TDS on salary is not at fixed rate; know how tax is calculated and deducted by employer (2024)

Every employer who is paying a 'salary' to their employees must deduct tax (tax deducted at source) on the month's salary. However, unlike other incomes, TDS rate on salary income is not fixed. It is dependent upon the total estimated taxable income of the employee in the relevant financial year, among other factors.

"The employer deducts TDS on salary at the employee's 'average rate' of income tax. This is because TDS on salary is not deducted at a flat rate," says Abhishek Soni, co-founder, Tax2Win, a tax filing assistance platform.

Here's how this TDS deduction works and how it can impact your monthly income.

Also read: Tax demand up to Rs 1 lakh/person waived: Check ITR a/c.

How is TDS on salary calculated?

The calculation of TDS is dependent upon the estimated net tax liability of the employee. In the process various factors such as tax regime chosen by the employee, tax exempted income, expenses and eligible deduction on tax savings investments (if any was made) are also considered. In order to make sure that a correct amount of TDS is being deducted, employers ask employees at the beginning of the financial year to declare their expenses and investment which would be eligible for tax deduction or exemption. Employers also ask employees to choose the tax regime (old/new) at the start of the financial year.

Based on the declaration given by the employees, the employer deducts an average TDS each month typically until the last quarter of the financial year. And as the end of the financial year approaches employers ask for proof of tax savings investments which the employees declared earlier.

According to Suresh Surana, founder, RSM India, a tax and business consulting group, "As per section 192 the amount of income-tax to be deducted shall be computed on the basis of the rates in force for the financial year in which the payment is made, based on the estimated income of the employee for the year."

Here's a Table showing a detailed process for calculating TDS under both old and new tax regime:

ParticularsOld Tax RegimeNew Tax Regime
Basic Salaryxxxxxxxx
Add: Allowances (HRA,LTA, etc)xxxxxx
Less: exemptions for allowances (HRA, LTA, etc)(xx)No exemption
Gross Salaryxxxxxxxx
Less: Standard deduction(xx)(xx)
Less: Professional tax paid(xx)No exemption
Net Salary income chargeable to taxxxxxxxxx
Income from other sources-
Capital gains--
Income from house property--
Less: Deductions (as declared to employer)(xx)Only section 80CCD(2) deduction available
Total taxable incomexxxxxxxx
Estimated tax liability for the year (A)xxxxxx
TDS to be deducted under section 192 (A/12)xxx/12 months= Rs xxxxxx/12 months= Rs xxx

Source: RSM India, a tax and business consulting group.

How is the rate of TDS determined?

The employer calculates their employees' tax liability based on the 'average rate of income tax'. The average rate of income tax means that once the net taxable income is estimated, the total tax liability would be estimated and deducted from the net salary income. The total tax amount would then be divided by 12 months and the figure thus derived would be deducted from each month's salary as TDS.

Here's a table explaining how the rate of TDS is determined in the old tax regime:

Particulars Amount
Estimated Total IncomeRs 7,60,000
Estimated Tax LiabilityRs 64,500
Add : Health & education cess @ 4% on Rs. 64,500Rs 2,580
Estimated Total Tax Liability (A)Rs 67,080
TDS per month (A/12 months)Rs 5,590
Salary per monthRs 80,000
Less :- TDS per month (As calculated above)Rs 5,590
Net salary in hand of the employeeRs 74,410

Source: Tax2Win, a tax filing assistance company

In the example above the TDS amount was Rs 5,590 and the employee's total tax liability was Rs 67,080 while the total income was Rs 7,60,000. So, the average rate of income tax under the old tax regime comes to Total tax liability/total income*100= 67,080/7,60,000*100= 8.8263%. Hence the employer would deduct 8.8263% from the monthly salary of the employee.

The average rate of tax as calculated above would remain the same throughout the year unless certain circ*mstances arise.

When can the TDS rate change?

Since the rate of deduction of TDS is based on the tax regime chosen and declarations made by the employee, it may undergo a revision if there is any change in certain circ*mstances.

According to Surana here are some circ*mstances which can cause the TDS rate to be revised:

  • Actual tax saving investments made during the year by the employee might change as compared to declarations submitted at the beginning of the financial year,
  • Any Increment / Bonus received by the employee which was otherwise not forming a part of total compensation,
  • Revision in the salary structure of the employee such as change in the allowances, perquisites provided to the employee,
  • Employee switching jobs in between the financial year.

"If an employee has income from multiple sources, such as salary, freelance work, rental income, etc., it may impact the TDS deductions. Employers need to account for all sources of income while calculating TDS hence employees need to declare all their income," says Soni.

TDS on salary is not at fixed rate; know how tax is calculated and deducted by employer (2024)

FAQs

TDS on salary is not at fixed rate; know how tax is calculated and deducted by employer? ›

The employer deducts TDS on salary at the employee's 'average rate' of income tax. It will be computed as follows: Average Income tax rate = Income tax payable (calculated through slab rates) divided by employee's estimated income for the financial year.

How is TDS deducted on fixed deposits? ›

The tax will be levied at your applicable income tax slab rate. What is the TDS rate on FD? TDS (Tax Deducted at Source) on FD is currently deducted at a rate of 10%. If the total interest earned on FDs for a financial year exceeds Rs. 40,000.

What is the interest rate for TDS deducted but not paid? ›

Under Section 201(1A), in case of late deposit of TDS after deduction, you have to pay interest. Interest is calculated at the rate of 1.5% per month from the date on which TDS was deducted to the actual date of deposit.

Is TDS calculated on taxable value? ›

As per the Explanation to Section 51 (1) – the value on which TDS shall be made by the recipient shall be the value excluding the CGST, SGST or UTGST. Therefore the TDS shall be made on a value excluding GST amount as indicated in the invoice or other document.

How to calculate TDS on professional fees? ›

An individual should deduct TDS at the rate of 10% when the following payments are made to a resident, in a fiscal year (higher than Rs. 30,000): Amount charged as professional services fee. Amount charged as technical service fee.

What is TDS and how is it calculated? ›

TDS stands for Tax Deducted at Source , a provision under the Indian Income Tax Act where a percentage of your income (such as salary, consulting fees, or bank interest) is taken out before you receive it. The deducted amount is deposited with the Income Tax (IT) department.

What are the rules for TDS? ›

Employers must deduct TDS from the salary of those employees whose income exceeds the maximum exempt limit. Employees can submit proof of tax-saving investments and expenses to reduce the TDS amount of the employer. Banks will deduct TDS at 10% from the interest payments on fixed deposits.

What happens if TDS is deducted but not paid? ›

Tax deduction at source (TDS) is mandated to be deducted by all employers within the specified time frame, and failure to do so may cause adverse effects on the employers. For instance, the Income Tax department will charge interest on the unpaid TDS, impose penalties, and more charges and penalties.

How can I avoid paying TDS? ›

Lowering your tax liability to claim a refund of excess TDS
  1. Make full use of Section 80C.
  2. Invest in a health insurance plan.
  3. Use NPS for retirement planning.
  4. Donate to the causes that you believe in.
  5. Maximize deduction on the home loan interest.
  6. Submit Form 15G/H to avoid TDS.

How to calculate TDS on bill amount? ›

For example, supplier A makes a supply worth Rs.5,000 to B. The rate of GST is 18%. When B pays A, he/she will pay Rs.5,000 (worth of Supply) + Rs.900 (GST) to A and Rs. 100 (RS. 5000*2%) as TDS to the government.

How do I know how much TDS I have deducted? ›

This is how you check your TDS Status on this portal:
  1. Visit the TDSCPC Portal.
  2. Go to the 'Taxpayer' tab.
  3. On this page, select the option 'View TDS/TCS Credit' from the left hand menu options.
  4. On the first page, you will need to enter the 'Verification Code' to proceed to the next page.

What is the tax rate on TDS? ›

Your employer deducts TDS at the income tax slab rates applicable. Banks deduct TDS @10%. Or they may deduct @ 20% if they do not have your PAN information. For most payments rates of TDS are set in the income tax act and TDS is deducted by the payer basis of these specified rates.

Is TDS rate 1% or 2%? ›

The TDS rate for Section 194C in FY 2023-24 is 1% for individuals and HUF (Hindu Undivided Family) and 2% for others. 6What is TDS on professional fees? TDS on professional fees is deducted at a rate of 10% under Section 194J of the TDS provisions.

How to get TDS refund? ›

If the actual tax payable is less than the TDS, you must file Income Tax Return (ITR) to claim TDS refund. While filing the ITR online, you need to provide the details of a bank account and IFSC code. The Income Tax (IT) department requires these details to give a TDS refund.

How to calculate TDS on contractor with example? ›

Multiply the payment amount by the applicable TDS rate to determine the tax amount. For example, if a contractor's payment is Rs. 50,000 and the TDS rate is 2%, the TDS amount will be Rs. 1,000.

What is the turnover limit for TDS deduction? ›

Rate Of TDS

Tax is to be deducted at source at the rate of 0.1% on the amount exceeding Rs 50 lakh in a financial year from a seller from whom the buyer has purchased goods worth more than Rs 50 lakh.

Is TDS deducted on fixed assets? ›

TDS is applicable not only on your income but also on your investments and any earnings made on your fixed assets. Hence, you must be aware of TDS rates and applicability while planning your investments. Tax is deductible at source, even on big-ticket purchases like buying a new home.

How do I deduct and deposit TDS? ›

The deductors can download Challan 281 online and fill in all the required details. After this, they have to deposit the TDS amount and the challan to the nearest bank branch. Counterfoil will be provided once the challan has been submitted.

Is TDS deducted by bank? ›

Who deducts TDS on cash withdrawal u/s 194N of the Act? TDS is deducted by banks (private, public, and co-operative) or post offices. The tax is deducted when making any cash payment to any person in excess of ₹ 20 lakh or ₹ 1 crore (as the case may be) from his/her account maintained with such banks or post offices.

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