TDS (Tax Deducted at Source) on salary is a mechanism where employers deduct income tax from an employee’s salary before disbursing it. This deduction is governed by Section 192 of the Indian Income Tax Act, 1961. The employer calculates the estimated annual income of the employee, determines the applicable tax liability based on prevailing tax slabs, and deducts tax proportionately each month. This ensures timely tax collection and reduces the burden of lump-sum tax payments at the end of the financial year.
Who is Responsible for Deducting TDS?
Any employer making salary payments is obligated to deduct TDS under Section 192. This includes:
- Private and Public Companies
- Individuals
- Hindu Undivided Families (HUFs)
- Trusts
- Partnership Firms
- Co-operative Societies
The key criterion is the existence of an employer-employee relationship.
When is TDS Deducted?
TDS is deducted at the time of actual salary payment, not on an accrual basis. This applies to regular salary payments, advance salary, and arrears. If the estimated annual salary does not exceed the basic exemption limit, no TDS is deducted.
How is TDS on Salary Calculated?
The calculation involves several steps:
- Estimate Gross Annual Salary: Include basic pay, dearness allowance, bonuses, commissions, perquisites, and other allowances.
- Deduct Exemptions: Subtract exemptions under Section 10, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and others.
- Subtract Deductions: Apply deductions under Chapter VI-A, including:
- Section 80C: Investments in PPF, EPF, LIC premiums, etc.
- Section 80D: Health insurance premiums
- Section 80G: Donations to specified funds
- Compute Taxable Income: Gross Salary – Exemptions – Deductions
- Apply Tax Slabs: Calculate tax liability based on applicable income tax slabs.
- Divide Tax Liability: Distribute the total tax liability over the remaining months of the financial year for monthly TDS deduction.
Example:
If an employee has a gross annual salary of ₹8,00,000, claims ₹1,50,000 under Section 80C, and ₹25,000 under Section 80D, and is eligible for a standard deduction of ₹50,000:
- Taxable Income = ₹8,00,000 – ₹1,50,000 – ₹25,000 – ₹50,000 = ₹5,75,000
- Tax liability is calculated based on prevailing tax slabs.
- If 10 months remain in the financial year, monthly TDS = Total Tax Liability / 10.
Tax Slab Rates
As per the financial year 2025-26, the tax slabs are:
- Old Regime:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh – ₹5 lakh: 5%
- ₹5 lakh – ₹10 lakh: 20%
- Above ₹10 lakh: 30%
- New Regime:
- Up to ₹3 lakh: Nil
- ₹3 lakh – ₹6 lakh: 5%
- ₹6 lakh – ₹9 lakh: 10%
- ₹9 lakh – ₹12 lakh: 15%
- ₹12 lakh – ₹15 lakh: 20%
- Above ₹15 lakh: 30%
Note: The new regime offers lower tax rates but does not allow most exemptions and deductions.
Form 16: TDS Certificate
At the end of the financial year, employers issue Form 16 to employees. This certificate provides a detailed summary of salary paid and TDS deducted, serving as a crucial document for filing income tax returns.
Consequences of Non-Compliance
Employers failing to deduct or deposit TDS timely may face:
- Interest: 1% per month for late deduction, 1.5% per month for late deposit.
- Penalty: ₹200 per day for late filing of TDS returns, subject to a maximum of the TDS amount.
- Prosecution: In severe cases, imprisonment ranging from 3 months to 7 years.
Conclusion
Understanding TDS under Section 192 is essential for both employers and employees to ensure compliance and effective tax planning. Proper calculation and timely deduction help in avoiding penalties and facilitate smooth financial operations.
