How is TDS Calculated?

TDS calculation

Tax Deducted at Source (TDS) is a means of collecting Income Tax in India, under the Indian Income Tax Act of 1961. It is managed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue managed by the Indian Revenue Service (IRS). It has great importance while conducting tax audits.

It is applicable to individuals and businesses, the payee is required to collect tax at source before making certain types of payments for rendering specific services. The types of payments include salary, fees, interest, rent, commission, etc. The payee is directed to collect a certain percentage of TDS that is sent to the Central Government.

Advantages of TDS

The concept of TDS is based on a simple principle i.e. tax is to be deducted at the time of payment getting due or actual payment whichever is earlier. It is a win-win scenario for both the taxpayers and the government. Tax is deducted when making payments by cash, credit or cheque, which is then deposited with the central agencies.

  • A steady source of revenue for the government.
  • Responsibility sharing for deduction and tax collection agencies.
  • Prevention of tax evasion.
  • Widens the tax collection.
  • Easier for a deductee as tax gets automatically collected and deposited to the credit of the central government.

TDS Calculation

The TDS on salary can be calculated by reducing the exemption from total annual earning as specified by the Income Tax department. The employer is required to obtain a declaration and proof from individuals to approve a tax exemption. There are limits to the maximum amount that can be considered for exemption. The government allows tax exemption under Section 80C and 80D. This allows an individual to seek exemption on tax based on various types of investment he/she is making for that particular financial year.

Categories considered for exemption

  • House Rent Allowance – If an employee is paying towards accommodation as rent and entitled for HRA from the employer, the employee can declare this amount of tax exemption.
  • Conveyance or Travel Allowance – If an employee is provided with a conveyance allowance, the employee can declare them for tax exemption.
  • Medical Allowance – If an employee is entitled to a medical allowance, he/she can declare and produce medical bills for tax exemption.

TDS Deduction Rate for Financial Year 2017 – 2018:

Annual Income Tax Rates Education Cess Secondary & Higher Education Cess
Up to Rs.2,50,000 Nil Nil Nil
Rs.2,50,001 – Rs.5,00,000 5% 2% of income tax 1% of income tax
Rs.5,00,001 -Rs.10,00,000 Rs.12,500 + 20% 2% of income tax 1% of income tax
Above Rs.10,00,000 Rs.1,12,500 + 30% 2% of income tax 1% of income tax

TDS returns are required to be filed timely on the 31st day of July, October, January, and May during a financial year. Non-filing or filing of return after the due date will attract fees under section 234E @ Rs 200/- per day until the return is filed. However, this amount shall not exceed the amount of tax.

Tax is required to be deducted at the time of payment getting due or actual payment whichever is earlier. Every person is required to pay the tax deducted to the credit of government by the 7th day of the following month. Non-payment or late payment of TDS will attract interest @ 1.5% per month until the tax has not been deposited.