How much TDS is deducted from salary?

How is TDS Calculated on Your Salary?

The amount of Tax Deducted at Source (TDS) from your salary is not a single, fixed percentage. Your employer calculates it based on your total estimated income for the financial year, after considering any deductions you claim. This calculation uses the income tax slab rates applicable to you. Understanding this is a key part of managing your finances under the Income Tax India framework.

Think of TDS as paying your income tax in small monthly instalments instead of a large lump sum at the end of the year. Your employer has the responsibility to deduct this tax and pay it to the government on your behalf. The final amount depends entirely on your earnings and the tax-saving choices you make.

The Step-by-Step Process Your Employer Follows

Your HR or accounts department does not pick a random number. They follow a specific process defined by income tax laws to determine your monthly TDS. Here is a breakdown of the steps involved.

1. Estimate Your Total Annual Income: The first step is to calculate your total earnings for the year. This includes your basic salary, dearness allowance (DA), house rent allowance (HRA), transport allowance, and any other allowances or perquisites. They will also include any other income you declare, like rent from a property.
2. Subtract Exemptions: Next, they subtract any components of your salary that are exempt from tax. Common exemptions include House Rent Allowance (HRA) and Leave Travel Allowance (LTA). You must provide proofs for these claims.
3. Factor in Deductions: This is where your investment declarations come in. Your employer will reduce your taxable income based on the deductions you claim under Chapter VI-A. This includes the standard deduction of 50,000 rupees, which is available to all salaried employees. Other major deductions include:
   • Section 80C: Up to 1.5 lakh rupees for investments in EPF, PPF, ELSS, life insurance premiums, etc.
   • Section 80D: For health insurance premiums.
   • Section 80CCD(1B): An additional 50,000 rupees for contributions to the National Pension System (NPS).
   • Section 80E: For interest paid on an education loan.
   • Section 24(b): For interest paid on a home loan.
4. Calculate Net Taxable Income: After subtracting all exemptions and deductions from your gross income, what remains is your Net Taxable Income. This is the final amount on which your tax will be calculated.
5. Apply the Income Tax Slab Rates: Your employer then applies the relevant income tax slab rates to your net taxable income. You must inform your employer whether you want to opt for the New Tax Regime or the Old Tax Regime. The default is the New Tax Regime.
6. Add Health and Education Cess: A cess of 4% is added to your total income tax amount. This is a mandatory levy.
7. Determine Monthly TDS: The final annual tax amount is divided by 12. This gives the average monthly TDS amount that is deducted from your salary.

Current Income Tax Slab Rates (FY 2023-24)

The tax slab you fall into is the biggest factor in your TDS calculation. You have a choice between two regimes. The New Tax Regime is the default option unless you specifically inform your employer to use the Old Tax Regime.

New Tax Regime (Default)

This regime offers lower tax rates but does not allow you to claim most common deductions like those under Section 80C and 80D. A standard deduction of 50,000 rupees is available.

Individuals with taxable income up to 7 lakh rupees pay zero tax in the New Regime due to a tax rebate under Section 87A.

Old Tax Regime

This regime has higher tax rates but allows you to claim a wide range of deductions and exemptions, which can significantly lower your taxable income.

Under the Old Regime, a tax rebate is available for those with taxable income up to 5 lakh rupees.

Example TDS Calculation

Let's see how this works with an example. Suppose Priya has an annual salary of 10 lakh rupees. She has declared investments of 1.5 lakh rupees under Section 80C.

Calculation under the Old Tax Regime:

• Gross Salary: 10,00,000
• Less: Standard Deduction: 50,000
• Less: 80C Deduction: 1,50,000
• Net Taxable Income: 8,00,000
• Tax Calculation:
  • On income up to 2.5 lakh: 0
  • On income from 2.5 lakh to 5 lakh (2.5 lakh @ 5%): 12,500
  • On income from 5 lakh to 8 lakh (3 lakh @ 20%): 60,000
  • Total Tax: 72,500
• Add 4% Cess: 2,900
• Total Annual Tax: 75,400
• Monthly TDS: 75,400 / 12 = 6,283 rupees

Calculation under the New Tax Regime:

• Gross Salary: 10,00,000
• Less: Standard Deduction: 50,000
• (No 80C deduction is allowed)
• Net Taxable Income: 9,50,000
• Tax Calculation:
  • On income up to 3 lakh: 0
  • On income from 3 lakh to 6 lakh (3 lakh @ 5%): 15,000
  • On income from 6 lakh to 9 lakh (3 lakh @ 10%): 30,000
  • On income from 9 lakh to 9.5 lakh (50,000 @ 15%): 7,500
  • Total Tax: 52,500
• Add 4% Cess: 2,100
• Total Annual Tax: 54,600
• Monthly TDS: 54,600 / 12 = 4,550 rupees

In this case, Priya's monthly TDS would be lower if she opts for the New Tax Regime.

How to Ensure Correct TDS Deduction

The best way to avoid excess or insufficient TDS is to communicate with your employer. At the start of the financial year, your company will ask you to submit an investment declaration in Form 12BB. This form allows you to declare all the tax-saving investments and expenses you plan to make during the year.

If you submit this declaration accurately, your employer can calculate your TDS correctly from the beginning. If you fail to submit it, they will calculate TDS based on the New Tax Regime without considering any of your deductions, leading to a higher TDS amount. Remember to submit the actual proofs of investment towards the end of the financial year (usually between January and March) to finalize the calculation. You can find more details on tax forms and filing at the official Income Tax Department portal.