What is TDS?
Tax Deducted at Source (TDS) is applicable for individuals and businesses, the payee is required to collect tax at source before making certain types of payments for rendering specific services. The types of payments include salary, fees, interest, rent, commission, etc. The payee is directed to collect a certain percentage of TDS that is sent to the Central Government.
How do you define Salary?
Salary is defined as the remuneration that a person receives periodically for rendering services based on an implied or express contract. If you are in an employee-employer relationship, you belong to the salaried class of individuals.
However, not all income is termed as salary. If a professional is being paid for his/her expertise in a professional capacity, it is termed as 'Professional/Technical Fees'. Similarly, a partner earning salary from his/her company is charged taxes under 'Profits & Gains from Profession or Business'. Other examples include the salary paid to a Member of Parliament or a Member of Legislative Assembly. According to the Indian Income Tax Act (ITA), 1961, a salary includes pension or annuity, wages, commission or fees, gratuity, profits or perquisites on salary, salary advance etc.
What is TDS Calculated on?
The CTC quoted to you at the time of joining includes components such as basic salary, travel allowance, house rent allowance, medical allowance, dearness allowance, special allowances and other allowances. The CTC is divided into two major categories : salary and perquisites. Perquisites, or perks as they are popularly called, include facilities and benefits provided by the employer towards expenses such as traveling, canteen and fuel subside, hotel expenses and so on.
TDS Rate Chart :
Rates for Tax Deduction at Source for FY 2017-18
|Particulars||TDS Rates (in %)|
|Section 192: Payment of salary||According to Income Slab as specified above|
|Section 192A: Payment of accumulated balance of provident fund which is taxable in the hands of an employee (with effect from 01.06.2015).||10|
|Section 193: Interest on securities|
|a) any debentures or securities for money issued by or on behalf of any local authority or a corporation established by a Central, State or Provincial Act;||10|
|b) any debentures issued by a company where such debentures are listed on a recognized stock exchange in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any rules made there under;||10|
|c) any security of the Central or State Government;||10|
|d) interest on any other security||10|
|Section 194: Dividend other than the dividend as referred to in Section 115-O||10|
|Section 194A: Income by way of interest other than "Interest on securities"||10|
|Section 194B: Income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort||30|
|Section 194BB: Income by way of winnings from horse races||30|
|Section 194C: Payment to contractor/sub-contractor|
|Section 194D: Insurance commission||5 (10% till Assessment year 2016-17)|
|Section 194DA: Payment in respect of life insurance policy||1 (2% till 31-5-2016)|
|Section 194EE: Payment in respect of deposit under National Savings scheme||10 (20% till 31-5-2016)|
|Section 194F: Payment on account of repurchase of unit by Mutual Fund or Unit Trust of India||20|
|Section 194G: Commission, etc., on sale of lottery tickets||5 (10% till 31-5-2016)|
|Section 194H: Commission or brokerage||5 (10% till 31-5-2016)|
|Section 194-I: Rent|
|a) Plant & Machinery||2|
|b) Land or building or furniture or fitting||10|
|Section 194-IA: Payment on transfer of certain immovable property other than agricultural land||1|
|Section 194J: Any sum paid by way of a) Fee for professional services, b) Fee for technical services c) Royalty, d) Remuneration/fee/commission to a director or e) For not carrying out any activity in relation to any business f) For not sharing any know-how, patent, copyright etc.||10|
|Section 194LA: Payment of compensation on acquisition of certain immovable property||10|
|Section 194LBA(1): Business trust shall deduct tax while distributing, any interest received or receivable by it from an SPV or any income received from renting or leasing or letting out any real estate asset owned directly by it, to its unit holders.||10|
|Section 194LBB: Investment fund paying an income to a unit holder [other than income which is exempt under Section 10(23FBB)]||10|
|Section 194LBC: Income in respect of investment made in a securitization trust (specified in Explanation of Section 115TCA)||25% in case of Individual or HUF 30% in case of other person|
|Any Other Income||10|
TDS Deduction Rate for Financial Year 2017 - 2018
Tax applicable for individuals below 60 years
|Annual Income||Tax Rates||Education Cess||Secondary and Higher Education Cess|
|Up to Rs.2,50,000||Nil||Nil||Nil|
|Rs.2,50,001-Rs.5,00,000||5%||2% of income tax||1% of income tax|
|Rs.5,00,001-Rs.10,00,000||Rs.12,500 + 20%||2% of income tax||1% of income tax|
|Above Rs.10,00,000||Rs.1,12,500 + 30%||2% of income tax||1% of income tax|
Tax applicable for individuals over 60 years and under 80 years
|Annual Income||Tax Rates||Education Cess||Secondary and Higher Education Cess|
|Up to Rs.3,00,000||Nil||Nil||Nil|
|Rs.3,00,001-Rs.5,00,000||5%||2% of income tax||1% of income tax|
|Rs.5,00,001-Rs.10,00,000||Rs.10,00 + 20%||2% of income tax||1% of income tax|
|Above Rs.10,00,000||Rs.1,10,000 + 30%||2% of income tax||1% of income tax|
Tax applicable for individuals over 80 years and above
|Annual Income||Tax Rates||Education Cess||Secondary and Higher Education Cess|
|Up to Rs.5,00,000||Nil||Nil||Nil|
|Rs.5,00,001-Rs.10,00,000||20%||2% of income tax||1% of income tax|
|Above Rs.10,00,000 Rs.1,12,500||Rs.1,00,000 + 30%||2% of income tax||1% of income tax|
TDS should be deducted at applicable rates as above along with surcharge and Education Cess.
How is TDS calculated?
The government allows tax exemption under Section 80C and 80D. This allows an individual to seek for exemption on tax based on various types of investment he/she is making for that particular financial year. The TDS on salary can be calculated by reducing the exemption from total annual earning as specified by the Income Tax department. The employer is required to obtain a declaration and proof from individuals to approve tax exemption. The following categories are considered for exemption:
- House Rent Allowance - If an employee is paying towards accommodation as rent and entitled for HRA from the employer, the employee can declare this amount for tax exemption.
- Conveyance or Travel Allowance - If an employee is provided with conveyance allowance, the employee can declare them for tax exemption.
- Medical Allowance - If an employee is entitled to a medical allowance, he/she can declare and produce medical bills for tax exemption.
There are limits to the maximum amount that can be considered for exemption.
The following process is involved in the deduction of TDS:
- Calculating total earning - The employer is required to calculate the total earning of the employee.
- Calculating total amount eligible for the exemption - The employer is accountable for calculating the total amount that is considered for tax exemption. The employee needs to declare the type of amount that is eligible for exemption.
- Obtaining declaration and investment proof - The employer is required to collect investment and proofs from employees
- Depositing TDS deductions - The employer will require depositing the collected TDS to the central government.
An employee can declare for a maximum of Rs.1,50,000 for tax exemption. The following investments schemes are considering for exemption under 80C:
- Investment in mutual funds and equity shares, such as ULIP, Linked Saving Scheme of a Mutual Fund/UTI
- Life insurance Premium paid
- Contribution to statutory PF, 15 years P.P.F., and superannuation funds
- Payments towards subscription for National Saving Certificates and Home Loan Account Scheme
- Interest earned through few of the National Savings Certificates are eligible for a certain amount of tax
- Fixed deposit scheme for a period of minimum 5 years
An employee is eligible for a maximum of Rs.25,000 annual exemption if the employee has made an investment under certain equity saving schemes. The investment should be made for at least 3 years from the date of scheme acquisition.
The section 80D offer exemption for the premiums paid for a Medical Insurance. The exemption is also extended to the individual's dependents.
There are various other Sections that regulates many other types of exemptions.
How do I calculate TDS on my salary?
While the basic salary is fully taxable according to respective tax bracket, some exemptions are available for payments made as allowances and perks. You can calculate TDS on your income by following the below steps.
- Calculate gross monthly income as a sum of basic income, allowances and perquisites.
- Calculate available exemptions under Section 10 of the Income Tax Act (ITA). Exemptions are applicable on allowances such as medical, HRA, travel.
- Reduce exemptions according to step (2) for the gross monthly income calculated in step (1).
- As TDS is calculated on yearly income, multiply the corresponding figure from above calculation by 12. This is your yearly taxable income from salary.
- If you have any other income source such as income from house rent or have incurred losses from paying housing loan interests, add/subtract this amount from the figure in step (4).
- Next, calculate your investments for the year which fall under Chapter VI-A of ITA, and deduct this amount from the gross income calculated in step (5). An example of this would be exemption of up to Rs.1.5 lakh under Section 80C, which includes investment avenues such as PPF, life insurance premiums, mutual funds, home loan repayment, ELSS, NSC, Sukanya Samriddhi account and so on.
- Now, reduce the maximum allowable income tax exemptions on a salary. Currently, income up to Rs.2.5 lakhs is fully exempt from paying taxes, while income from Rs.2.5 lakhs to Rs.5 lakhs is taxed at 10%, and Rs.5 lakhs to Rs.10 lakhs income bracket is taxed at 20%. All income above this amount is taxed at 30%.
- Do note that senior citizen have different tax slabs and receive higher exemptions than those discussed above.
As per the steps outlined above, let’s consider a numeric example for better understanding.
- Steps (1) & (2)
- Suppose your monthly gross income is Rs.80,000. This figure may contain divisions as - basic pay Rs.50,000, HRA of Rs.20,000, travel allowance of Rs.800, medical allowance of Rs.1,250, child education allowance (CEA) of Rs.200 and other allowances totalling 12,750.
- Steps (3) & (4)
- Assuming that you stay at your own property, your monthly exemption from allowances equals Rs.2,250 (medical + travel + CEA). Therefore, your yearly taxable amount comes to (Rs.80,000 - Rs.2,250)*12, which comes to Rs.9,33,000.
- Step (5)
- Let's say you just experienced a loss of Rs.1.5 lakhs on house loan interest repayments over the year. Reducing this exempted amount from the taxable income, your taxable income becomes Rs.7,83,000.
- Step (6)
- Suppose you have invested Rs.1.2 lakhs in various categories that fall under Section 80C exemptions, and made another Rs.30,000 investment in categories falling under Section 80D. So, the resulting Rs.1.5 lakhs is exempted from taxes according to Chapter VI-A. Deducting this amount from the gross taxable income calculated above, your taxable income becomes Rs.6,33,000.
- Step (7)
- Finding out your tax slab
Your final tax breakup according to income slabs listed by the IT department is as follows:
- Income Tax Slab
- TDS Deductions
- Tax Payable
- Up to Rs.2.5 lakhs
- Rs.2.5 lakhs to Rs.5 lakhs
- 10% of (Rs.5,00,000-Rs.2,50,000)
- Rs.5 lakhs to Rs. 6.33 lakhs
- 20% of (Rs.6,33,000-Rs.5,00,000)
- Therefore, the final TDS to be deducted on your yearly income is Rs.25,000 + Rs.26,600, which comes to Rs.51,600 for current year's income, or Rs.4,300 per month for the current fiscal.
Importance of filing correct Tax Returns:
It is imperative that you are honest about the details of all your income and expenses for a fiscal for tax calculation purposes. Sometimes, you may miss a few details such as income from previous job when switching to a new job, or additional income from a contractual opportunity. This should not happen as hiding or misrepresenting income sources will be heavily penalised by the respective tax authorities. You have to ensure that all your data is in order and will hold up to any cross verification at a later stage to avoid problems with the taxman.
Frequently Asked Questions
- What is the TDS rate for FY 2017-18?
- Can HRA be claimed as a deduction when calculating TDS?
- How much deduction can I claim under Section 80C when calculating TDS?
- What items are allowed for TDS exemption?
For individuals under 60 years of age, the tax rate for income up to Rs.2.5 lakh is nil. The tax for income between Rs.2.5 lakh and Rs.5 lakh is 5%. The rate for income between Rs.5 lakh and Rs.10 lakh is 20%. The rate for income in excess of Rs.10 lakh is 30%.
For individuals between 60 and 80 years of age, the rate for income up to Rs.3 lakh is nil. The rate for income between Rs.3 lakh and Rs.5 lakh is 5%. The tax rate for income between Rs.5 lakh and Rs.10 lakh is 20%, and the rate for income in excess of Rs.10 lakh is 30%.
For individuals above 80 years of age, income up to Rs.5 lakh is exempt from tax, while income between Rs.5 lakh and Rs.10 lakh is 20%, and income above Rs.10 lakh is charged at 30%.
Surcharge will be applicable for individuals who earn income in excess of Rs.50 lakh, and a 3% cess is also applicable on tax plus surcharge.
Employees will have to declare the amount paid as rent and it can be claimed as an exemption.
The maximum amount that can be claimed under Section 80C of the Income Tax Act is Rs.1.5 lakh.
The following items are eligible for exemption:
- PPF (Public Provident Fund)
- ELSS (Equity Linked Savings Scheme)
- Contribution to EPF (Employees Provident Fund)
- Bank FDs
- NSC (National Savings Certificate)
- Premiums paid towards life insurance policies
- Repayment of home loan principal amount
- Transport allowance
- House Rent Allowance
- Savings under Section 80C of the Income Tax Act, 1961
Here is a list of items on which deductions can be claimed under Section 80C:
- Investment in Public Provident Fund
- National Savings Certificate
- Employee’s share of Provident Fund contribution
- Premium payment towards life insurance policies
- Tuition fees of children
- Home loan principal repayment amount
- Unit linked insurance plans
- Equity linked savings schemes
- Investment in Sukanya Samriddhi Account
- Amount paid to buy deferred annuity
- Senior Citizens savings scheme
- 5-year deposit scheme
- Subscription to notified deposits scheme / notified securities
- Subscription to National Housing Bank’s Home Loan Account Scheme
- Contribution to LIC’s notified annuity plan
- Subscription to deposit scheme of companies involved in offering housing finance or public sector companies
- Contribution to notified Pension Fund set up by UTI or Mutual Fund
- Subscription to NABARD’s notified bonds
- Subscription to debentures / equity shares of approved eligible issues
News About How to Calculate TDS from Salary
Salaried Class Content with Tax Reduction After Having High Hopes
The salaried class expressed its joy at the reduction of the tax rate from 10% to 5%, but maintained that the government could have lowered it further. One of the teachers from a private-aided school, Rajesh Pandya, revealed that many including himself were waiting for the government to take such a step, and that they are happy now that it has finally been taken. Mr Pandya added that although the government has reduced tax, it continues to tax individuals in the forms of various cesses. He said that such forms of taxes could be removed, adding that Maharashtra is among the few states that also charges a ‘professional tax’ to add to other taxes. Many salaried individuals were of the same opinion and were relatively happy with the reduction in taxes, but expected more from the budget meeting.
7 February, 2017
TDS not valid for MACT compensation
The Madras High Court in Chennai has ruled that TDS is not applicable on compensation awarded under the Motor Accident Claim Tribunal or on the interest accrued by this compensation amount.
The debate centered around the question whether compensation received under MACT by any accident victim should be considered as taxable income or not. The Chennai High Court however, was quite clear on its stand and has denied classifying this compensation as taxable income. Justice MV Muralidharan was the judge who passed this judgement. The court said that the Motor Vehicles Act has been enacted to offer financial compensation to victims and their family whereas the Income Tax Act is primarily intended for tax collection. Hence, the two cannot be mixed and any compensation amount under MACT and any interest accrued on the same is not to be considered as taxable income.
8 June, 2016
Draft Guidelines on Foreign Tax Credit revealed by Government
Overseas income has always been a source of confusion in the country, with both corporates and individuals with such income finding it hard to get clarity on taxes in such cases. The government, in a bid to ease this confusion has released a set of new draft proposals, termed Foreign Tax Credit (FTC) rules. These new rules will allow an assessee credit on the tax paid by him/her in a foreign country ensuring that double taxation is avoided.
Entities can utilise this credit against Minimum Alternate Tax, surcharge and cess in India, with the exemptions being any penalty, fee or interest on tax paid in a foreign country. Assessees can claim this credit by submitting a certificate issued by the tax agency of the country in which they paid the tax, indicating the amount paid and the source of income for said tax.
For Tax Deducted at Source (TDS) on Salary requires to revise to allow taking the foreign tax credit to deduct tax from salaries of foreign working employees in India.
19 April, 2016
IT Department Issues Notices to Companies for Failure to File Returns on TDS
Over 1,000 firms received notices calling for reasons why tax returns pertaining to TDS were not filed. Promoters of start-ups also received these notices. Recipients are required to provide information supporting TDS payments made from 2012 - 2015 along with satisfactory explanations for not filing returns as required. A number of government companies are also under the IT department scanner for non-filing of TDS returns.
Non-filing or delay in filing of TDS returns beyond one year of the filing date attracts penalties ranging from Rs.10,000 to Rs.1 lakh. An estimated Rs.1,000 crore is due from defaulters. IT officials are not just looking at collecting penalties but also prosecuting defaulters.
3 September, 2015