Calculating TDS (Tax Deducted at Source) on salary can seem daunting, but it’s quite straightforward once you understand the process. This guide will walk you through the steps to ensure you’re compliant with the tax regulations and avoid any surprises at the end of the financial year.
Step 1: Determine the Gross Salary
The first step is to identify the gross salary. This includes:
- Basic salary
- House Rent Allowance (HRA)
- Special allowances
- Leave Travel Allowance (LTA)
- Bonus
- Other allowances (e.g., medical, travel)
Example: If your monthly gross salary is ₹50,000, your annual gross salary will be ₹50,000 x 12 = ₹6,00,000.
Step 2: Calculate Exemptions and Deductions
Next, identify any exemptions and deductions applicable under various sections of the Income Tax Act.
a. House Rent Allowance (HRA) Exemption:
The least of the following is exempt from tax:
- Actual HRA received.
- 50% of salary (for metro cities) or 40% (for non-metro cities).
- Rent paid minus 10% of salary.
Example: If you live in a metro city, receive an HRA of ₹20,000 per month, and pay ₹18,000 as rent:
- Actual HRA received = ₹20,000 x 12 = ₹2,40,000.
- 50% of salary = 50% x ₹6,00,000 = ₹3,00,000.
- Rent paid – 10% of salary = ₹2,16,000 – ₹60,000 = ₹1,56,000.
The HRA exemption will be ₹1,56,000 (the least of the three).
b. Standard Deduction:
A flat deduction of ₹50,000 is available to all salaried employees.
c. Other Allowances:
Certain other allowances like LTA are exempt if claimed with valid proof.
d. Section 80C Deductions:
Investments and expenditures under this section (e.g., EPF, PPF, LIC, principal repayment of home loan, ELSS) are eligible for a maximum deduction of ₹1,50,000.
Example: If you invest ₹1,50,000 in PPF.
Step 3: Calculate Taxable Income
Subtract the exemptions and deductions from the gross salary to arrive at the taxable income.
Example:
- Gross Salary: ₹6,00,000
- HRA Exemption: ₹1,56,000
- Standard Deduction: ₹50,000
- Section 80C Deductions: ₹1,50,000
Taxable Income = ₹6,00,000 – ₹1,56,000 – ₹50,000 – ₹1,50,000 = ₹2,44,000
Step 4: Apply the Income Tax Slabs
Now, apply the current income tax slabs to the taxable income. As of the latest financial year, the slabs for individuals below 60 years are:
- Up to ₹2,50,000: Nil
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
Example: Since the taxable income is ₹2,44,000, which is below ₹2,50,000, the tax liability is zero.
Step 5: Calculate TDS
If there is a tax liability, the employer will deduct TDS monthly. Divide the annual tax liability by 12 to get the monthly TDS amount.
Example: If your taxable income were ₹5,00,000, the tax calculation would be:
- Up to ₹2,50,000: Nil
- ₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
Annual tax liability: ₹12,500
Monthly TDS deduction: ₹12,500 / 12 = ₹1,042
Step 6: Consider Rebate under Section 87A
If your total income after deductions is less than ₹5,00,000, you can claim a rebate under Section 87A up to ₹12,500, making your tax liability zero.
Step 7: Understand the Impact of Rebate under Section 87A
The Rebate under Section 87A is a provision aimed at providing relief to individuals with lower taxable incomes. If your taxable income (after all deductions and exemptions) is less than or equal to ₹5,00,000, you can claim this rebate to reduce your tax liability.
The rebate under Section 87A is the lower of two amounts:
- The actual tax payable.
- ₹12,500.
This means that even if your tax liability is up to ₹12,500, you can reduce it to zero using this rebate.
Example of Section 87A in Action:
Let’s take a practical scenario:
Scenario 1: Taxable income of ₹4,50,000
1.Income Tax Calculation:
- Up to ₹2,50,000: No tax (as per the slab for individuals below 60 years).
- ₹2,50,001 to ₹5,00,000: 5% of ₹2,00,000 = ₹10,000.
2.Rebate under Section 87A:
- Since your taxable income is below ₹5,00,000, you are eligible for a rebate of ₹10,000 (equivalent to the tax liability).
- Thus, after applying the rebate, the total tax liability = ₹10,000 – ₹10,000 = ₹0.
In this case, no TDS will be deducted from your salary as your final tax liability is zero.
Scenario 2: Taxable income of ₹5,50,000
1.Income Tax Calculation:
- Up to ₹2,50,000: No tax.
- ₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500.
- ₹5,00,001 to ₹5,50,000: 20% of ₹50,000 = ₹10,000.
- Total tax = ₹12,500 + ₹10,000 = ₹22,500.
2.Rebate under Section 87A:
- Since the taxable income exceeds ₹5,00,000, no rebate is available under Section 87A.
- Final tax liability = ₹22,500.
In this case, the employer would deduct TDS based on the monthly equivalent of ₹22,500.
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