TDS or Tax Deducted at Source is a process through which the income tax payable by a tax payer at the end of one financial year is deducted from the source of his earning. The sources may be the at the place of his employment where his salary bill is prepared or may be a bank where the tax payer has earned interest income over a prescribed amount on certain deposits or on the amount receivable on certain contractual works performed by a supplier or contractor.
TDS is tax paid in advance and applicable on interest income over Rs. 10,000 in a year. It is charged if the interest income exceeds Rs 10,000 on instruments like Fixed Deposits on bank or Senior Citizen schemes, etc. If anybody wants to save paying TDS, instead of making large investment in one place they can split the investments in different banks or branches so that the amount of interest does not exceeds Rs 10,000 at one place.
In addition they can submit Form 15G or Form 15H which is a declaration that they do not have any taxable income in the previous year so that no TDS is levied on their income. These forms should be submitted well before the end of a financial year.
Form 15G is applicable for person below the age of 60 years whereas Form 15H is to be submitted by Senior Citizens who are above 60 years of age.
How To Save TDS On Salary?
There are certain incomes which should not to be included in salary income and no TDS can charged on such income. They are:
- Retirement Gratuity Paid on the death.
- Commuted Pension under Sec 10(10A).
- Leave encashment within the limits of Section 10AA.
- Compensation received on Retrenchment within the limits of Section 10 (10B).
- Compensation received on Voluntary Retirement within the limits of Section 10 (10C).
- Payment received from Provident Fund as per sec. 10(11) & sec. 10(12).
- Payment received from superannuation fund (approved) as per sec 10(13).
- Investment income and interest received as per section 10 (15).
- Exemption of family pension or pension to awardees under section 10 (clause 18)
There are certain allowances that should not form a part of the salary for TDS. They are:
- The value of any LTC.
- House Rent Allowance as per the provisions of section 10(13A).
- Allowances exempted under section 10(14) with Rule 3A.
Calculation Of Tax Deduction At Source
TDS is allowable on the salary of an employee if his salary for a particular year exceeds the non taxable limit of Rs 1, 80,000 (For general tax payer from the assessment year 2011-12). The finance ministry as per its direction published on February 27, 2011 has made certain changes in the non taxable limits for different groups of people;
The tax level for general tax payer has been lifted to Rs. 180,000 from previous Rs. 160,000.
The non taxable limit for women is now at Rs. 190,000.
The eligible age for Senior Citizen has been brought down to 60 from previous 65. Senior citizens are people aged between 60 and 80. The non taxable income for Senior Citizen has been raised to Rs. 250,000 from previous Rs. 240,000.
An employer can deduct TDS from the salary of an employee each month under the following circumstances:
- If the salary income exceeds the non taxable income limit as mentioned above.
- Such amount exceeding the limit of exemption must be arrived at after allowing the deductible allowances and expenses. Deductible allowances are under Section 80C, 80G, 80D, 80GG, 80CCC, 80DD, etc. Allowable expenses are like house rent expenses, medical expenses, etc.
- Income must include the value of all perquisites.
- If any new employee has joined from another organization, the amount of TDS transferred should be properly accounted for.
Suppose, Mr. A is an employee in XYZ Co with an annual income of Rs.400,000, So his taxable income beyond the non taxable ceiling is Rs. 220,000 (400,000-180,000). He is entitled for exemption Under Section 80C is Rs. 50,000.
His taxable income becomes Rs (220,000- 50,000) or Rs. 170,000.
Since he is in 10% tax slab his tax liability on Rs. 170,000 @ 10% is Rs.17,000, if 3% education Cess and SHEC (2%+ 1%) is added his tax liability for the year becomes Rs. 17,510. Dividing his yearly tax liability by 12 we get Rs. 1459.17. This amount his employer should deduct every month from his salary as TDS.
TDS returns are to be submitted by quarterly basis.