Understanding Tax Deduction at Source on Salary: TDS Under Section 192

Tax Deducted at Source (TDS) is a system by the Income Tax Department of India to collect tax at the source of income. Section 192 of the Income Tax Act, 1961, specifically governs TDS on salary payments.

As per section 192 of income tax act 1961, employer is required to deduct tax on salary at the time of payment to employee. Employers have to follow the rules in the tax law, which means they can’t just decide how much tax to take out on their own.

Employers must deduct TDS (Tax Deducted at Source) before paying salaries, based on the employee’s estimated annual income. If they don’t do this, they could face interest charges and other penalties according to the law. TDS reduces an employee’s gross salary, meaning the amount you receive is lower than your total earnings. For example, if your gross salary is ₹50,000 and TDS is ₹5,000, your net salary will be ₹45,000.

In this article, we will talk about the rules for TDS (Tax Deducted at Source) on salaries, specifically section 192 of the Income Tax Act of 1961, along with other related provisions.

Nature of Payment and income to be included or excluded

Employers are responsible to deduct tax on salary for a particular financial year on the basis of slab rates applicable to employees.

Apart from salary, employers can consider income from any other head based on the declaration received from the employee. However, loss can’t be considered by the employer other than loss from house property.

For instance, business loss if any incurred during the financial year can’t be considered by the employer. In such a case, the assessee in his Income Tax Return can set-off with other income and claim tax refund in case of excess deduction.

No tax is required to be deducted if estimated salary income and other income including losses if any do not exceed the basic exemption limit.

If an employee has worked for more than one employer during a particular financial year, then the employee can furnish details of income under the head salary due or received from the previous employer and tax deducted there from. These details should be collected in a form of declaration verified by the employee.

On the basis of declaration, the present employer shall recalculate and deduct tax on salary accordingly.

In case of relief, the employer has to obtain a declaration in form 10E from the employee.

How to Calculate TDS on Salary

To calculate TDS (Tax Deducted at Source) on salary, follow these steps:

1. Estimate Income: Start by calculating the employee’s estimated income based on the declarations they provided at the beginning of the financial year.
2. Determine Tax Slabs: Once you have the estimated income, find out the applicable tax slab rates for that financial year and calculate the total tax liability for the entire year.
3. Calculate Monthly TDS: To find out how much TDS to deduct each month, divide the total annual tax liability by 12. If the employee will work for less than 12 months, divide the total tax liability by the actual number of months they will work.
4. Deduct Monthly: Deduct the calculated TDS from the employee’s salary each month so that the full tax liability is covered by the end of the year.
5. Adjust TDS Amount: Employers can adjust the TDS amount as needed. If they deducted less TDS in earlier months, they can increase the amount in later months to ensure the total tax liability for the year is met. For employees joining mid-year, TDS is adjusted based on the remaining salary for the year. If salary changes, TDS deductions are recalculated.

This way, the employer ensures that the correct amount of tax is deducted and submitted to the tax department by the end of the financial year.

Also Read: Applicable Income Tax Slabs and Rates for the financial year 2024-25 (AY 2025-26)

Documents to Collect for Calculating Tax Liability

To calculate the estimated income and tax liability, employers need to collect specific documents from employees in the required format. Here are some examples:

1. For HRA Exemption: Employees should provide Rent receipts, Rent agreement and PAN details of the landlord
2. For Deductions Under Section 80C: Employers will ask for receipts and certificates related to eligible investments.
3. For Relief Under Section 89: If an employee has arrears of salary or gratuity, they must submit a declaration in form 10E to the employer.

Collecting these documents helps ensure accurate tax calculations and compliance with tax laws.

TDS on Non-Monetary Perquisites

Employers can pay income tax on non-monetary benefits (perquisites) they provide to employees.

In these situations, the value of these non-monetary benefits must be included when calculating salaries for tax purposes. Additionally, any tax the employer pays on behalf of the employee should also be factored in when calculating TDS (Tax Deducted at Source).

Deduction Schedule

TDS is deducted monthly and remitted to the government by the 7th of the following month.

For example, TDS for October salary is deducted in October and must be deposited by November 7.

For the month of March, the last date of deposit is 30th April of the following financial year. For example, TDS for the March 2024 salary is deducted in March 2024 and must be deposited by 30th April 2024.

How Employees Can Reduce TDS Deductions

Employees can lower their TDS (Tax Deducted at Source) deductions on salary by optimizing their taxable income through various exemptions and deductions allowed under the Income Tax Act, 1961. Here’s how:

• Inform Your Employer: Provide your employer with information about eligible deductions and submit necessary proofs or declarations to adjust TDS.
• Claim HRA Exemption: If you live in rented accommodation, claim House Rent Allowance (HRA) exemption to reduce taxable income.
• Utilize Section 80C Deductions: Claim deductions for investments in specified instruments like Public Provident Fund (PPF), Life Insurance Premiums, and Employee Provident Fund (EPF) under Section 80C.
• Health Insurance Deductions: Claim deductions for health insurance premiums and preventive health check-ups under Section 80D.
• Education Loan Interest: Deduct interest on education loans under Section 80E to reduce taxable income.
• Charitable Donations: Claim deductions for donations made under Section 80G to eligible charitable organizations.
• Home Loan Interest: Deduct interest paid on home loans under Section 24(b) to lower taxable income.
• Submit Timely Tax Declarations: Ensure that your tax declarations are submitted on time for proper TDS calculations.
• Opt for a Lower Taxable Income: Consider salary structuring options that can reduce your taxable income.
• Consult a Tax Professional: Seek advice from a tax consultant for tailored tax planning based on your salary structure.

By utilizing these strategies, employees can effectively reduce their TDS deductions and better manage their tax liabilities.

What Happens if TDS is Not Deducted or Paid?

If TDS (Tax Deducted at Source) on salary is not deducted or paid by the employer, it can lead to significant consequences for both the employer and the employee.

Consequences for the Employer

• Interest Charges: If TDS is not deducted or is short-deducted, the employer must pay interest on the unpaid amount: 1% per month for late deduction. 1.5% per month for late deposit.
• Penalties: A penalty of up to ₹1,000 per day may apply for delayed deposit of TDS. Under Section 276B, penalties can range from ₹10,000 to ₹1,00,000 for failure to comply with TDS provisions.
• Expense Dis-allowance: If TDS is not deducted on payments (including salaries), those amounts may be disallowed as business expenses, increasing the employer’s tax liability.

Consequences for the Employee

• Tax Liability: The employee must still pay the tax due when filing their income tax return (ITR), potentially leading to a financial burden.
• Interest on Tax Due: Employees may incur interest on unpaid taxes from the due date until payment, under Sections 234B and 234C.
• Refund Delays: Delayed processing of tax refunds may occur if TDS is not properly deducted, leading to complications when filing the ITR.
• Filing Complications: Discrepancies between expected and actual TDS can complicate the filing process, requiring additional follow-ups with the employer or tax authorities.

What to Do If TDS is Not Deducted or Paid?

• Notify the Employer: Immediately inform your employer about the missing TDS deduction and request correction.
• Request Updated Form 16: If Form 16 is issued without proper TDS details, ask for an amended version.
• File Your ITR: You must still file your income tax return and pay any taxes owed, even if TDS was not deducted.
• Claim Tax Credits: If advance tax payments were made or TDS is deducted later, you can claim it as a tax credit when filing your return, which may result in a refund.

How to Avoid Issues with TDS on Salary?

• Review Salary Slips: Regularly check your salary slips for accurate TDS deductions.
• Verify TDS in Form 26AS: Use Form 26AS, a consolidated tax statement, to confirm all TDS deducted and deposited against your income.
• Keep Records: Maintain all relevant documents, such as payslips, Form 16, and TDS certificates, for easy reconciliation and future reference.

Important Forms and Compliance

Understanding the important forms related to TDS is crucial for both employers and employees. Here’s a summary:

• Form 16: Issued annually by the employer, summarizing salary paid and TDS deducted.
• Form 24Q: Quarterly TDS return filed by employers to report TDS deductions from salaries. Includes employer details and summaries of TDS deducted and deposited.
• Form 26AS: An annual tax statement showing all TDS deducted on an individual’s income. Accessible through the Income Tax e-filing account or TRACES portal. Used for verifying that TDS has been deposited with the government.
• Form 12BB: Employee declaration form to report deductions (like under Section 80C, 80D, HRA) to the employer. Typically submitted at the start of the financial year or upon changes in claims.
• Form 10E: Used to claim relief under Section 89 when receiving arrears or advance salary.

By staying informed and compliant with these forms, both employees and employers can effectively manage TDS-related issues and ensure smooth tax reporting and payments.

Key Compliance Requirements for Salary TDS

• Monthly TDS Deduction: Employers must deduct TDS based on estimated income and eligible deductions.
• TDS Deposit: The deducted TDS must be deposited to the government account by the 7th of the following month.
• Quarterly Filing of Form 24Q: Employers must file Form 24Q for each quarter to report TDS deducted.
• Issuance of Form 16: Employers must issue Form 16 by May 31st of the following year.

Quarterly TDS Return on Salary

Employers must deposit the TDS (Tax Deducted at Source) from employees’ salaries with the Income Tax department by the 7th of the month following the deduction. For example, if tax is deducted in August, it must be deposited by September 7th. This can be done online using net banking.

After making the payment for the entire quarter, employers need to file a quarterly TDS return using Form 24Q with the Income Tax Department. Once the TDS return is filed, employees can see the tax deducted in their Form 26AS online.

When filing Form 24Q, employers must include details such as:

• Employee’s PAN
• Amount of tax deducted
• Salary amount on which TDS is calculated
• Employee’s name

Form 24Q needs to be submitted for each quarter by the due date.

Key Dates for TDS Compliance

New Regime vs. Old Regime

Section 192 applies whether the employee opts for the new tax regime (with lower tax rates but no exemptions or deductions) or the old regime (with exemptions and deductions). Employers must calculate TDS based on the chosen regime.

Rebate under Section 87A

If the employee’s total taxable income is less than ₹5 lakh, they are eligible for a tax rebate under Section 87A, reducing the TDS deducted.

In the old tax regime, taxpayers can claim up to ₹12,500 as a tax rebate under Section 87A if their income is less than ₹5 lakh.

In the new tax regime, the tax rebate under Section 87A is ₹25,000 if income does not exceed ₹7.5 lakh.

Certificate Issued to Employees

By May 31st of the relevant assessment year, employers must provide employees with Form 16. This certificate can be signed using the employer’s digital signature certificate (DSC). It’s important to check the content of Form 16 before signing, as it cannot be changed afterward.

Additionally, if the salary paid or payable exceeds ₹1,50,000, employers should issue Form 12BA, which includes details of any perquisites or benefits. If the salary is less than that amount, Form 12BA can be included with Form 16.

Frequently asked questions (FAQs)

What is the basic exemption limit below which TDS is not calculated?

TDS (Tax Deducted at Source) on salary depends on income levels and tax slabs. If your salary is below the following basic exemption limit, then TDS will not be applied:

• Old Tax Regime:
  • ₹2.5 lakh for individuals under 60.
  • ₹3 lakh for senior citizens (60 years and above).
  • ₹5 lakh for super senior citizens (80 years and above).
• New Tax Regime: ₹3 lakh for all individuals, regardless of age.

Employers estimate annual income and calculate monthly TDS based on projected tax liability.

What are the other incomes on which TDS is deducted?

• Interest on Bank Deposits: TDS on interest exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.
• Rent Payments: TDS if monthly rent exceeds ₹2.4 lakh, typically at 10% for individuals and HUFs, 40% for others.
• Professional Fees: TDS on professional fees exceeding ₹30,000 at a rate of 10%.
• Contractor Payments: TDS if contract payments exceed ₹30,000, at 1% for individuals and HUFs, 2% for others.
• Commission or Brokerage: TDS on payments over ₹15,000 at a rate of 5%.
• Dividends: TDS on dividends exceeding ₹5,000 at a rate of 10%.
• Lottery Winnings: TDS on winnings over ₹10,000 at a rate of 30%.
• Insurance Commission: TDS on payments exceeding ₹15,000 at a rate of 5%.
• Payments to Non-Residents: TDS applies to various payments with rates varying based on the income type and relevant agreements.
• Sale of Property: TDS on property sales over ₹50 lakh at a rate of 1%.

Understanding TDS helps employees manage their finances and comply with tax regulations. Regularly monitoring TDS deductions can also prevent surprises during tax season.

Which TDS certificate is issued for tax deduction on salary?

The TDS certificate issued for tax deduction on salary is called Form 16.

• What is Form 16?: It is a certificate from your employer that shows the salary you received and the TDS deducted during the financial year.
• Parts of Form 16:
  • Part A: Contains details about the employer and employee, along with a summary of TDS deductions.
  • Part B: Provides a detailed breakdown of salary components, deductions claimed (like under Sections 80C, 80D), and your taxable income.

Employers must issue Form 16 to employees by June 15 of the assessment year, after the financial year ends.

Is it possible to file an income tax return without receiving Form 16?

Yes, you can file your income tax return (ITR) without receiving Form 16, but keep these points in mind:

• Use Alternative Documents: You can report your income using salary slips, bank statements showing salary deposits, and other proof of income.
• Calculate Income and Deductions: You’ll need to determine your total income, applicable deductions, and any TDS based on your records. Make sure your calculations are accurate.
• Check Form 26AS: If TDS has been deducted, you can verify it using Form 26AS, which shows all taxes deducted on your behalf. You can access this form through the Income Tax Department’s e-filing portal.
• Follow Up with Employer: If your employer should provide Form 16 but hasn’t, follow up with them. They are required to issue it by June 15 of the assessment year.
• Choose the Right ITR Form: Depending on your income sources, select the appropriate form (like ITR-1, ITR-2, etc.) for filing your return.
• Watch for Discrepancies: Filing without Form 16 might lead to discrepancies if tax authorities have different records, which could complicate the process or raise queries later.

While it’s possible to file your ITR without Form 16, having complete documentation is advisable for accuracy and compliance.

What Is a Tax Declaration to the Employer and When to Submit It

A tax declaration is a formal statement employees provide to their employer regarding income, deductions, and other financial details. This helps the employer accurately calculate TDS.

Key Information to Include

• Salary from Previous Employers
• Tax Regime Choice (new or old)
• Eligible Deductions (e.g., under Sections 80C, 80D)
• Additional Income Sources

Submission Timing: Employees typically need to submit tax declarations at the start of the financial year or during specific periods before TDS calculations begin. You can revise your declaration if there are changes in your financial situation.

A tax declaration is essential for accurate payroll processing, allowing employers to deduct the right amount of tax and helping employees manage their tax obligations effectively.

What to Do If Too Much Tax Is Deducted from Your Salary

If you notice that a higher amount of tax has been deducted from your salary than expected, follow these steps:

• Check Pay Slips: Review your recent pay slips to verify the TDS amount deducted. Ensure the calculations align with your expected income and deductions.
• Review Salary Components: Look at the different parts of your salary (like basic pay, allowances, and bonuses) to understand how they affect your taxable income. Changes in your salary structure may impact TDS.
• Verify TDS Calculations: Check for any errors in the TDS calculation by your employer. If you find any discrepancies, discuss them with your HR or payroll department.
• Update Your Employer: If your tax situation has changed (due to new investments, deductions, or personal circumstances), provide updated tax information to your employer to help adjust future TDS deductions.
• Claim Eligible Deductions: Ensure you’re claiming all eligible deductions (like those under Sections 80C, 80D, etc.) to lower your taxable income. Declare these for the current financial year if you haven’t already.
• Reconcile at Tax Filing: When you file your Income Tax Return (ITR), reconcile the TDS deducted with your total tax liability. If too much TDS has been deducted, you can claim a refund.
• Check Form 26AS: Regularly review your Form 26AS, which shows all TDS deducted and deposited with the government. This helps ensure accuracy.
• Notify Your Employer: After filing your return, if you expect a refund, inform your employer to adjust TDS for the upcoming months, if possible.

By reviewing your salary structure, ensuring accurate declarations, and properly filing your tax return, you can effectively manage your tax situation and potentially reclaim any excess deductions.

How should you manage your tax obligations when you have multiple jobs in a year?

When you have more than one job, managing TDS (Tax Deducted at Source) can be tricky:

• Disclosure of Income: Each employer calculates TDS based only on the salary they pay you. If you don’t inform them about your total income, they might assume you have no other earnings, leading to incorrect TDS deductions.
• Higher Overall TDS: If one employer deducts TDS based on a higher salary while you also earn from another, you may end up paying more tax than necessary.
• Basic Exemption Limit: Employers might not consider the basic exemption limit, which can result in over-deduction.
• Inform Your Employer: It’s advisable to tell your current employer about your total expected income for the year, including past salaries. This helps them adjust TDS calculations.
• Check Form 26AS: Regularly review your Form 26AS, which shows the TDS deducted by all employers. This helps you track your total tax liability.
• Combine Income for Tax Returns: When filing your tax return, include all income from different jobs and reconcile TDS against your total tax liability.
• Claim Refunds: If too much TDS has been deducted, you can claim a refund when filing your tax return.
• Report Accurately: Ensure you report all income accurately to avoid penalties or interest on unpaid taxes.

Being proactive, by communicating with employers and keeping track of your deductions, can help you manage your tax obligations effectively. If you’re unsure about your situation, consider consulting a tax professional for personalized advice.

Why Does the Government Use TDS?

The government employs TDS (Tax Deducted at Source) to collect taxes throughout the year instead of requiring a lump sum payment at year-end.

Here are the Benefits of TDS:

• Makes tax collection easier for the government.
• Helps employees budget effectively with regular deductions.
• Encourages compliance and reduces tax evasion.
• Provides taxpayers with a clear record of income and taxes, making filing easier.

Overall, TDS streamlines tax collection and promotes compliance.

What are the Advantages of TDS on salary?

Here are the main advantages of TDS on salary:

• Reduces Tax Evasion: Collecting tax at the source ensures compliance.
• Easier Tax Management: Regular deductions simplify tax handling.
• Avoids Big Tax Bills: Year-round deductions reduce the likelihood of large tax bills.
• Clear Records: Form 16 provides a straightforward record of income and taxes, facilitating tax filing.
• Encourages Financial Awareness: Regular deductions help employees manage finances and learn about tax planning.
• Steady Government Revenue: TDS provides consistent revenue inflow for the government.

Overall, TDS promotes compliance, eases tax management for employees, and supports government revenue.

What are the drawbacks of TDS on Salary?

While TDS is crucial for tax compliance, it has limitations:

• Reduced Take-Home Pay: TDS decreases monthly salaries, affecting cash flow.
• Complex Calculations: Determining accurate TDS can be difficult with multiple income sources.
• Estimation Issues: TDS based on estimated income may not reflect actual earnings.
• Refund Delays: Claiming a refund for excess TDS can take time.
• Lack of Understanding: Many employees may not fully grasp TDS, leading to confusion about net salary and tax liabilities.
• Exclusion of Tax Credits: TDS doesn’t consider potential tax credits that could lower tax burdens.
• Reliance on Employers: Employees depend on employers for accurate TDS calculations.
• Limited Flexibility: Once deducted, adjusting tax payments during the year is challenging.
• Misclassification Risks: Employers may misclassify income components, leading to inappropriate deductions.
• Administrative Burden: Employers face increased workload to comply with TDS regulations.

Awareness of these limitations and proactive communication can help mitigate TDS challenges.