What is TDS?
TDS stands for “Tax Deducted at Source” by employers when they pay salaries to their employees. This is an indirect way of collecting tax by Indian Tax Authorities and recommended as per Income Tax Act of 1961, Section 192. According to the TDS Methodology, all the individuals who receive income under the heading of ‘Salary’ are responsible to pay income tax commensurate to their earnings. Employers are entrusted with the responsibility to deduct the estimated tax from their salaries in the form of TDS during the entire financial year. The tax that the employers deduct from the income of their employees has to be deposited with the Central Government in lieu of advance tax.
TDS is a convenient way of paying tax by employees and they get the benefit of tax payment on their earnings. While filing for Income Tax, the TDS amount is counted as tax paid by the employee. TDS is also helpful for the Government to collect advance tax to ensure that the tax collections occur as soon as income is earned by the employees.
TDS could be deducted by employers only on the income that is mentioned under the head: ‘Salary’ in their pay slips. The tax is deducted as per the rate bracket that a particular income comes under for a particular financial year. At the beginning of the financial year, the employer calculates the total salary for the coming year and the tentative tax liability on the income employee. Any arrear or overage of TDS is adjusted usually in the later months of the financial year. However, if there is excess payment to the government for a financial year, the employer could apply for a refund as per the specified procedure. And, in case the tax deducted from employees as TDS was insufficient, the balance has to be paid by the employee when filing the tax return.
When the employer deducts tax for the salary of its employees, it has to certify the amount to the employees. The certificate employer provides to employees as a proof of TDS, according to the Section 203, IT Act, is known as Form 16. This is a very important document for filing income tax since most of the required information is contained in Form 16. Employers must issue this form when they deduct taxes from the employees’ salaries. If now tax is deducted, the issuance of Form 16 by employer is optional. During a financial year, if any person worked for two or more employers, then the person will receive more than one Form 16, one from each employer and then need to furnish all of those while filing the income tax. Form 16 is not available in any website and could be obtained from the employers only. This is issued once a year and no later than 31st of May for the previous financial year.
To calculate ‘TDS for Salary’ – it is imperative to define which earnings come under salary. Salary is the type of payment received on specific intervals and by a specific amount for providing certain services as per a contract signed by two parties namely - the employer and the employee. If the relationship between the two parties connected by payment terms are not ‘Employer and Employee’, then the concept of salary does not work even though payment is given and income is earned. Such cases are called non-salary incomes. Some of these include: Fees for technical or professional services, Payments to contractors and sub-contractors, Payment of Dividends, Interest earned on securities, Interests earned on Bank deposits, Payments for repurchase of units by Unit Trust of India or a Mutual Fund, Prizes from winning lottery or crossword puzzles, Commission and other profits on sale of lottery tickets, Payment of Insurance Commission, commission or brokerage, Rent and so on.
To calculate the income tax on salary, the first thing to consider is the Income Tax slabs decided by the Income Tax Department of India for the financial year.
For the financial year of 2016-17, the Tax slabs were as follows:
For Individuals up to the age of 60 years and for Hindu Undivided Family (HUF):
- If taxable income was up to Rs. 250,000 then it was tax exempt.
- If taxable income was between Rs. 250,000 and Rs. 500,000 then Tax Rate was 10%.
- If taxable income was between Rs. 500,000 and Rs. 10,00,000 then Tax Rate was 20%.
- If taxable income was over Rs. 10 lakhs then Tax Rate was 30%.
For Senior Citizens between the ages of 60 to 80 years, initial exemption was up to Rs. 3 lakhs annually. And for very senior citizens who were over 80 years old, the exemption was up to Rs. 500,000.
Additional charges that are applied for both these categories are:
- A Surcharge consists of 12% of the Income Tax in case income is more than Rs. 1 Crore (Subject to the marginal relief)
- An additional Educational Cess of 2% is charged on the sum of Income Tax and Surcharge combined
- A 1% additional Cess for Secondary or Higher Education is charged on the sum of Income Tax and Surcharge combined.
Some Rebate is given Under the Section 87A –This is given for individuals whose total income is less than Rs. 500,000. The total rebate amount is lesser of Rs. 2000 and 100% of the person’s Income Tax
For the current financial year of 2017-18, the Tax slabs are as follows:
For Individuals who are less than 60 years old (either men or women):
- If Income is up to Rs. 250,000, there is no tax
- If Income is between Rs. 250,000 and Rs. 500,000 then Tax Rate is 5% (earlier 10%)
- If Income is between Rs. 500,000 and Rs. 10,00,000 then Tax Rate is 20%
- If Income is Above Rs. 10,00,000 then Tax Rate is 30%
For Individuals who are between the age of 60 - 80 years, and for the tax payment by Hindu Undivided Family (HUF), the initial bracket of exception is up to Rs. 300,000 for both men and women. The tax rate remains the same as above for all other income slabs.
For Individuals who are over 80 years old, for them the tax exemption bracket is up to the income of Rs. 500,000 for either men or women. And above that income level, the rates are same as before for all the other categories.
For all the three categories in addition to appropriate taxes, the following are also collected:
- A surcharge consisting of 10% of the Income Tax in case income is Rs. 50,000 lakhs and Rs. 1 Crore.
- A Surcharge consists of 15% of the Income Tax in case income is above Rs. 1 Crore.
- A Cess of 3% is collected on the sum of Income Tax and Surcharge combined in such cases.
Salary consists of several components which together makes the CTC of the employee. The key component parts of salary include:
- The basic salary along with allowances like House Rent Allowance (HRA), Medical Allowance, travel allowance, transport allowance, dearness allowance, special allowance, other allowances and so on.
- The perquisites (in short ‘Perks’) include the benefits and facilities offered by the employer for expenses like Subsidized fuel and canteen facilities, travel allowance and expenses towards hotels if the employee needs to travel for work and so on.
Method of TDS Calculation
While talking about Tax calculations, the first thing comes up in this context is the tax deductions and exceptions that are available in the Indian Tax return contexts. Both deduction and exemption of taxes are the ways to lower the tax burden and give some benefits to the people.
There will be certain standard tax exemptions allowed by the Government of India. While computing TDS for the salary, these exemptions are deducted first from the total annual salary as per specification of Income Tax Department of India. Then tax is calculated on the non-exempt part of annual income. There are several provisions by Income Tax Department of India regarding availing tax exemptions. The employees need to submit those proofs of exemption along with the declaration to their employers so that TDS could be computed properly. Employer is responsible for computation of TDS based on the proofs and declaration, deducting the taxes from salary and depositing those with the authority.
Items eligible for TDS exemption are:
- Deduction of allowances under Section 10A of IT Act
- HRA – If the employee lives in a rented facility and is paying rent towards accommodation, then it will be allowed for House Rent allowance deduction. A maximum of Rs. 180,000 could be deducted annually from tax as Allowance for House Rent (HRA).
- Transport Allowance – The employer pays this to cover the commute expenses of employees to and from work. An annual deduction in this category is a maximum of Rs. 19,200.
- Savings under Section 80C of IT Act – A whole array of savings and investment options are available under this section to select from and it is among the most popular tax saving options currently. The total tax deduction under 80C is a maximum of Rs. 150,000 invested in either single or in combination of instruments. Some of the 80C instruments include:
- Public Provident Fund
- Contribution to Employers’ Provident Fund
- Premiums paid on Policy of Life Insurance
- Equity-Linked Saving Schemes (ELSS) – these are the Mutual Funds available for tax saving
- Bank Fixed Deposits – Of certain duration
- National Savings Certificates – issued by post offices
- Repayment of the Principal amount for your Home Loan
- TDS Under Sections 80CCC and 80CCD – For contribution towards some annuity plan of any insurance company for receiving pension comes under 80CCC while 80CCD is for contribution towards Nation Pension Scheme (NPS) of Central Government
Cumulative total for Sections 80C, 80CCC and 80CCD cannot go beyond Rs. 200,000 i.e. Rs. 1.5 lakhs plus an additional Rs. 50,000 is tax deductible.
- TDS under Section 80TTA – Up to Rs. 10,000 per annum is tax deductible on the interest earned in the savings account of the bank.
- TDS under Section 80CCG – In case any investment is done in the Rajiv Gandhi Equity Savings Scheme. This is only applicable for those who are investing for the first time. The maximum limit for this is Rs. 25,000 on top of the Rs. 1.5 lakhs and Rs. 50,000 limits mentioned earlier.
- TDS under Section 80D – This section deals with tax deduction for medical expenditure and on payments of medical insurances.
- Medical Allowance – Employees can declare Medical Allowance by producing Medical bills for tax exemptions. Medical Bills up to Rs. 15,000 is exempt in this category
- Premium for purchase of Medical insurance for self, spouse and dependent children – This savings could be up to Rs. 25000 for resident tax payers aged less than 60 years and Rs. 30,000 for senior citizens.
- TDS under Section 80U and 80DD – These sections deal with the deduction in case of physical disability of the tax payer and their dependent(s) respectively. Based on the extent of disability, the deduction ranges from Rs. 75,000 to Rs. 125,000 per annum.
- TDS under Section 80DDB – This is applicable towards expenses incurred in the treatment of certain specified diseases. This deduction is capped at Rs. 40,000 annually, even if the treatment expenses exceed these, if less than Rs. 40000.
. For Senior citizens, the amount is Rs. 60,000 and for very senior citizens, it is Rs. 80,000 exemption.
Section 80E – The interest paid on repay of Education loan for higher education is tax deductible. This education loan can be for self, spouse, or children of the employee and there is no upper limit for claiming deduction for this payment.
TDS for the payment of interest on Home Loan – This comes under Section 80EE. Up to Rs. 200,000 interest payment towards home loan is tax exempted per annum
- TDS under Sections 80G, 80GGA, 80GGB and 80GGC – These are applicable for donations. 80G is general donation, 80GGA is donation towards Rural Development or scientific research, 80GGB and 80GGC are the donations towards political parties.
There are some other profession-specific sub-sections where the TDS is applicable. These Government supported tax saving benefits include:
- A decrease in taxable income of people resulting in more disposable income.
- Decrease in tax payment helps people to engage the disposable income in generating savings and other investment opportunities.
- A reduction in taxable income many a times results in lowering of tax bracket which otherwise a person would not been eligible for.
- Tax exemptions available for charitable activities encourage people to be more engaged in various philanthropic activities.