What is Salary & How to Calculate TDS on Salary

Salary! isn't it everyone's favorite? It's paid once in a month & in 5 days or less fully expensed out. We wait eagerly for the whole month to receive the same. We work hard & with full efforts to earn this. When it is credited in bank a/c or received check or cash on pay day, see that smile on your face and especially your family.

So it's your right to know why the employer is deducting TDS (tax) on salary while making payment. Employee is aggrieved when less salary is received & higher TDS is deducted by employer. And employers are also confused about how much TDS to be deducted on salary  and how to make maximum payout.

Employee is doing all sorts of investment to minimize tax burden then also every year he ends in paying higher tax as compared to last year.

So let's go one by one and understand in an easy layman way as well as let me clarify some technical nitty gritty to all my readers. This article explains how TDS on salary is deducted on salary under section 192 of the Income Tax Act 1961:

What is Salary?

Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. In short it is your right of remuneration against your full one month efforts.

The existence of employer-employee relationships is the sine-qua-non for taxing a particular receipt under the head "salaries."

Does all payout by organization to people working for them is Salary?

No, the payment made to professionals in their professional capacity is payment of "Professional / Technical fees". the salary received by a partner from his partnership firm carrying on a business is not chargeable as "Salaries" but as "Profits & Gains from Business or Profession". Similarly, salary received by a person as MP or MLA is taxable as "Income from other sources".

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of "Salaries" including therein:

Wages, Annuity or pension, Gratuity, Fees or Commission, perquisites or profits in lieu of salary, Advance of Salary, Leave Encashment, Compensation as a result of variation in Service contract etc.

So what is CTC?

Nowadays CTC (Cost to company) is a new term used by corporations while offering salary to its employees. It is nothing but the total cost which an organization ends up paying on an employee for the period under consideration. In addition to the wages paid to salary it also includes employer liability towards employee i.e. Statutory liability viz. all taxes like PF, ESIC, LWF and other commitments like Gratuity, Pension, Statutory bonus, Leave Encashment, Employees Accident Insurance, Mediclaims etc.

Formula is CTC = Gross Salary (wages) + PF + ESIC + LWF + Insurance + Leave pay + Gratuity

Understanding TDS on Salary under section 192. Step by Step:

TDS i.e. Tax deducted at source is nothing but Income Tax on Salary; it is also called as withholding tax.

On which amount of Salary TDS u/s 192 is to be deducted?

Before determining on which amount TDS under section 192 is deducted. Let's understand components of salary.

When an employer pays any amount to an employee in form of salary it is bifurcated into two parts: Salary & Perquisite.

Salary is pure cash payouts; however on other hand perquisite which is also called as perks are benefits & facilities enjoyed by employee while providing his services to organization which are generally transportation, car service, canteen subsidy, accommodation in hotels, lodging & boarding, travelling expenses, fuel & gas subsidy, interest free loans etc.

So u/s 10 of income tax exemption is allowed i.e. some portion of allowances & perquisites are not loaded to your taxable income however same is exempted. E.G. Conveyance allowance upto Rs. 800 pm is exempt, HRA exemptions and in case of perks Interest free loan or advances upto Rs. 20,000-, cost of meal served during office hours etc.

So here goes calculation of Taxable Salary for TDS section 192 :

Step 1: Calculate Total Gross Salary

Gross salary is sum total of all salary components which employer has agreed to pay under terms of contract which are:

 Basic + Dearness Allowance + House Rent Allowance + Conveyance / Transport Allowances +  Special Allowances + Other allowances

Why so many salary components & not few?

Income Tax is evolving with change in time & various other laws related to labor requires employers to pay some allowances. So Basic salary is kept as low as Minimum wages of that particular state & above that allowances are paid.

EG. Maharashtra State requires mandatory payment of HRA to the extent of 5% of Basic Wage. If we segregate Basic into Basic & HRA, employees can enjoy HRA exemption benefits if they are staying in rented property and so on.

So let's take an example of Mr. A, he is CA and Finance Manager and draws a Monthly Gross Salary of Rs. 70,000/- (Basic = 40000, HRA = 20000, Travel Allowance = 800, Child education allowance =200, Medical Allowance = 1250, Other allowance = 7750)

Step 2: Give exemptions to Allowances u/s 10:

Allowances paid are exempt u/s 10 as mentioned earlier. So we need not consider that portion to the extent it is exempt, and balance to be taxed.

Refer link for details: Summary of exemption u/s 10 to salaried employee

So in case of Mr. A, Travel allowance Rs. 800, CEA Rs. 200 & Medical allowance Rs. 1250 is fully exempt assuming he will submit a bill of Rs.1250 pm. No HRA assuming he is living in owned property taken on loan. So total exemption for him is Rs. 2,250.

*Please note that if an employee claims standard deduction of Rs 50,000 he cannot claim transport and medical allowance.

Step 3: Calculate annual taxable Gross Salary for the financial year.

Net of Step 1 Less Step 2 gives monthly taxable gross salary. We have to project annual taxable gross salary. The same can be done by multiplying monthly taxable gross salary with 12 if we are calculating TDS from the month of April else we need to multiply the said amount with the number of months remaining in the financial year.

So we will be arriving at annual taxable gross income taxable under the head Salary by doing this exercise.

Why to project salary for 12 months or full financial year?

Since income tax is payable on annual taxable income we have to project salary payout.

So in case of Mr. A, Rs. 67,750 x 12 (70000 - 2250) which amounts to Rs. 8,13,000.

Step 4: Add any Income / Loss reported by employee

In step 3, add any other income earned by an employee which is reported to the employer. Such includes Income from house property or Loss from house property (Interest paid on Housing loan taken), Interest Income on bank deposits etc.

So Step 4 plus/minus Step 4 will give us Gross Total Income of employee.

So in case of Mr. A suppose he declared Loss on House Property for Interest he paid for loan taken on purchase of his house Rs. 150000. So his Gross total income will be Rs. 6,63,000/-

Step 5: Calculate deductions available to employee against gross salary

Chapter VI-A of income tax act mentions deduction that can be allowed from taxable gross salary by way of investments. So From Gross total income calculated above we have to deduct all total of

Refer link for details: Deductions under Chapter VIA of Income Tax Act

So Step 4 Less Chapter VI-A deduction will give us Total taxable income of employees.

So in case of Mr. A, if he declares investment of Rs. 1 lakh u/s 80C & Rs. 30,000 u/s 80D. Total benefit available Rs.1.30 lakh under Ch. VI-A. So total Taxable Income will be Rs. 5,33,000/ (663000-130000).

Step 6: Calculating net Taxable Income & Tax amount

Current Income Tax slab rates are as follows:

For Individual below 60 years:

For Senior Citizens (from 60 years to 80 years):

For Citizens Above 80 years:

So in case of Mr. A, on Rs. 5,33,000 tax liability will be as follows:

First 2.5 lakh = Nil, on balance Rs. 2,83,000@ 5% = Rs.14,150. Cess & Higher Edu. Cess @ 4% on it Rs. 566 would be Rs.14,716/-.

So monthly TDS amount will be Rs.1226/-

Source: Self

Please note this is not an outcome of one day fancy I have taken all care to explain lucidly, if any query do ask & if you find any error please notify.

Thank you for reading.