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How is TDS Calculated on One's Salary?

There is a famous saying “Today it takes more brains and effort to make out the income tax form than it does to make the income”. What does one do when he finds his taxes too difficult to calculate? It is obvious he forgoes the amount. Many a time one is too casual with his taxes and negligence causes one to pay more than the amount which he needs to. Who has the time to bother about tax? If one cannot calculate his own taxes how will the Government do so is the common approach. Remember the Government knows how to extract taxes whether one is willing to pay it or not. One cannot fool the Government. Most of the time one lands up fooling himself.

What is tax deducted at source on salary?

  • One receives salary which is a remuneration or a payment for services rendered when one fulfils the terms and conditions of his contract of employment. One obtains a salary in exchange for services rendered from his employer. One needs to note that a relationship known as employer-employee needs to exist for one’s income to be taxed under the head “Income from Salary”.
  • One has heard the phrase “ Go to the root of the problem”. What does it mean? One would understand this as the root or the source of the problem. This would imply at the start or the beginning itself. Under the tax deducted at source the Government collects its due at the very source of one’s income. The Government collects one’s salary directly as it is being earned.
  • One’s employer pays a salary under the head “income from salary”. If this income one gets is above the basic tax exemption limit one’s Company would designate an officer to deduct tax at source from the salary.

How is TDS calculated on one’s salary?

  • One’s salary is divided into two parts the actual salary and the perquisites. One is paid a salary as a pure payout. Perquisites colloquially known as “Perks” might be a rent free accommodation, a car and a driver, servants, watchman, guards, as well as furniture, fridge or a television provided by the employer. Insurance and a gym membership might also be provided by ones employer or even an interest free loan.
  • One has a total cost to Company which is the sum of the gross salary, employee provident fund gratuity, ESIC, insurance and leave pay.

Step 1 : Components of one’s salary

  • One has a gross salary which consists of a number of components such as basic pay which is around 40-50% of one’s cost to Company. A dearness allowance is provided to protect an employee from the effects of inflation. House rent allowance, leave travel allowance, medical allowance, conveyance allowance, children’s education allowance, special allowance and certain other allowances are provided. One might have a bonus or commissions also as part of his gross salary.

Step 2 : Exemptions

  • One gets a medical allowance as part of the salary. This amount is tax exempt up to INR 15,000 per annum. One gets a conveyance allowance for commuting from ones home to the office. An amount of up to INR 800 per month is tax exempt. One gets a special allowance for carrying out duties in his official capacity and the expenses actually incurred are tax exempt.
  • Hostel expenditure allowance is granted to meet hostel expenses of one’s child. This amount is exempt from tax to the extent of INR 300 per month per child. One gets Children’s education allowances which are tax exempt up to an amount of INR 100 per month per child for a maximum of 2 children. Leave travel allowance is obtained by one from the employer for vacation travel. In order to obtain leave travel one needs to actually travel .If one resides on his own property then there is no HRA allowance.
  • One is not charged tax for the portion which is exempt.

Step 3 : What is the taxable amount on one’s gross salary?

  • One has to pay tax on the remaining amounts which is the gross salary minus the allowable exemptions subject to their limit. One now has the gross monthly pay which has to be multiplied by 12 in order to get the yearly projections if one calculates the TDS for the month of April.TDS is tax deducted at source which has to be calculated before one’s salary actually reaches his pocket. One has the yearly salary as a projection and it is assumed that one’s salary does not change in the year. If one calculates TDS at a later month or quarter then one needs to multiply the gross monthly pay with the remaining months of the year.
  • Mr Rajesh 38 years of age earns a gross salary of INR 60000 per month. Mr Rajesh basic pay is INR 34000 and his HRA is INR 17000.He gets conveyance allowance of INR 800 per month, medical allowance of INR 1250 per month and children’s education allowance of INR 200 for his two children .His other allowances are INR 7750.Since one pays income tax on his yearly income we project Mr Rajesh income for the whole year or get his projected salary payout. So in the case of Mr Rajesh one has INR 60000 his monthly salary minus INR 2250 the total of allowances available for deductions = INR 57750.This amount is projected on a yearly basis as (INR 57750 * 12) = INR 693000.

Step 4 : Income or a loss from house or a property

  • Any income such as income from house or property or a loss from house or a property or interest income from a bank fixed deposit needs to added or subtracted from the projected yearly income .Mr Rajesh has availed of a loan for his house and the interest component is tax deductible up to INR 150000 under Section 24 (b).Mr Rajesh gross total income is INR 693000 – INR 150000 = INR 543000.

Step 5 : Chapter V1 A Deductions

  • One has deductions under Chapter V1 A which gives one’s total taxable income. These are deductions from Section 80 C to Section 80 U. Mr Rajesh avails deductions on his insurance premium, public provident fund up to INR 1 Lakh. Mr Rajesh takes up a health policy for himself and his parents who are senior citizens and avails deductions of up to INR 35000 on the premiums paid under Section 80 D. Total taxable income will be INR 543000 – INR 100000 –INR 35000= INR 408000.

Step 6 : Calculate net taxable income

Individuals in India are classified under different income tax slabs based on their age and salary. If a male or female citizen of India is below 60 years of age he or she falls under the income tax slab shown. This rule also applies to a HUF (Hindu Undivided Family)

Annual Income Tax Rate
0- INR 2 Lakhs NIL
INR 2 Lakhs-INR 5 Lakhs 10%
INR 5 Lakhs - INR 10 Lakhs 20%
INR 10 Lakhs and above 30%
  • Mr Rajesh has a net taxable income of INR 408000.He is not taxed for an income up to INR 2 Lakhs which is the basic exemption limit.
  • Mr Rajesh pays tax @ 10% on INR 208000 which is INR 20800.He has to pay education cess at 2% and higher education cess at an extra 1%.
  • Mr Rajesh is charged cess and higher education tax at 3% which is 20800 @ 3% which is INR 624.Mr Rajesh has to pay a total tax of INR 21424 per annum.TDS is calculated on a monthly basis by dividing by 12 which is INR 1785 per month. Mr Rajesh is deducted TDS at the rate of INR 1785 per month.
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