Most of the organizations ask their salaried employees to send their investment declaration at the start of every financial year. These investment declarations are called for, so that tax deductions are done accordingly. Based on the investment declaration statement, the employer will estimate the taxable income and start deducting tax on a monthly basis in the form of tax deducted at source (TDS) before paying the monthly salary to the employee.
TDS is a medium of collecting Income Tax in India under the Indian Income Tax Act of 1961. TDS is applicable on salary, commission, royalty payments, brokerage, contract payments, interest earned on several financial investments, earnings from lotteries, rent income, professional fees, etc. TDS is managed by the Central Board for Direct Taxes (CBDT) and is a part of the Department of Revenue, which is managed by Indian Revenue Service (IRS). This amount is collected so as to keep the revenue source for the Government stable round the year. This prevents people from evading taxes.
A Salary is a form of payment from an employer to an employee, which may be specified in an employment contract. Or Salary can also be defined as the earnings that a person receives periodically for rendering services to an organization based on the contract. Therefore, in case you are in an employee-employer relationship, then you belong to the salaried class of individuals.
Note: Not all income can be termed as Salary. For instance, if a professional is being paid for his/her expertise in a professional capacity, it is termed as 'Professional/Technical Fees'. Or a partner earning a salary from his/her company is charged taxes under 'Profits & Gains from Profession or Business'.
Remember: As per the Income Tax Act, 1961 a salary includes wages, commission or fees profits or perquisites on salary, pension or annuity, salary advance etc.
If you ever noticed, the CTC (cost to company) that was quoted to you at the time of joining includes components like basic salary, travel allowance, medical allowance, house rent allowance, and other allowance. Also, Salary is divided into two major categories i.e.: Perquisites. Perks include facilities provided by the employer to the employee such as the travelling expenses, fuel expenses and so on.
Following are the rates for Tax Deduction at Source for the financial year 2017-2018:
| Particulars | TDS Rates (in %) |
|---|---|
| Section 192: Payment of salary | According to Income Slab as specified in Income Tax Rates |
| Section 192A: Payment of accumulated balance of provident fund which is taxable in the hands of an employee (with effect from 01.06.2015). | 10 |
| Section 193: Interest on securities | |
| a) any debentures or securities for money issued by or on behalf of any local authority or a corporation established by a Central, State or Provincial Act; | 10 |
| b) any debentures issued by a company where such debentures are listed on a recognized stock exchange in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and any rules made there under; | 10 |
| c) any security of the Central or State Government; | 10 |
| d) interest on any other security | 10 |
| Section 194: Dividend other than the dividend as referred to in Section 115-O | 10 |
| Section 194A: Income by way of interest other than "Interest on securities" | 10 |
| Section 194B: Income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort | 30 |
| Section 194BB: Income by way of winnings from horse races | 30 |
| Section 194C: Payment to contractor/sub-contractor | |
| a) HUF/Individuals | 1 |
| b) Others | 2 |
| Section 194D: Insurance commission | 5 (10% till Assessment year 2016-17) |
| Section 194DA: Payment in respect of life insurance policy | 1 (2% till 31-5-2016) |
| Section 194EE: Payment in respect of deposit under National Savings scheme | 10 (20% till 31-5-2016) |
| Section 194F: Payment on account of repurchase of unit by Mutual Fund or Unit Trust of India | 20 |
| Section 194G: Commission, etc., on sale of lottery tickets | 5 (10% till 31-5-2016) |
| Section 194H: Commission or brokerage | 5 (10% till 31-5-2016) |
| Section 194-I: Rent | |
| a) Plant & Machinery | 2 |
| b) Land or building or furniture or fitting | 10 |
| Section 194-IA: Payment on transfer of certain immovable property other than agricultural land | 1 |
| Section 194-IB: Payment of rent by individual or HUF not liable to tax audit Note: This provision is applicable from June 1, 2017 | 5 |
| Section 194-IC: Payment of monetary consideration under Joint Development Agreements | 10 |
| Section 194J: Any sum paid by way of a) Fee for professional services, b) Fee for technical services c) Royalty, d) Remuneration/fee/commission to a director or e) For not carrying out any activity in relation to any business f) For not sharing any know-how, patent, copyright etc. | 10 |
| Section 194LA: Payment of compensation on acquisition of certain immovable property | 10 |
| Section 194LBA(1): Business trust shall deduct tax while distributing, any interest received or receivable by it from an SPV or any income received from renting or leasing or letting out any real estate asset owned directly by it, to its unit holders. | 10 |
| Section 194LBB: Investment fund paying an income to a unit holder [other than income which is exempt under Section 10(23FBB)] | 10 |
| Section 194LBC: Income in respect of investment made in a securitization trust (specified in Explanation of Section 115TCA) | 25% in case of Individual or HUF 30% in case of other person |
| Any Other Income | 10 |
Following are the Income Tax rates for the Financial Year 2017-2018 (for individuals below 60 years)
| Annual Income | Tax Rates |
|---|---|
| Up to Rs.2,50,000 | Nil |
| Rs.2,50,001-Rs.5,00,000 | 5% |
| Rs.5,00,001-Rs.10,00,000 | Rs.12,500 + 20% of income above Rs 5 lakhs |
| Above Rs.10,00,000 | Rs.1,12,500 + 30% of income above Rs 10 lakhs |
Following are the Income Tax rates for the Financial Year 2017-2018 (applicable for individuals over 60 years and under 80 years)
| Annual Income | Tax Rates |
|---|---|
| Up to Rs.3,00,000 | Nil |
| Rs.3,00,001-Rs.5,00,000 | 5% |
| Rs.5,00,001-Rs.10,00,000 | Rs.10,00 + 20% of income above Rs 5 lakhs |
| Above Rs.10,00,000 | Rs.1,10,000 + 30% of income above Rs 10 lakhs |
Following are the Income Tax rates for the Financial Year 2017-2018 (applicable for individuals over 80 years and above)
| Annual Income | Tax Rates |
|---|---|
| Up to Rs.5,00,000 | Nil |
| Rs.5,00,001-Rs.10,00,000 | 20% of income above Rs 5 lakhs |
| Above Rs.10,00,000 Rs.1,12,500 | Rs.1,00,000 + 30% of income above Rs 10 lakhs |
Note: TDS should be deducted at applicable rates as above along with surcharge and Education Cess.
Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.
Health and Education Cess @ 4% of applicable Income Tax
As per Government Tax deductions are allowed under section 80C and section 80D of the Income Tax Act, 1961. This in turn allows an individual to look for various type of investments for a particular financial year.
TDS on salary can be calculated by reducing the exemption from total annual earning as specified by the Income Tax department. In case of tax exemption, the employer is required to obtain a declaration and proof from the employees to approve tax declaration.
One can consider the following categories for tax exemption.
House Rent Allowance: An employee can declare HRA (House Rent Allowance) from the employer if he/she is paying towards accommodation as rent.
Conveyance or Travel Allowance : In case if the employer provides you with such allowance, he/she can declare them for tax declaration.
Medical Allowance : In case the employer provides you with medical allowance, he/she can declare and produce medical bills for tax exemption.
However, there are limits to the maximum amount that can be considered for tax exemption.
In case an individual has paid a surplus amount as compared to the liable tax amount, the payee can file a claim for a refund of the excess amount. Also, the TDS deductions are calculated based on various factors for individuals from different types of income categories.
Both income and expenditure such as the salary, lotteries, interests from banks, rent payment, payment of commissions, and payments to freelancers etc. fall under the range of TDS. Therefore, when a payment is made under these segments, a percentage of the overall payment is withheld by the source that is making the payments. This source can be a person or an organization, known as the ‘Deductor’. And the person whose payment is getting deducted is called the Deductee.
For example: Amit works for an organization named KBL Corporation. In this case, KBL Corporation is a deductor who is paying salary to the employee who is the deductee.
Note: Under the laws stated by the Government, any kind of payment made from one party to another will be subject to TDS while complying with the provisions of the Income Tax Act, 1961. Here, the tax will be deducted at source and will be deposited to the Department of Income Tax.
Under Section 80C, an employee can declare maximum of Rs. 1,50,000 for tax exemption. Also, the following investment schemes can be considered for exemption under 80C.
Fixed deposit scheme for a period of minimum 5 years
Life insurance Premium paid
Interest earned through few of the National Savings Certificates are eligible for a certain amount of tax
Investment in mutual funds and equity shares, such as ULIP, Linked Saving Scheme of a Mutual Fund/UTI
Payments towards subscription for National Saving Certificates and Home Loan Account Scheme
Contribution to statutory PF, 15 years P.P.F., and superannuation funds
If the employee has made an investment under certain equity saving schemes, then he/she is eligible for a maximum of Rs.25,000 annual exemption. However, the investment should be made for at least 3 years from the date of scheme acquisition.
This Section offers exemption for premiums paid for Medical Insurance. Also, the exemption is extended to your dependents and parents.
Since the basic salary is fully taxable under the respective tax bracket, there are some exemptions available for payments made, allowances and perks. One can calculate TDS on income by following the below steps.
1) Calculate gross monthly income as a sum of basic income, allowances and perquisites.
2) Calculate exemptions under section 10 of the Income Tax Act (ITA). Exemptions are applicable on allowances such as medical, HRA, travel etc.
3) Reduce exemption as per step 2, for the gross monthly income calculated in step 1.
4) Since TDS is calculated on yearly income, multiply the corresponding figure from above calculation by 12. And this is your yearly taxable income from salary.
5) Also, in case you have any other income source, such as income from house rent or have incurred losses from paying housing loan interests, add/subtract this amount from the figure in step (4).
6) Then, calculate your investments, for the year which fall under Chapter VI-A of ITA, and deduct this amount from the gross income calculated in step (5).
For Example: Exemption of up to Rs.1.5 lakh under Section 80C, which includes investment avenues such as PPF, life insurance premiums, ELSS mutual funds, home loan repayment, NSC, Sukanya Samriddhi account, etc.
7) Now deduct, the maximum allowable income tax exemptions on a salary. In the current scenario, income up to Rs.2.5 lakhs is fully exempt from paying taxes, while income from Rs.2.5 lakhs to Rs.5 lakhs is taxed at 5%, and Rs.5 lakhs to Rs.10 lakhs income bracket is taxed at 20%. Also, all income above this is taxed at 30%.
8) Note: Senior citizens have different tax-slabs and also receive exemptions than those mentioned above.
Example: Below is an example based on the steps above:
Step 1 & 2 : Assume that your monthly gross income is Rs. 80,0000. And this contains several divisions like the basic salary of Rs. 50,000, HRA of Rs. 20, 000, travel allowance of Rs. 800, medical allowance of Rs. 1,250, child education of allowance (CEA) of Rs. 200 and other allowances that sum up to Rs. 12, 750.
Step 3 & 4 : Assume that you stay at your own property, the monthly exemption from allowances equals Rs. 2,250 (medical + travel + CEA). Therefore, your yearly taxable amount comes to (Rs.80,000 - Rs.2,250)*12, which comes to Rs. 9,33,000.
Step 5 : Suppose that you experienced a loss of Rs. 1.5 lakh on your house loan interest repayments over the year. Deducting this exempted amount from the taxable income, your taxable income becomes Rs. 7,83,000.
Step 6 : Now, suppose that you have invested Rs. 1.5 lakhs in various categories that fall under Section 80C exemptions and made another Rs.30,000 investment in categories falling under Section 80D. Therefore, deducing this amount invested Rs.1.2 lakhs in various categories that fall under Section 80C exemptions and made another Rs.30,000 investment in categories falling under Section 80D.
Step 7 : To find your tax slab.
The Tax breakup according to income slab listed by the Income Tax department is as follows:
| Income Tax Slab | TDS Deductions | Tax Payable |
|---|---|---|
| Up to Rs.2.5 lakhs | NIL | NIL |
| Rs.2.5 lakhs to Rs.5 lakhs | 5% of (Rs.5,00,000-Rs.2,50,000) | Rs.12,500 |
| Rs.5 lakhs to Rs. 6.33 lakhs | 20% of (Rs.6,33,000-Rs.5,00,000) | Rs.26,600 |
Hence, the final TDS to be deducted from your yearly income is Rs. 12,500 + Rs. 26, 600, which comes to Rs. 39,100 for the current year’s income or Rs. 3,258 per month for the current fiscal.
It is essential that you are honest with regards to details of your income and expenses for fiscal for tax calculation purposes. But there is a possibility that you may miss a few details such as income from the previous job when switching to a new job or additional income from a contractual opportunity. However, one should avoid doing so, as hiding or misrepresenting income sources will be heavily penalized by the respective tax authorities. Therefore, you have to ensure that all your data is in order and will hold up to any cross verification at a later stage to avoid problems with the taxman.
Ans: Deductions on the following items can be claimed under section 80C.
Ans: Yes, HRA can be claimed as an exemption, however, Employees will have to declare the amount paid as rent.
Ans:
Ans: The maximum amount that one can claim under Section 80C of the Income Tax Act is Rs.1.5 lakh.
Ans:
Note: 10% Surcharge will be applicable for income in excess of Rs. 50 lakh to Rs. 1 Crore and 15% on income in excess of Rs. 1 crore, and a 4% cess is also applicable on tax amount.
Ans: Ideally, a person who earns income is responsible to pay tax. However, if the employee deposits such tax then the employer will be liable for interest and penalty for failure to deduct tax.
Ans: Yes. The deductor is liable to issue the certificate on a plain paper giving necessary details of deduction and remittance.
Ans: If an employee is employed with more than one employer during the financial year, he may furnish the details of salary due or received from one employer to another employer in Form 12B.
Ans: Section 192 of Income Tax Act, 1961, contains provisions regarding TDS on salary. According to the Section, tax is ascertained “at the average of income-tax computed on the basis of the rates in force for the financial year”. It is important to note that there is no specified rate of TDS deduction from salary income. Instead, the rate comes down to the income tax slab applicable on the employee’s taxable income. The tax liability is calculated on the average rate of income tax.
