TDS on Salary

Tax Deducted at Source (TDS) on salary is a critical component of the Indian taxation system, ensuring the timely collection of income tax from salaried individuals. For both employees and employers, understanding the rules governing TDS on salary is essential to avoid compliance issues and penalties. Here’s an in-depth guide to TDS on salary, including its calculation, filing requirements, and key provisions under the Income Tax Act, 1961.

What is TDS on Salary?

TDS on salary is the tax deducted by an employer at the time of paying a salary to an employee. Employers are required to deduct TDS under Section 192 of the Income Tax Act. The deducted amount is then deposited with the government on behalf of the employee.

How is TDS on Salary Calculated?

1. Determine Gross Salary:

Include basic pay, allowances, perquisites, and bonuses.

2. Deduct Eligible Exemptions:

Exemptions under Section 10, such as:

• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Conveyance Allowance

3. Deduct Eligible Deductions:

Deductions under Chapter VI-A, such as:

• Section 80C (Investments like PPF, LIC, etc.)
• Section 80D (Health Insurance Premium)
• Section 80G (Donations)

4. Apply Income Tax Slabs:

The residual income is taxed as per applicable income tax slabs (old or new regime).

TDS Deduction Process for Employers

1. Estimate Total Taxable Income: Employers must compute the employee’s total income based on declarations and proofs submitted.
2. Compute Tax Liability: Calculate tax as per applicable rates.
3. Deduct TDS Monthly: Divide the tax liability by 12 months and deduct the corresponding amount each month.
4. Deposit with the Government: Deposit the deducted TDS using Challan ITNS 281 by the 7th of the following month.
5. File TDS Returns: Employers must file Quarterly TDS Returns (Form 24Q) to report deductions.

TDS Certificate: Form 16

Employers issue Form 16, which serves as proof of TDS deducted and deposited. This certificate is crucial for employees when filing their Income Tax Returns (ITR).

Key Components of Form 16:

• Details of salary paid
• TDS deducted and deposited
• PAN and TAN of the employer
• Tax computation

Penalty for Non-Compliance

Failure to deduct or deposit TDS on salary can lead to:

• Interest under Section 201(1A)
• Penalty under Section 271C
• Disallowance of salary expenditure as a deduction

How Employees Can Reduce TDS on Salary

Employees can minimize TDS deductions by:

1. Submitting Investment Declarations at the start of the financial year.
2. Claiming exemptions like HRA or LTA.
3. Providing accurate proofs for deductions under Section 80C, 80D, etc.
4. Opting for the new tax regime if beneficial.

Important Due Dates Related to TDS on Salary

Note:

• The TDS deposit deadline for March is  30th April instead of the 7th of April.

Conclusion

TDS on salary ensures seamless tax compliance for both employees and employers. By understanding the provisions, keeping track of exemptions and deductions, and adhering to due dates, taxpayers can effectively manage their obligations and avoid penalties. For detailed guidance or assistance with TDS compliance, consult a trusted Chartered Accountant (CA).

FAQs on TDS on Salary

1. Is TDS deducted on all components of salary?
No, certain exemptions and deductions apply under Sections 10 and Chapter VI-A.

2. Can employees claim a refund for excess TDS?
Yes, employees can claim a refund while filing their Income Tax Returns.

3. What happens if the employer fails to deduct TDS?
The employer may face penalties and interest, and the employee may need to pay the tax directly.