Managing your taxes as a salaried employee in India is essential to avoid unnecessary financial stress. One of the ways the Indian tax system ensures regular tax compliance is through deduction of tax at source from salary or TDS (Tax Deducted at Source). TDS on salary is a form of advance tax where your employer deducts a portion of your income as tax every month, making it easier for salaried individuals to pay taxes over time.
This blog covers the essentials of TDS on salary, its calculation, key exemptions, and more, to help you understand how TDS works for salaried employees in India.
Deduction of Tax at Source from Salary
In India, the Income Tax Department requires employers to deduct tax from an employee’s salary based on the estimated income for the financial year. This concept, known as deduction of tax at source from salary, helps ensure that tax is paid at regular intervals. By deducting tax every month, TDS minimizes the risk of non-compliance and makes tax payments easier for employees.
The TDS deduction from salary is governed by Section 192 of the Income Tax Act, 1961, and is influenced by the employee’s income, applicable exemptions, and deductions. Let’s explore how TDS on salary works and what factors impact the TDS amount.
How is TDS on Salary Calculated?
The deduction of tax from salary is calculated by the employer based on the following key factors:
1. Income Tax Slab Rates
The TDS amount is determined by the employee’s taxable income and the income tax slabs applicable to them. For individual taxpayers under 60 years, the income tax slabs for Financial Year 2023-24 are as follows:
- Income up to ₹2.5 lakh**: No tax
- Income between ₹2.5 lakh and ₹5 lakh**: 5%
- Income between ₹5 lakh and ₹10 lakh**: 20%
- Income above ₹10 lakh**: 30%
The taxable income is calculated by considering both the basic salary and additional benefits such as allowances, bonuses, and perquisites.
2. Exemptions and Deductions
Deductions under Section 80C (up to ₹1.5 lakh), 80D (for medical insurance premiums), and the standard deduction of ₹50,000 are commonly claimed by employees. These exemptions reduce the taxable income and, consequently, the TDS amount deducted each month. Other deductions, such as those under Section 80E (education loans) and Section 80G (donations), also contribute to reducing TDS liability.
3. Declaration and Submission of Investment Proofs
At the beginning of each financial year, employees must declare their planned investments. Employers adjust the TDS calculation based on these declarations, but employees are required to submit proof of investments at the end of the year to validate their claims.
Step-by-Step Process for TDS Deduction on Salary
The deduction of tax at source from salary follows a specific process from calculation to remittance:
1. Income Estimation : Employers estimate the annual salary income and consider the declared investments and eligible deductions.
2. Monthly Deduction : TDS is deducted each month based on the projected annual income.
3. Payment to Government : Employers are required to remit the deducted TDS to the government by the 7th of the subsequent month.
4. Form 16 Issuance : At the end of the financial year, employers provide Form 16, summarizing the total salary paid, TDS deducted, and other details.
Important Documents Required for Claiming TDS Benefits
To claim the correct TDS benefits, employees must submit the following documents to their employer:
- Investment Proofs : Documents like receipts of life insurance premiums, fixed deposit certificates, and mutual fund statements.
- Rent Receipt : If claiming House Rent Allowance (HRA) exemption, rent receipts or a rental agreement must be provided.
- Medical Bills : For those claiming deductions under Section 80D for health insurance, premium payment receipts and medical bills are necessary.
Common Exemptions and Deductions for Reducing TDS Liability
1. Standard Deduction
The standard deduction of ₹50,000 is automatically available to all salaried individuals, reducing their taxable income by this amount. It applies regardless of the salary amount or other deductions claimed.
2. House Rent Allowance (HRA)
Employees receiving HRA as part of their salary can claim an exemption on it if they are paying rent. The exemption depends on factors such as the basic salary and the rent paid.
3. Deductions under Section 80C
Section 80C allows for deductions of up to ₹1.5 lakh on eligible investments, including life insurance premiums, Employee Provident Fund (EPF) contributions, Public Provident Fund (PPF) contributions, and tuition fees for children.
FAQs
1. What is the deduction of tax at source from salary?
The deduction of tax at source from salary is the process by which an employer deducts income tax from an employee’s salary and remits it to the government. It is done monthly to ensure that the employee’s tax liability is met in installments rather than a single, year-end payment.
2. Can I claim a refund if excess TDS is deducted?
Yes, if excess TDS has been deducted, you can claim a refund by filing your income tax return (ITR). The excess amount will be refunded after the assessment by the Income Tax Department.
3. How is TDS different from Income Tax?
While both TDS and income tax are forms of tax on income, TDS is deducted at the source by the employer, while income tax may be paid directly by the individual through self-assessment or advance tax payments.
4. What should I do if my employer does not deduct TDS?
If your employer does not deduct TDS and your income is taxable, you are responsible for paying advance tax or self-assessment tax. Failure to do so can result in penalties.
5. Where can I check my TDS details?
You can check your TDS details on the Income Tax Department’s TRACES portal (https://www.tdscpc.gov.in) or by viewing Form 26AS through the e-filing portal.
Conclusion
Understanding the deduction of tax at source from salary is crucial for effective tax planning and financial stability. This monthly deduction ensures that salaried individuals meet their tax obligations without a last-minute financial burden. By being aware of income tax slabs, exemptions, and investment declarations, employees can make the most of TDS deductions and avoid over-deductions or underpayments.
