POSTED BY ALOK PATNIA ON February 21st, 2014
How to deduct TDS on salaries?
The concept of TDS on salaries, creates some pressure on the employers who need to deduct taxes at source on making payment to their employees. Many questions arise when the time to make the payment comes, how much tax should be deducted? On what amount the tax needs to be deducted? Should we deduct tax only on cash payment?
To understand this first we need to know the components of salary. Salary is mainly divided into two broad heads i.e. Salary and Perquisites.
Cash payouts are termed as salaries whereas perquisites are other facilities and amenities enjoyed by the employees, while in employment these generally include transportation, accommodation, fuel & gas, interest free loans, other subsidies etc. The Income Tax Act also provides some exemptions relating to many of these allowances and perquisites.
Now for the purpose of calculation of the TDS amount you need to calculate the total taxable salary and on the basis of that the TDS amount would be distributed along the year, equally.
The steps would be as follows:
1) First we need to compute the total income from salaries, this would include all the allowance and perquisites given to the employees. After adding up the total salary to the employee, exemption provided by the Income Tax Act would be subtracted to calculate the gross salary income.
Should this be done every month?
No, This needs to be done for a one month and then multiplied by the total number of months worked by the employee for a particular year. However if the salary structure of an employee is altered in the middle of the year, then the gross salary would be altered and this calculation needs to be done again.
2) Incorporate any other income or loss disclosed by your employee. This could be income/loss from house property, interest on deposits, any interest expenses with regard to specific loans etc.
3) Providing deduction under chapter VIA like deduction under section 80C for any investments made by the employee.
4) Calculation taxable income and taxable amount: According
to the income tax act, income to the extent of Rs. 2 lakhs is exempt from taxes. Hence, you need to calculate the taxable amount after allowing the exemption limit.
Lets take an example for clarity:
Mr. A earns gross salary of Rs. 90,000 per month.
The breakup of the gross salary would be as follows: Basic salary – Rs. 60,000; HRA – Rs. 15000; Transport allowance – Rs. 800; Child Education – Rs. 200; Medical allowance – Rs 1250; Other allowance – Rs. 12750.
The exemption on the above would be as follows: Transport allowance would be fully exempt i.e. Rs 800, Child Education allowance would be fully exempt i.e. Rs 200, Medical allowance would be exempt to the extent Mr. A furnishes a bill assuming Rs. 1000. NO exemption in HRA assuming Mr. A stays in self owned property. The total exemption would amount to Rs 2000 per month.
Hence the taxable income from salaries would amount to Rs. (90000 – 2000)*12 = Rs. 1056000.
Incorporating any other income or loss reported by the employee. Assuming Mr. A took a loan for house property hence the interest paid by Mr. A will be loss from house property to a maximum of Rs. 150000. Assuming the interest amount was Rs. 120000 for the year. Income from house property would be – Rs. 120000.
Deduction under chapter VIA, assuming Mr. A invested in various tax saving bonds to the extent of Rs. 100,000. The deduction under section 80C would be Rs. 100,000.
The total taxable income of Mr.A would amount to Rs. (1056000 – 120000 – 100,000) = Rs. 836,000.
The total tax payable by Mr. A would be calculated as follows:
First 2 lakhs = NIL
Next 3 lakhs @ 10% = 30,000
Balance 336000 @ 20% = 67,200
Total tax payable would be Rs. 97,000 + 3% education cess = Rs. 100116.
Now, TDS needs to be deducted equally over 12 months, hence TDS amount would be Rs. 8343 per month.
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