TDS ON SALARY
Tax Deduction at Source is a way of collecting tax from the salary or other sources even before transferring the salary to the employee. TDS is ruled under the Income Tax Act, 1961 where the income tax gets deducted from the salary at the source. TDS is applicable on income from salary, royalty payments, commission, contract payments, brokerage, lottery, interest from financial investments, professional fee, rental income etc. the Central Board of Direct Taxes manages TDS and composes a part of the DoR (Department of Revenue) under IRS (Indian Revenue Services).
If you are a salaried employee, you would have come across your HR or Accounts department asking for your investment declaration at the start of the financial year. These investment declarations are instrumental in finalizing the tax deductions of a particular employee. Based on those declarations, the taxable income for an employee is finalized. This is when even before paying the monthly, the TDS is deducted from the salary of an employee.
WHAT IS SALARY?
Any form of payment to an employee from the employer, as specified in an employment contract. Or any other periodic earnings as a result of rendering services towards an establishment or employer also form salary. Hence, you belong to salaried-class if you have this employee-employer association.
Note: Advance salary, annuity, pension, wages, fees, commission, profits etc. Also come under the term salary according to the Income Tax Act, 1961.
HOW IS TDS CALCULATED?
When exemptions are reduced from the total earnings for a given year, the resultant is TDS. To claim a tax exemption, the employee needs to produce declaration and proof.
Under section 80C and 80D of the IT Act, 1961, the tax deductions are allowed. These deductions are in the form of investments one has made throughout the year.
Tax exemption can be claimed under the following categories:
House Rent Allowance: If accommodation rent is paid by an employee, HRA can be declared.
Conveyance or Travel allowance: The employer can claim deductions if the employees are provided with any such allowance.
Medical allowance: The employer can claim deductions if they provide with any such allowance to the employees.
Note: These allowances can be claimed to a maximum limit only as specified by the government.
HOW IS TDS DEDUCTED?
TDS covers up both expenses and incomes like a lottery, salary, rent payment, interest on investment, commission etc. whenever, any such payment is made, a portion of the payment is kept back at the source itself. The source is called ‘DEDUCTOR’ which may be a person or an organization. The one from whose account the amount is deducted is called ‘DEDUCTEE’.
EXEMPTIONS UNDER SECTION 80C
Section 80C allows an exemption of up to Rs. 1,50,000 from taxation. Following is a list of schemes considered for exemption under this section:
1. 5-year Fixed Deposit scheme
2. Premium paid for life insurance
3. Interest gained on NSC (National Saving Certificate)
4. Investment in ULIP, UTI or equity shares and mutual funds
5. Payment of Home loan and NSC (National Saving Certificate)
6. Contribution towards superannuation funds, 15 years PPF and statutory PF
EXEMPTIONS UNDER SECTION 80CCG
An exemption of up to Rs. 25000 is allowed on investments made under equity savings schemes. The time span should be three years minimum for any such scheme.
EXEMPTIONS UNDER SECTION 80D
Exemptions are offered for premiums paid for medical insurance. The dependents are parents are also included under this section.
HOW TO CALCULATE TDS?
Let us understand the TDS calculation with an example:
Step 1: let us say Raj’s monthly gross income is Rs. 80,000 which is a sum of basic salary, HRA, travel allowance, medical allowance, child education allowance (CEA) and other allowances which amount to Rs. 50,000, Rs. 20,000, Rs. 800, Rs. 1250, Rs. 200, Rs. 12,750 respectively.
Step 2: Raj lives at his own house which brings down the exemption to Rs. 2250 which is the sum of medical, CEA and travel allowance. Hence, Raj’s annual taxable income is Rs. (80,000-2250) * 12 = Rs. 9,33,000
Step 3: Raj has made investments worth Rs. 1,50,000 in various schemes under section 80C and Rs. 30,000 under section 80D. the taxable income remains to be Rs. 7,53,000
Step 4: Raj incurred a loss of Rs. 1,50,000 on house loan interest repayment. The final taxable income remains to be Rs. 6,03,000.
Step 5: In order to calculate the TDS, the slab needs to be identified under which Raj falls. Raj comes under the third slab which is:
Rs. 5 lakhs to Rs. 6.33 lakhs
TDS will be deducted at
20% of Rs. (6,03,000- 5,00,000) = Rs. 20,600
5% of Rs. (5,00,000-2,50,000) = Rs. 12,500
Hence, the total TDS to be deducted from Raj’s salary is Rs. (20,600 + 12,500) = Rs. 33,100.
FAQS on TDS
Q1. Section 80C covers which items for tax exemption?
Following is the list of items/schemes on which exemption can be claimed:
1. National Saving Certificate
2. Life insurance policy premium payment
3. Senior citizen savings scheme
4. 5-year fixed deposit
5. Investment in PPF
6. Sukanya Samriddhi Yojana account investment
7. notified annuity plan of LIC
8. notified bonds of NABARD
9. principal repayment amount of home loan
10. ELSS of mutual funds
11. Child’s tuition fee
Q2. Is HRA allowed to be claimed under deductions?
Yes, you can claim HRA for deductions upon declaration of the amount.
Q3. What is the maximum limit for exemption under section 80C?
A maximum of Rs. 1,50,00 can be claimed under this section.