TDS on Salary under Section 192 of the Income Tax Act

TDS (Tax Deducted at Source) on salary is a mechanism implemented by the Indian government to collect income tax from employees at the time they receive their salary or income. Here are the complete details of TDS on salary in India:

Applicability: TDS on salary is applicable to individuals who are employed and receive a salary income. It is applicable to both government and private sector employees.

TDS Deduction: Employers deduct TDS from the salary of employees based on the applicable income tax slab rates and the exemptions, deductions, and allowances declared by the employee.

Tax Slabs: The income tax slabs and rates for TDS on salary are determined by the Indian government and are revised from time to time. As of my last update, the income tax slabs for individuals under the age of 60 are as follows:
Up to ₹2.5 lakh: No tax
₹2,50,001 to ₹5,00,000: 5%
₹5,00,001 to ₹10,00,000: 20%
Above ₹10,00,000: 30%
Additionally, a health and education cess of 4% is applicable on the income tax amount.

Exemptions and Deductions: Employees can claim various exemptions and deductions under the Income Tax Act, such as HRA (House Rent Allowance), LTA (Leave Travel Allowance), standard deduction, deductions under Section 80C (for investments in instruments like EPF, PPF, life insurance premiums, etc.), and others. These exemptions and deductions are considered by the employer while computing TDS.

Form 16: Employers are required to issue Form 16 to employees, which is a certificate of TDS. It contains details of salary income, TDS deducted, exemptions, deductions claimed, and other relevant information. Employees use Form 16 while filing their income tax returns.
TDS Payment to Government: Employers are required to deposit the TDS amount deducted from employees' salaries with the government within the specified due dates. They also need to file quarterly TDS returns providing details of TDS deducted and deposited.

Filing Income Tax Return: Employees need to file their income tax returns annually to reconcile the TDS deducted by the employer with their actual tax liability. If excess TDS is deducted, they can claim a refund, and if there's a shortfall, they need to pay the remaining tax.

Penalties for Non-Compliance: Employers failing to deduct TDS or depositing it with the government are liable to penalties and interest under the Income Tax Act.

Who can Deduct TDS under Section 19?

The employer’s can be:

Companies (Private or Public)
Individuals
HUF
Trusts
Partnership firms
Co-operative societies

All these employers are required to deduct TDS every month and deposit it with the government within a specific time period.

The employer’s status such as HUF, firm or company is irrelevant for the deduction of tax at source under this section. Only employer-employee relationship matters. According to section 192 of the Income Tax Act, there must be an employer-employee relationship between the dedcutor and deductee for the deduction of tax at source. Moreover, the number of employees employed by the employer also does not matter for deducting TDS.


When is TDS Deducted under Section 192?

Under Section 192, TDS is deducted at the time of actual payment of salary and not during the accrual of salary. It means tax will be deducted when your employer pays your salary whether in advance or on time or in arrears (late payment).
 

In case your estimated salary is not more than the basic exemption limit, tax payable will be zero and hence, TDS will not be deducted.

This rule is applicable even to those who do not have a PAN. To know the income tax rates applicable to you, click here.
 

The table below shows the basic exemption limit as per the age that does not require TDS to be deducted:  

Age Minimum income

Resident in India below 60 years,Rs 2.5 lakh

Senior Citizens between 60 years and below 80 years- Rs 3 lakh

Super Senior Citizens above 80 years Rs 5 lakh

How to Calculate TDS on Salary under Section 192

Calculation of Taxable Income of the Employee

Step 1: At first, the employer estimates employee’s salary for the relevant financial year. This should include basic pay, dearness allowance, perquisites granted by the employer, other allowances granted by the employer like HRA, LTA, meal coupons, etc., EPF contributions, bonus, commissions, gratuity, salary from the previous employer, if any, etc. 

Step 2: In the next step, the employer calculates exemptions under Section 10 of the Income Tax Act. The exemptions can be applicable on allowances like HRA, travel expenses, uniform expenses, children’s education allowances, etc. Also, reduce the amount of professional tax paid, entertainment allowance and standard deduction of Rs 50,000.

Step 3: The employer reduces such exemption from the gross monthly income and the net amount will be treated as the taxable salary income.

Step 4: If the employee has provided the information about other incomes such as rental income from house property or bank deposits, etc. In that case, such amounts should be added to the net taxable salary. Further, the interest paid on housing loans is deducted from the house property income, but if there is no income from house property, there will be a negative figure under the head ‘income from house property’. After adding or reducing the said amounts, the calculated figure will be the employee’s gross total income.

Step 5: Now, the employer reduces the investments for the year, which fall under Chapter VI-A of the Income Tax Act declared by the employees as per the investment declaration submitted. The declaration may include the amounts of investments such as PPF, employee’s provident fund, ELSS mutual funds, NSC and Sukanya Samridhi account. It may also include expenditures such as home loan repayment, life insurance premiums, NSC Sukanya Samridhi account, etc. Similarly, the employer allows a deduction under various other sections such as Section 80D, 80G, etc.

Note: From FY 2023-24, the new tax regime is the default tax regime and your tax calculation will be done as per the new regime tax rates. If you wish to opt for the old tax regime, then you will have to intimate the same to the employer at the time of making the investment declaration. You can exercise this option between the old and new tax regime each year. The employer may deduct his/her income tax according to the tax regime selected.

Also, if the employee has declared to calculate income tax as per the new tax regime, then the Income Tax act does not allow majority of the exemptions and deductions which are allowed in the old tax regime. Hence, the employer will calculate the net taxable income as per the income tax regime chosen by the employee.

Rate of TDS Deduction

Section 192 does not specify a TDS rate. TDS will be deducted as per the income tax slab rates applicable to the taxpayer for the relevant financial year for which the salary is paid.

 After the introduction of the new tax regime under section 115BAC, employees will be provided with an option to choose the tax regime, old or new tax regime, at the beginning of the financial year accordingly, the income tax shall be calculated on the total income after consideration of applicable exemptions, deductions etc.,

If the employee fails to choose the tax regime, the default tax regime shall be applied, and taxes shall be calculated. For FY 2023-24 and onwards, the new tax regime is the default tax regime.

The tax calculation is usually done by the employer at the beginning of the financial year. The TDS is to be deducted by dividing the estimated tax liability of the employee for the financial year by the number of months of his employment under the particular employer.

The employer adjusts any excess or deficit arising out of any earlier deduction by increasing or decreasing the number of subsequent deductions during the same financial year.

If the employee has made any payment as an advance tax, then the same can be adjusted for the calculation of TDS. The employee needs to intimate the same to the employer.

Understanding TDS on salary is crucial for both employers and employees to ensure compliance with tax regulations and avoid penalties. It's advisable to consult a tax expert or chartered accountant for personalized guidance regarding TDS and income tax filing.