What Is TDS? How Is It Calculated?

TDS payment is among the most prominent ways to collect tax from the liable individuals and entities as per the Income Tax Act. For the financial year 2020-21, the Gross TDS collections stand at around INR. 5.45 lakh crores.

TDS refers to a specified amount deducted when a certain payment is received. This payment includes salary, commission, rent, interest, or professional fees. The person (payer) who makes the payment siphons the due tax at the source and deposits it with the tax department. Thus, ultimately the person who receives the payment/income is actually liable to pay the tax. It reduces tax evasion since the tax is collected even before the taxpayer gets his payment.

After reducing TDS, the net amount is paid to the income recipient. The receiver adds the gross total amount to his or her income, and the TDS amount is deducted from his ultimate tax liability. The receiver can get a credit for the Tax amount deducted and already paid with the tax department on his behalf.

This blog will cover the main elements of TDS and how to calculate TDS.

TDS is deducted from the following types of payments:

• Salaries
• Bank interest payments
• Payment of commissions
• Payments for rent
• Fees for consultations
• Fees for professional services

When should one deduct TDS? Who is obligated to deduct it?

• Anyone making certain payments under the Income Tax Act is obligated to deduct TDS at the time when the payer makes the payment. However, there is no need for TDS deduction if the payer is an individual or a HUF who do not need to undergo an audit of their records.

• However, when an individual or HUF member pays rent over INR 50,000, a TDS of 5% is deducted, even if your books are not subject to a tax audit. If you have TDS deducted at the rate of 5%, you will not need to apply for a TAN (Tax Deduction Account Number).

• In the case of a working professional, your employer will deduct TDS based on the appropriate income tax band rates. The bank with whom you have an active account will deduct TDS at a rate of 10%. However, if one does not possess a PAN, then TDS at 20% shall get deducted. TDS rates are specified under the Income Tax Act for most payments, and the payer deducts TDS based on the rates applicable.

• If you submit investment evidence (for the purposes of deduction claim) to your current employer and your provisioned total taxable income is less than the taxable limit, then you do not have to pay any tax. As a result, no TDS gets deductible from your income. In the same way, if your gross total income is less than the taxable limit, you can send Forms 15G and 15H to the bank. On submission of such forms, one does not have to pay TDS on their interest income.

• Suppose you did not submit the investment evidence to your employer, and the bank deducted the TDS. In that case, you may submit your return and demand a refund if your total taxable income is less than the total taxable limit.

How to calculate TDS on salary?

People are frequently perplexed about how to calculate TDS on salary. TDS rates on salaries are the same as tax slab rates for people. If you are under age 60, your TDS duty will be zero if your annual income is below INR 2.5 lakh. Individuals earning between INR 2.5 lakh and INR 5 lakh would be liable to TDS of 5%. While those earning between INR5 lakh and INR10 lakh would have a TDS obligation of 20%, those making more than INR10 lakh will have a TDS liability of 30%.

For salaried individuals, no TDS is required for an annual income of up to INR 2.5 lakh. It is the basic exemption threshold.

In line with the recently introduced new tax regime, the tax liability is 5% for the part of the income between INR 2.5 lakh and INR 5 lakh. The tax liability is 10% for the portion of income between INR 5 lakh and INR 7.5 lakh. The tax liability is 15% for the part of income between INR 7.5 lakh and INR 10 lakh.

Understanding How to calculate TDS on salary using an example

The employer makes a TDS deduction on salary at the employee's "average rate" of income tax. This average rate is calculated in the following manner:

Average rate of Income tax = Payable Amount of Income tax ( using slab rates) / employee's income provisioned for the financial year.

For example, suppose Mr Kapoor (58 years old) is paid INR. 1,00,000 pm during the fiscal year 2010-21.
Total income will be INR 12, 00,000
The estimated deduction is INR 1,00,000
Income subject to tax will be INR 11, 00,000
According to u/s 192, his TDS on pay will be INR 1,42,500 at the current slab rate.
After deducting the 4% EHEC (education and higher education cess) i.e. INR 5 700, the net tax due is INR 1,48,200.
The average TDS rate on payment will be INR.1, 48,200 / 12, 00 ,000 X 100.
In other words, Mr. Kapoor TDS rate on pay will be 12.35 per cent.
His TDS on salary u/s 192 will get deducted monthly at the rate of (Rs 1, 00,000 x 12.35 per cent), or INR 12,350.

The TDS on salary is thus calculated by adjusting the amount of exemption and deduction from the employee's total yearly salary income. The Income Tax Department establishes the limit for such exemptions and deductions. When computing TDS on salary, the employer must get relevant documents and a self declaration made from the employee regarding the exemptions and deductions availed.

Allowances eligible for tax exemption:

House rent allowance

If an employee is paying rent for housing, he or she may be eligible for House Rent Allowance (HRA) from the company.

Leave Travel allowance

LTA (Leave Travel Allowance) is a form of allowance for employees by their employer/organization. Employees can use LTA to travel on leave from work, cover their travel expenditures, and collect the same from the organization.

Medical allowance

Minimum deduction instead of transportation and medical allowance, the government has granted a flat deduction of Rs 50,000.

According to the government's stated rules, every type of payment made from one person to another would be subject to TDS when complying with the terms of the Income Tax Act of 1961. TDS shall be deducted from the payment and remitted to the Department of Income Tax.

Common Deductions Available

Deduction as per Section 80C

An employee can report a maximum of INR 1 50,000 for tax deduction under Section 80C.

Deduction as per Section 80CCG

If the employee has invested in certain equity saving plans, he or she is eligible for a maximum yearly deduction of INR 25,000. The investment, however, shall be made for at least three years from the date of scheme ownership.

Deduction as per Section 80D

This Section allows deducting medical insurance premiums from the Gross total income. Additionally, the deduction is available for your dependents and parents.

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