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.

The Central Board for Direct Taxes (CBDT) manages it, operating as part of the Department of Revenue overseen by the Indian Revenue Service (IRS). It has great importance while conducting tax audits.

Individuals and businesses are subject to it; the payee must 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 operates on a straightforward principle: tax deduction occurs at the earliest of the due date or the actual payment. It benefits both taxpayers and the government. Taxes are deducted when payments are made via cash, credit, or cheque, and the deducted amount is subsequently 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 calculation of TDS on salary involves deducting the exemption from total annual earnings as specified by the Income Tax department. Individuals need to provide a declaration and proof to the employer for tax exemption approval. There are limits to the maximum amount eligible for exemption. The government allows tax exemption under Sections 80C and 80D. This allows an individual to seek exemption on tax based on various types of investments 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 to 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

One must file TDS returns promptly on the 31st day of July, October, January, and May within a financial year. Failure to Non-filing or filing of returns returns after the due date incurs fees under section 234E at Rs 200 per day until the return is filed.

However, this amount shall not exceed the amount of tax.

One must deduct tax at the earlier of the due date or the actual payment. Every individual needs to remit the deducted tax to the government’s credit by the 7th day of the following month. Failure or delay in TDS payment incurs interest at a rate of 1.5% per month until the tax is deposited.

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