TDS on Salary under Section 192

TDS on Salary under Section 192: A Comprehensive Guide to Tax Deduction at Source

Tax Deduction at Source (TDS) impacts individuals' net salary, leading to a lower paycheck than their Cost to Company (CTC). Employers extract tax from salaries and deposit this amount with the government on behalf of the employee. This article covers TDS on salary in-depth, including details on who, when, how and at what rate TDS is deducted.

Who Can Deduct TDS on salary under Section 192

TDS on salary can be deducted by various entities, including companies (private or public), individuals, Hindu Undivided Families (HUFs), trusts, partnership firms, and cooperative societies. Regardless of the employer's status, such as being a firm, HUF, or company, what matters is the employer-employee relationship for the deduction of tax at source under Section 192 of the Income Tax Act, 1961. The number of employees employed by the employer is also irrelevant for TDS deduction.

When is TDS Deducted under Section 192?

TDS under Section 192 is deducted when the salary is paid, not when it is accrued. This applies whether the payment is on time, in advance or late. 

If the estimated salary isn't more than the basic exemption limit, no TDS will be deducted. This rule applies to everyone, even those without a PAN. Basic exemption limits differ for each age group.

How to Calculate TDS on Salary under Section 192

Calculating TDS on salary involves several steps. Let's break down the process:

Step 1: Calculation of Taxable Income of the Employee

The employer estimates the employee's salary for the relevant financial year, considering components such as basic pay, dearness allowance, perquisites granted by the employer, other allowances like House Rent Allowance (HRA), Leave Travel Allowance (LTA), meal coupons, etc. Additionally, factors like Employee Provident Fund (EPF) contributions, bonus, commissions, gratuity, and salary from previous employers are also taken into account.

Step 2: Calculation of Exemptions under Section 10 

The employer calculates exemptions under Section 10 of the Income Tax Act. This includes exemptions for allowances like HRA, travel expenses, uniform expenses, children's education allowances, etc. The employer also deducts professional tax paid, entertainment allowance, and a standard deduction of Rs 50,000 from the gross monthly income.

Step 3: Determination of Taxable Salary Income

The employer subtracts the exemptions calculated in the previous step from the gross monthly income to arrive at the net taxable salary income.

Step 4: Inclusion of Other Incomes

If the employee has additional sources of income, such as rental income from a house property or bank deposits, the employer adds these amounts to the net taxable salary. Similarly, if there is any interest paid on housing loans, it is deducted from the house property income. The resulting figure is the employee's gross total income.

Step 5: Deduction of Investments

The employer reduces the investments made by the employee during the year under various sections of the Income Tax Act. These investments may include Public Provident Fund (PPF), Employee's Provident Fund (EPF), Equity Linked Savings Scheme (ELSS) mutual funds, National Savings Certificate (NSC), Sukanya Samriddhi Account, home loan repayment, life insurance premiums, etc. Deductions under other sections like Section 80D and 80G are also considered.

It is important to note that from the financial year 2023-24 onwards, the new tax regime is the default regime. Employees have the option to choose between the old and new tax regimes each year. If an employee opts for the new tax regime, certain exemptions and deductions allowed in the old regime are not applicable. The employer will calculate the net taxable income based on the chosen tax regime.

Rate of TDS Deduction 

Section 192 doesn't define a specific TDS rate. The TDS deduction is based on the taxpayer's income tax slab rates for the relevant financial year. The employer calculates the TDS at the start of the financial year by dividing the employee's estimated tax liability by the months of employment. 

If an employee doesn't have a PAN, TDS is deducted at 20% plus a 4% cess. The employer adjusts any excess or deficit from previous TDS deductions by adjusting future deductions within the same financial year.

Illustrations

Let's look at a couple of illustrations to understand the calculation of TDS on salary:

Case 1:

Nikhil, 40, is employed at ClearTax with a monthly salary of Rs 1,00,000 for FY 2022-23. He has invested Rs 50,000 in ELSS funds, Rs 60,000 in PPF, and Rs 40,000 in NSC. The monthly TDS calculation under Section 192 is as follows:

If 12 months are left for TDS deduction in the financial year, the employer will deduct TDS u/s 192 = Rs 1,17,000 / 12 = Rs 9,750. 

If the employee chooses the new tax regime, the TDS calculation will be different: 

In the new regime, standard deduction of Rs 50,000 and deductions for ELSS, PPF, and NSC investment are not allowed. Tax is based on the new slab rates. The tax payable is Rs 1,05,000, and the 4% education and higher education cess is Rs 4,200. So, the net tax payable is Rs 1,09,200. The monthly TDS u/s 192 to be deducted will be Rs 1,09,200 / 12 = Rs 9100.

Case 2:

Mr. Soni receives a pension of Rs 30,000 per month, and he has an additional income of Rs 12,000 from interest on a pension account (savings account) during the FY 2022-23. Let's calculate the monthly TDS amount deducted from the pension:

TDS is required to be deducted on all monetary amounts paid by the employer under the head 'Salary,' which includes pension. Here's the computation of TDS for Mr. Soni:

No TDS will be deducted from the pension since the tax payable is zero.

Salary from Multiple Employers 

If a person works for multiple employers, they can share their salary and TDS details using Form 12B with one employer. This employer will then calculate the total salary and deduct TDS. 

When changing jobs, an individual can provide the new employer with previous salary details using Form 12B. The new employer will then calculate TDS for the rest of the financial year. 

If an employee doesn't disclose other income sources, each employer will only deduct TDS from the salary they pay.

Section 89 Deductions 

Section 89 of the Income Tax Act allows individuals to reduce taxable income through certain deductions. This adjustment, called marginal relief, applies when salary or arrears of salary are taxed at a higher rate due to slab rate changes. 

To get this relief, individuals need to file Form 10E on the official income tax portal. Without this form, they can't get relief under Section 89.

TDS Statements and Certificates 

Employers must provide employees with Form 16, detailing salary and tax deductions. Form 12BA may also be given, outlining perks and profits instead of salary. 

The deadline for TDS deposits under Section 192 varies. If deducted by a government employer, it's due the same day. For non-government employers, there are different timelines: 

• TDS deducted in March: Due by 30th April
• TDS deducted in any other month: Due within seven days of the following month

The employer must file a TDS return in Form 24Q every quarter, detailing salary paid and TDS deducted. Form 24Q has two appendices - Annexure I for all quarters and Annexure II for the last quarter. Reasons must be given for non-deduction or lesser deduction of TDS. 

Post TDS return filing, the employer creates a TDS certificate (Form 16) which can be accessed from the TRACES utility. This certificate carries details of the quarterly TDS deducted and deposited, the employer's PAN and TAN, a salary breakdown, exemptions, Chapter VI-A deductions, and the income tax amount.

Conclusion

Understanding TDS on salary is crucial for both employers and employees. Employers must ensure proper compliance with TDS provisions, while employees should be aware of how their salary is taxed. By following the guidelines under Section 192 of the Income Tax Act and accurately calculating TDS, employers can fulfill their tax obligations, and employees can effectively plan their finances. Remember to consult a tax professional or refer to the official resources for specific queries or clarifications regarding TDS on salary.