How to Calculate TDS on Employee Salary

TDS or, Tax Deducted at Source holds an important role in the management of salaries in any organization. It means timely tax collection and compulsory adherence to the acts and rules of Indian income tax. An employer has to cut TDS on the amount paid to the workers if the income paid to an employee is more than the basic exemption restrictions.

Through this guide, you will learn how to correctly compute TDS on employee salary without going wrong.

What is TDS for Salaried Employees?

TDS simply stands for Tax Deducted at Source. This was introduced by the Income Tax Act of 1961 where employers deduct tax for their employees and employee’s tax from employee’s salary before paying salary to the employee. It ensures that employees fulfill their tax obligations throughout the financial year instead of paying them as a lump sum at year-end.

TDS for salaried employees is deducted when the earned income is more than the basic exemption of the income tax for the year (₹2.5 lakh per annum for most people). The employer hereby subtracts taxes from the pay received by the employee based on the income tax rates of the applicable tax band and pays directly to the government. This deduction is claimed on form 16 which is issued to employees to prove their tax computation while filing their tax returns.

Importance of TDS for Employee Salary

TDS for employee salary makes sure they have paid reasonable proportions of taxes in the financial year. It avoids the cost of a large single payment during the filing of tax returns. From the aspect of the employers, proper TDS for the workers who are paid through a salary signifies fulfillment of legal principles and boosting the confidence of their workers.

How to Calculate TDS on Employee Salary?

Employers can compute TDS on employee salary using this step-by-step method:

1. Determine Gross Income

The first step is calculating the total gross salary, including:

• Basic salary
• House Rent Allowance (HRA)
• Travel Allowances
• Bonuses
• Any other privileges or allowance 

2. Deduct Exemptions

Identify and deduct eligible exemptions such as:

• HRA

Exempted as per the rent paid, the salary, and the residing place of the employee.

• Leave Travel Allowance (LTA)

For travelling within India only under certain conditions.

• Professional Tax

Subtracted by the state government.

3. Account for Deductions

Consider deductions under various sections of the Income Tax Act, like:

• Section 80C

Expenses in Provident Funds, ELSS, Premiums for Life Insurance, etc. (up to ₹150000).

• Section 80D

Medical insurance premiums.

• Other Deductions

An education loan, a donation, or a contribution to the National Pension Scheme.

4. Calculate Taxable Income

Taxable income is the amount left after deducting exemptions and deductions from the gross income: Taxable Income = Gross Income – Exemption – Deduction.

5. Apply Income Tax Slabs

After knowing your taxable income, apply the income tax slab rates to it. For example:

• Up to ₹2.5 lakh: No tax
• ₹2.5 lakh to ₹5 lakh: 5%
• ₹5 lakh to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

6. Adjust for Rebates

Deductibles from net income are like Section 87A, which applies given that net income does not exceed ₹5,00,000.

7. Calculate Monthly TDS

Deduct the number of months already gone in the financial year from the total annual tax payable, then divide that by the number of months left in the running financial year. For instance, if the annual tax liability is ₹ 60,000 and the year has still six months, the monthly TDS deduction would be ₹10k. 

Example of Employee TDS Calculation 

Let’s consider an example for clarity of employee TDS:

Employee Details:

• Gross Salary: ₹8,00,000 per year
• HRA Exemption: ₹50,000
• Section 80C Deductions: ₹1,50,000
• Professional Tax: ₹2,400

Step-by-Step Calculation:

1. Gross Income: ₹8,00,000
2. Exemptions: ₹50,000 (HRA) + ₹2,400 (Professional Tax) = ₹52,400
3. Deductions: ₹1,50,000 (Section 80C)
4. Taxable Income: ₹8,00,000 – ₹52,400 – ₹1,50,000 = ₹5,97,600
5. Tax Calculation:
   • ₹2.5 lakh (No tax)
   • ₹2.5 lakh – ₹5 lakh (5%): ₹12,500
   • ₹5 lakh – ₹5.97 lakh (20%): ₹19,520
   • Total Tax: ₹12,500 + ₹19,520 = ₹32,020
6. Monthly TDS: ₹32,020 ÷ 12 = ₹2,668.33

Compliance and Timely Deposits

Employers are bound to pay this TDS to the government by the 7th of the following month. Annual TDS return in Form 24Q is mandatory They also need to file the quarterly TDS return in Form 24Q. Calculating and promptly making deposits erases penalties and enhances the organization’s compliance.

Conclusion 

Handling the payroll and TDS for employee salary calculations can be quite tiresome if the right tools are not used. These activities are made easy by the Pion HR HRMS software since it has calculations for TDS, and reporting and even comes with a feature of checking compliance with tax laws. So, now businesses can concentrate on their expansion with the help of Pion HR.

Transform your payroll operation today with the help of Pion HR HRMS software – contact SGCMS for more information.