If you are a salaried professional or individual, you need to be aware of the different terms and regulations related to your salary income. While you may be aware of the fundamentals like gross and net salary and the various deductions, you should also know how to calculate the TDS on salary.
For all employees whose income exceeds the basic exemption limit, tax will be deducted at source from the salary before it is paid out each month. If you take a closer look at your salary slip, you may find the TDS details readily available.
But what is TDS on salary, why is it deducted and how to calculate the TDS on salary? Let’s find out the answers to these questions in the sections below.
Also Read More About Types of TDS
What is TDS on Salary?
TDS is an acronym for the tax deducted at source. In the context of TDS on salary, the term refers to the amount of tax that an employer deducts from an employee’s salary before it is paid to the recipient. The employer then deposits the tax deducted with the Income Tax Department.
To better understand how to calculate the TDS on salary under section 192 of the Income Tax Act, you need to first understand how the TDS rate is determined for each employee. Contrary to the popular misconception, the TDS rate is not fixed. Instead, it depends on each employee’s total tax liability and their total income.
How to Calculate TDS on Salary?
The onus of deducting and depositing tax on salary lies with the employer. Nevertheless, it helps if employees also know the process of how to calculate the TDS on salary. Let us take a closer look at the key steps involved in determining the amount of tax to be deducted from your salary.
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Step 1: Calculate the Net Salary Income
The first step is to find your net salary income. To do this, add the different allowances paid by your employer to the basic salary. Then, deduct eligible exemptions from the total amount to find the gross salary.
The deductions allowed depend on the tax regime you choose. In the old tax regime, House Rent Allowance (HRA), Leave Travel Allowance (LTA), entertainment allowance etc. are allowed as deductions either partly or fully. In the new tax regime, they are not deductible.
Once you have the gross salary, subtract the standard deduction and the professional tax (only allowed in the old tax regime) to find the net salary income.
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Step 2: Calculate Income Under Other Heads
If you have any other income like interest from deposits or savings accounts, rental income, capital gains or the like, calculate the taxable income under each head or category.
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Step 3: Find the Total Income
Add the taxable income under the five heads of income to find your total income.
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Step 4: Find the Total Taxable Income
From your total taxable income, subtract the eligible deductions under Chapter VI-A of the Income Tax Act to find your total taxable income.
The deductions allowed in this case also depend on your choice of tax regime. For instance, if you choose the old tax regime, all the deductions under sections 80C, 80D, 80G etc. will be available to you. However, in the new tax regime, only select deductions (such as u/s 80CCD) are allowed.
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Step 5: Estimate the Total Tax Liability
Once you have your total taxable income for the financial year, the relevant income tax slab rate is applied to the income to arrive at your total tax liability. You also need to add cess at the rate of 4% to find the total amount of taxes due.
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Step 6: Find the TDS per Month
Divide the total amount of tax liability by 12 to arrive at the tax to be deducted from your salary per month. This concludes the basic guide on how to calculate the TDS on salary.
How to Calculate the TDS on Salary: An Example
Now that you have seen the process for how you can calculate the TDS on salary, let us take a deep dive into how this works. Here is an example of how to calculate the TDS on salary under the new and old tax regimes.
| Particulars | Old Tax Regime | New Tax Regime |
| Basic salary (A) | ₹7,00,000 | ₹7,00,000 |
| Add: Allowances like LTA, HRA etc. (B) | ₹2,00,000 | ₹2,00,000 |
| Exempted allowances (C) | ₹80,000 | NA |
| Gross salary
(D = A + B – C) |
₹8,20,000 | ₹9,00,000 |
| Standard deduction (E) | ₹50,000 | ₹50,000 |
| Net salary (F = D – E) | ₹7,70,000 | ₹8,50,000 |
| Income from other sources (G) | ₹2,00,000 | ₹2,00,000 |
| Total income
(H = F + G) |
₹9,70,000 | ₹10,50,000 |
| Deductions under Chapter VI-A (I) | ₹1,00,000 | NA |
| Total taxable income (J = H – I) | ₹8,70,000 | ₹10,50,000 |
| Estimated tax liability (K) | ₹86,500 | ₹67,500 |
| Cess at 4% in tax liability (L) | ₹3,460 | ₹2,700 |
| Total tax liability
(M = K + L) |
₹89,960 | ₹70,200 |
| TDS to be deducted each month
(M ÷ 12) |
₹7,497 | ₹5,850 |
Calculating the Average Rate of Tax for TDS Deduction
The average rate of tax for TDS deduction is calculated by dividing the total annual tax liability by the total annual income. So, you should use the following formula:
| Average rate of tax = (Total annual tax liability ÷ Total annual income) x 100 |
Using the above formula, we get the following average rate of tax deduction for the above example under the old and new regimes:
| Particulars | Old Tax Regime | New Tax Regime |
| Total tax liability | ₹89,960 | ₹70,200 |
| Total annual income | ₹8,70,000 | ₹10,50,000 |
| Average rate of tax | 10.34% | 6.69% |
Things to Know About TDS on Salary
Knowing how you can calculate the TDS on your salary is undoubtedly important. However, you also need to know the following aspects about salary, taxation and TDS deduction.
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Default Tax Regime
The default tax regime from FY 2023-24 will be the new tax regime. So, employers will likely deduct tax at the new tax rates. If you want to opt for the old tax regime, you may have to intimate your employer separately.
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Salary from Multiple Employers
If you switch jobs during a financial year, you will have to provide your income details to both employers during your employment with them. They will each deduct taxes based on the TDS already deducted and the remaining amount due as per the income level.
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Depositing TDS u/s 192
Employers must also know when and how to deduct TDS from salary. Government employers must deposit the TDS on the same day as the deduction. For the TDS deducted by non-government employers in months other than March, the tax must be deposited by the 7th of the next month. For March, it must be deposited by April 30.
Conclusion
This sums up how to calculate the TDS on salary. Although you may not have to do the computations yourself as an employee, it helps if you know how you can calculate the TDS on your salary. This way, you can confirm if adequate or excess tax is being deducted from your salary and plan your finances to meet your surplus tax liabilities, if any. On a related note, ensure that you keep the documents related to TDS on salary handy, particularly Form 16, as it is a valid proof of income for various verification purposes.
FAQs
Who is responsible for deducting TDS on salary?
As per the Income Tax Act of 1961, the responsibility of deducting TDS on salary lies with the employer.
What is the rate at which TDS on salary is deducted?
The rate of TDS on salary is not fixed. Instead, it can range anywhere from 5% to 30% per annum depending on your total taxable income. For instance, if your total taxable income is between ₹3 lakh and ₹5 lakh, the rate of TDS reduction will be 5%.
What to do if my employer deducts excess TDS?
If your employer deducts excess TDS, you can claim the excess amount as a refund by filing an income tax return (ITR) within the stipulated due date.
Will I get any proof from my employer regarding TDS deductions from my salary?
Yes. Your employer is required to provide Form 16, which is essentially a TDS certificate outlining the details of tax deducted and deposited with the government on your behalf.
