How TDS is Calculated?

Introduction

According to the provisions under Section 192 of the Income Tax Act, 1961, TDS (tax deducted at source) is done on salary. Generally, TDS is deducted by the employer from the salary that is payable to the employee.  Under the provisions of Income Tax Act, 1961, salary received from the employer will come under the income head of "Salary" and accordingly, TDS is deducted on the average income tax rate basing on the current income tax slab during a particular financial year and considering the estimated income. The TDS deducted will be reflected in Form 16 which will be issued by the taxpayer in each financial year ending.

Who can Deduct TDS under Section 192?

As mentioned above, generally employers are liable to deduct TDS under Section 192. The term "Employer" include the following;

• Hindu Undivided Family (HUF)
• Individuals
• Companies
• Partnership Firm
• Trusts
• Co-operative societies

All the aforesaid employers are obliged to deduct TDS at a specific time and deposit the same to the government. As per the provisions of Section 192 of the Income Tax Act, 1961, the employer and employee relationship must exist between the parties for deduction of TDS. It is to be noted that under the aforesaid section, the status of the employer such as company or HUF is irrelevant in respect of TDS deduction. Apart from that it does not matter how many employees are working for an employer while computing and deducting tax deducted at source.

When is TDS deducted under section 192?

It is to be noted that under Section 192 of the Income Tax Act, TDS is deducted at the time of actual or original payment of salary and not on the accrual salary.  Apart from that in case the employer making payment of advance salary or salary-in-arrear, then tax will also be deducted. TDS, will not be deducted, if the estimated salary is less than basic exemption limit.

This aforesaid rule is applicable for all persons including the ones who does not have a valid PAN. A table showing the basic exemption limit according to age which does not require TDS deduction is provided below;

Rate of Tax Deduction for FY 2019-20

It is to be noted that Section 192 of the Income Tax Act does not specify any rate for TDS calculation. Generally, TDS are deducted according to the slab of income tax and accordingly the rates will be applicable for that particular financial year in which the salary payment is done.

Firstly, the total salary of the employee is computed after considering all the applicable deductions and accordingly tax is computed as per the applicable tax rate. In case an employee wants to opt for the new tax regime, he or she can inform the same to his or her employer to exercise the same in each financial year. 

Usually, the tax calculation is done by the employer at the starting of each financial year. The TDS deducted will be deducted by division of estimated tax liability of the employee in a particular financial year by number of months of the employment.

However, in case an employee does not have a PAN then TDS will be deducted at a rate of 20% excluding the higher education cess and education cess.  If there is a deficit or excess in any of the deduction then the same can be adjusted by decreasing or increasing the number of deductions made subsequently in a particular financial year.

In case any payment has been made as in terms of an advance tax, then the same can also be adjusted for computation of TDS.

Illustration

The tax on salary income is deducted basing on average rate of income tax which is computed as per the following formula:

Average rate of income tax = Income tax payable (computed as per the tax slab rates)

                                                         Estimated income of the employee

For example, A resident employee Aayansh who is aged about 60 years works for General Electric Company receives a salary of Rs 1,00,000 per month during the financial year 2019-20. What will be the TDS deducted under Section 192 of Income tax Act, 1961 for each month?

In this case, his total income is estimated as Rs 12,00,000.  A standard deduction of Rs 50,000 is allowed on income from salaries.  Under Chapter VI of the Income Tax Act, 1961, a estimated deduction as declared by the employer is Rs. 1,00,000. Thus, the income that is chargeable to tax is estimated will be Rs. 10,50,000.

Hence, the tax is computed as per the current slab rate for resident individuals for TDS computation of salary under Section 192 will be Rs 1,27,500.

Accordingly, Education and higher education cess of 4% will be charged on the income tax that will be Rs 5,100.

Hence, the total tax payable will be Rs 1,32,600.

According to the formula provided above = Rs 1, 32,600 /12, 00,000 X 100

                                                                           = 11.05%

Therefore, The TDS under Section 192 of the Income Tax Act, 1961 to be deducted each month will be 

Rs 1, 00,000 x 11.05% = Rs 11,050

In the provided case, if a declaration has been made by the employee to the employer to opt for the new tax regime, then the employer has to deduct the TDS as per the below mentioned process.

Under the new tax regime, the deduction of Rs 50,000 as well as chapter VI A of Income Tax Act as deduction is not allowed. Thus, tax will be computed according to the new slab rate for resident individuals and the TDS on salary will be Rs 1,15,000

Accordingly, education and higher education cess of 4% will be charged on the income tax and the same will be Rs. 4,600

Thus, the net tax payable is Rs 1, 19,600

As per the above mentioned formula = Rs 1, 19,600/12, 00,000 X 100, 

                                                                   = 9.97%

Thus, the TDS under Section 192 of the Income Tax Act, 1961 deducted will be Rs 1, 00,000 x 9.97% = Rs. 9,967

When you Receive Salary from More Than One Employer

In case you are working for more than one employer simultaneously, then details of salary and TDS in form 12 B has to be provided to either of the employers. When the employer receives all the aforesaid information from the employee, then the employer will be liable to compute the gross salary and deduct TDS accordingly.

Apart from that, in case an employee resigns or joins a different employer, the details of previous employment must be shared in Form 12B to the current employer. Considering the details of previous year salary the current employer will deduct TDS for the remaining months of the relevant financial year.

In case the employee does not wish share the details of his/her previous employment, then each employer will deduct the TDS on the salary paid by them.

Standard Deduction for Salaried Individuals

A standard deduction of Rs. 40,000 was introduced by the former Finance Minister Late Mr. Arun Jaithley to the salaried individuals. The aforesaid deduction ultimately replaced the medical reimbursement and transport allowance of Rs. 15,000 and Rs. 19,200 each year respectively. It is to be noted that a standard deduction can be claimed for exemption as it is deducted from the gross salary. On 1 February 2019, an interim budget was presented in the Parliament which contains the details of tax benefits that will be provided to middle class and salaried individuals.  Apart from that an additional amount of Rs 10,000 was also added to the subsequent standard deduction. Thus, now the standard deduction is Rs 50,000. This will definitely help the taxpayer to reduce their tax liability. This can be better analyzed with the help of an illustration. A table containing some details for an illustration is provided below;

Considering the details of the aforesaid table, it can be noted that there is reduction in the taxable salary in respect of standard deduction.