During the time of paying a salary to an employee, the employer deducts TDS from the pay. The employer pays this amount to the government as specified in the Income Tax Act.
What is the TDS on salary?
- Working professionals are required to pay income tax under the Income Tax Act, 1961, using TDS.
- It applies to commissions, salary, brokerage, royalties, investment returns, contract payments, and other gains.
- CBDT is responsible for collecting and managing the TDS, which is a part of the Department of Revenue. The TDS amount received by the government is collected to prevent tax evasion.
An understanding of salary income
To understand how to calculate TDS on salary income, you must first understand salary income. Generally, a salary is an amount that an individual receives as compensation for providing services or skills. The income includes pensions, wages, annuities, perquisites, fees, commissions, and gratuities.
How is TDS determined?
Deductions and exemptions are deducted from your salary to calculate TDS.
CTC structures of every company include certain allowances for housing/accommodation, travel expenses, medical allowances, etc. These components of the income are called exemptions.
Income Tax Act Section 10 details these exemptions, including their maximum amount. Popular exemptions include:
- Rental Allowance for Houses
- Travel allowances for leave
- Allowance for medical treatment
In regards to the deduction, it is a collection of tax-saving options that can reduce tax liability. Among these are the Standard Deductions, which are available to all taxpayers. As a result, the gross taxable income is reduced by INR 50,000 when deducted from the gross salary.
To further reduce your taxable income, there are several other tax deductions you can claim in addition to the standard deduction. Under Section 80C, employees are able to save, invest, and spend money (for returns) on instruments that come with different lock-ins and market risks (for returns).
Under Section 80C, there are deductions for Public Provident Funds (PPFs), Tax Saving Fixed Deposits (5-years), National Pension Systems (NPSs), and Unit Linked Insurance Plans (ULIPs), and so on.
A contribution towards medical expenses for dependents can be deducted under Section 80D, and educational expenses can be deducted under Section 80E.
What are the steps to calculate TDS on a salary?
Calculating TDS on salary is as simple as following these steps:
Add the basic income, the perquisites (bonuses/incentives), and the allowances to get the gross monthly income. For example, consider a gross salary of INR 80,000.
Second next step
TDS is calculated based on the annual income received each year, so subtract exemptions from gross monthly income and multiply by 12 to get the annual taxable income.
If, for example, you include the following allowances in your gross monthly income:
INR 800 as travel allowance
Amount: 1,250 INR for medical allowance
CEA: 200 rupees
Therefore, your taxable income is as follows:
A taxable income is calculated as [80000 – ( 800 + 1250 + 200 ) x 12 = INR 9,33,000
To calculate Annual Taxable Income, subtract yearly investments.
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