TDS on salary, governed by Section 192 of the Income Tax Act, mandates employers to withhold taxes from the salary they disburse to employees. Since salary constitutes income, it is subject to TDS based on prevailing tax rates.
Employers must deduct TDS on salary payments, provided the salary surpasses the minimum exemption threshold as per the Income Tax Act. To check the threshold limit : https://myfinanceinfo.com/finance-facts/new-income-tax-slab-rates-for-fy-2023-24-ay-2024-25-in-india/
Typically, TDS deducted from salary is refundable, particularly if it exceeds the employee’s actual tax liability. However, instances may arise where the declared investments at the beginning of the fiscal year differ from those made by its end. In such cases, excess TDS on salary is eligible for refund.
TDS on salary refers to the process where an employer withholds a portion of an employee’s salary to pay their taxes directly to the government.
Once deducted, the employer is responsible for remitting this amount to the government on behalf of the employee. To initiate TDS deductions, an employer must first obtain a Tax Deduction and Collection Account Number (TAN).
This unique 10-digit alphanumeric identifier, known as the TAN number, serves as a tracking mechanism for both the deduction and remittance of TDS by the employer to the Income Tax Department.
Formula to calculate TDS on salary
Here’s how TDS is calculated and deducted by the employer:
- Taxable Income Calculation: The first step is to calculate the taxable income of the employee. This includes their salary, any allowances, perquisites, bonuses, or other benefits they receive.
- Applying Tax Slabs: Once the taxable income is calculated, it’s then subjected to the income tax slabs applicable for that financial year. The income tax slabs may vary based on the individual’s age and other factors.
- TDS Deduction: Based on the taxable income and applicable tax slabs, the employer calculates the amount of tax to be deducted. This deduction is done as per the rates prescribed by the Income Tax Department.
- Form Filing and Payment: After deducting TDS, the employer files TDS returns with the Income Tax Department and deposits the deducted TDS amount to the government’s account within the due dates specified by the tax authorities.
Employers are mandated to deduct TDS for various reasons:
- Compliance: It ensures compliance with tax regulations. Employers are required by law to deduct TDS and deposit it with the government.
- Prevention of Tax Evasion: TDS helps in preventing tax evasion by ensuring that taxes are deducted at the time income is earned. This reduces the chances of individuals defaulting on their tax payments.
- Ease of Tax Collection: TDS ensures a steady source of tax revenue for the government throughout the year, as tax is collected at the time of payment itself.
Employers must adhere to TDS regulations to avoid penalties or legal consequences. They have to issue TDS certificates to the employees reflecting the TDS deducted, which the employees can then use for claiming tax credit while filing their income tax returns.
Who can deduct TDS
Employers who can deduct TDS under Section 192 are
- Individuals
- Partnership firms
- HUF
- Public and private companies
- Co-operative societies