TDS, or Tax Deducted at Source, is a type of tax levied by the Indian government wherein taxes are collected on the basis of â€˜pay as you getâ€™. The taxes are deducted at the source of payments such as salary paid to an employee or commission earned by a broker. TDS provides a way for the government to ensure steady collection of taxes throughout the year, while a taxpayerâ€™s year-end tax calculations become simpler.
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 â€˜Professional/Technical Feesâ€™. Similarly, a partner earning salary from his/her company is charged taxes under â€˜Profits & Gains from Profession or Businessâ€™. 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 â€“ salary and perquisites. Perquisites, or perks as they are popularly called, include facilities and benefits provided by the employer towards expenses such as travelling, canteen and fuel subside, hotel expenses and so on.
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.
Example (linked to FY2014-15 lp)
As per the steps outlined above, lets consider a numeric example for better understanding.
- Steps (1) & (2)
- Steps (3) & (4)
- Step (5)
- Step (6)
- Step (7)
Suppose your monthly gross income is Rs.80,000. This figure may contain divisions as â€“ 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.
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 â€“ Rs.2,250)*12, which comes to Rs.9,33,000.
Letâ€™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.
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.
Finding out your tax slab
Your final tax breakup according to income slabs listed by the IT department is as follows:
|Income Slab||TDS Deductions||Tax Payable|
|Up to Rs.2.5 lakhs||NIL||NIL|
|Rs.2.5 lakhs to Rs.5 lakhs||10% of (Rs.5,00,000-Rs.2,50,000)||Rs.25,000|
|Rs.5 lakhs to Rs. 6.33 lakhs||20% of (Rs.6,33,000-Rs.5,00,000)||Rs.26,600|
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 yearâ€™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.
News About How to Calculate TDS from Salary
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.
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.
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.