrutiny by the Income Tax Department.
  • Interest on Late Payment: Interest is charged for late payment or non-payment of TDS.

To Wrap it Up

Understanding TDS on salary is essential for both employers and employees to ensure compliance and avoid penalties. Staying informed about the latest tax regulations and diligently managing TDS can lead to a smoother tax filing experience.

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