TDS on Salary
Have you ever been perplexed by the significant gap between your gross salary and the amount in your bank account? Taxes are a prominent culprit in this discrepancy. Employers typically deduct taxes from your salary before depositing it into your account and remit the deducted amount to the government. This practice is known as Tax Deduction at Source (TDS).
In this article, we will delve into the intricacies of TDS on salary under Section 192 of the Income Tax Act, 1961, shedding light on who can deduct TDS, when it is deducted, how it is calculated, and other crucial aspects.
Who Can Deduct TDS Under Section 192?
TDS on salary can be deducted by a wide range of employers, including:
- Companies (Private or Public)
- Hindu Undivided Families (HUF)
- Partnership firms
- Co-operative societies
Regardless of their legal status (e.g., HUF, firms, or companies), the crucial factor for TDS deduction is an employer-employee relationship. According to Section 192 of the Income Tax Act, the tax deduction at source hinges on this relationship. The number of employees under an employer also does not impact the requirement to deduct TDS.
When is TDS Deducted Under Section 192?
Under Section 192, TDS is deducted at the time of actual salary payment, not during salary accrual. Tax will be deducted when the employer disburses salary, whether in advance, on time, or even in arrears (late payment).
If an employee’s estimated annual salary falls below the basic exemption limit, their tax payable will be zero, and consequently, TDS will not be deducted. This rule applies even if the employee does not possess a Permanent Account Number (PAN).
The basic exemption limits for various age groups are as follows:
- Residents in India below 60 years: Rs 2.5 lakh
- Senior Citizens aged 60 to 80 years: Rs 3 lakh
- Super Senior Citizens above 80 years: Rs 5 lakh
How to Calculate TDS on Salary under Section 192?
Calculating TDS on salary involves several steps:
Step 1: Estimate the employee’s annual salary for the relevant financial year, which includes components like basic pay, dearness allowance, perquisites, allowances (HRA, LTA, etc.), EPF contributions, bonuses, commissions, gratuity, and previous employer’s salary if applicable.
Step 2: Calculate exemptions under Section 10 of the Income Tax Act. These exemptions can apply to various allowances and expenses like HRA, travel expenses, uniform expenses, children’s education allowances, and more. Deduct the professional tax, entertainment allowance, and standard deduction of Rs 50,000.
Step 3: Subtract the exemptions calculated in Step 2 from the gross monthly income to arrive at the taxable salary income.
Step 4: If the employee has additional income sources, such as rental income or bank deposits, add or subtract them as appropriate. Adjust the interest paid on housing loans if applicable. The result is the employee’s gross total income.
Step 5: Reduce the investments declared by the employee under Chapter VI-A of the Income Tax Act. These investments can include PPF, employee’s provident fund, ELSS mutual funds, NSC, Sukanya Samriddhi account, as well as expenses such as home loan repayments and life insurance premiums. Deductions under other sections like 80D and 80G may also apply.
Note: Starting from the financial year 2023-24, the new tax regime is the default option. Employees must inform their employers of their preferred tax regime when making investment declarations. The new tax regime offers fewer exemptions and deductions compared to the old regime, and the employer calculates the net taxable income based on the chosen regime.
Rate of TDS Deduction
Section 192 does not specify a fixed TDS rate. The TDS deduction is based on the income tax slab rates applicable to the taxpayer for the relevant financial year in which the salary is paid. Employers typically calculate the TDS at the start of the financial year by dividing the employee’s estimated annual tax liability by the number of months in their employment under that particular employer.
In cases where the employee lacks a PAN, TDS will be deducted at a rate of 20% plus a 4% cess. Any excess or deficit from previous deductions is adjusted by varying subsequent deductions within the same financial year. If the employee has already made advance tax payments, this information should be communicated to the employer for adjustment.
Salary from More Than One Employer
If an individual works for multiple employers concurrently, they can provide details of their salary and TDS in Form 12B to one of the employers. This employer is then responsible for calculating the gross salary and deducting TDS.
When switching to a different employer, the employee can provide the details of their previous employment through Form 12B. The new employer will deduct TDS for the remaining months of the financial year.
If the employee chooses not to share income details with other employees, each employer will deduct TDS only from the salary they disburse.
Deductions Under Section 89
To reduce taxable income and lower the tax liability, individuals can claim various deductions. Section 89 of the Income Tax Act allows for adjustments in cases where a salary is paid by government organizations, companies, cooperative societies, local authorities, universities, associations, or bodies, and the salary or arrears thereof fall into a higher tax slab due to rate changes.
To benefit from this adjustment, one must file Form 10E on the official income tax portal; failing to do so will result in the forfeiture of relief under Section 89.
Employers are obligated to provide Form 16 to their employees, which contains details of the salary amount paid and tax deducted. Additionally, Form 12BA may accompany Form 16, offering information about perquisites and profits in lieu of salary.
Time Limit for Tax Deposit under Section 192
The time limit for depositing tax under Section 192 depends on whether the TDS is deducted by a government employer or a non-government employer:
- Government employer: TDS must be deposited on the same day.
- Non-government employer: TDS deducted in March should be deposited on or before April 30th, while TDS deducted in months other than March should be deposited within seven days of the following month.
TDS Return Filed by the Employer
Employers are required to file a salary TDS return in Form 24Q, submitted on a quarterly basis. This return includes details of salary payments and TDS deductions for employees.
Form 24Q comprises two annexures, Annexure I and Annexure II. Annexure I is filed for all four quarters of the fiscal year, while Annexure II is required only for the January-Mar quarter.
If an employer fails to deduct TDS or deducts it at a lower rate, they must provide reasons for their actions.
Employers are responsible for providing employees with a TDS certificate, typically in the form of Form 16. This certificate is generated after filing the TDS return and can be downloaded from the TRACES utility. Form 16 contains Part A and Part B, with Part A detailing quarterly TDS deductions, PAN and TAN information of the employer, and other particulars, while Part B provides a salary breakdown, exemptions, deductions under Chapter VI-A, and the income tax amount.
TDS on salary under Section 192 of the Income Tax Act is a crucial mechanism for ensuring that employees meet their tax obligations. Understanding how TDS is calculated and the rules surrounding its application is essential for both employers and employees. By complying with these regulations, individuals can effectively manage their tax liabilities and stay in good standing with the tax authorities.