TDS on salary: How it is calculated and deducted
Under Section 192 of the Income Tax Act, every employer who is paying a salary income to his employee is required to deduct TDS from the salary income if it exceeds the basic exemption limit.
Due to this mandate, every employer is tasked with deducting tax at source (TDS) from the employee's salary before crediting the same to the employee. Since TDS deduction is compulsory, it is important to understand the rate of such deduction and how such deduction happens.
Here's everything you need to know about how TDS on salaries work.
Rate of TDS on salary income
As per current income tax laws, there is no specified rate of TDS deduction from salary income. The rate depends on the income tax slabs applicable on the taxable income of the employee. The employer calculates the tax liability on the 'Average rate of Income Tax'.
In layman terms, average rate can be defined as the total tax liability divided by total income of an employee. To arrive at total tax liability for deducting tax on salary, employer will take into account the tax-saving investments made by him. Here's how this average rate of income tax is calculated:
Calculation of TDS from salary
| Particulars | Income Tax Payable (FY 2018-19) (In Rs) |
| Salary income | 10,00,000 |
| Less: Deductions (as per the declaration submitted by the employee) | 1,50,000 |
| Net taxable income | 8,50,000 |
| Tax payable* | 82,500 |
| Add: Health and Education Cess @4%** | 3,300 |
| Total Tax Liability (plus cess) | 85,800 |
| Average rate of income tax*** | 8.58% |
** 82,500*4%
***(Tax liability / total income) * 100 i.e. (85,800/10,00,000)* 100
Individuals must remember that while deducting TDS on income other than salary like interest income, professional income etc., TDS is deducted at a flat rate and calculation of cess is not considered.
Thus, from the monthly salary income, TDS at the rate of 8.58 per cent would be deducted and then the employee would receive the net salary income.
The average rate of income tax can remain constant every year. It is calculated at the start of each financial year on the basis of the employee's salary which will be paid to him during the year and tax-saving investments that will be made by him. It can continue to remain same if the employee submits the proofs for the investments made during the financial year.
However, remember the rate at which TDS is deducted from salary income can undergo revision as well.
Revision in TDS deductions
The employer deducts TDS based on the employee's net taxable income, i.e., gross taxable income minus tax-saving deductions (as declared by the employee) under sections 80C to 80U. Since, the calculation of average rate is based upon declarations made by the employee and forecasted salary of the employee for the upcoming period, it might undergo changes in future under the following circumstances:
- Any increment or bonus received by employee during the year resulting in an increase in income and therefore, taxes payable;
- Submission of any tax-saving investment proofs which were not submitted earlier;
- Actual tax-saving investment amount is lower than the declarations made at the beginning of the year;
- Switching jobs.
In such cases, the additional TDS can be deducted in later months to compensate for the lower deduction earlier. Similarly, if the employer has deducted a higher rate of TDS than required, he can deduct lower TDS in later months and average out the total TDS deducted. If there is any delay or default by the employer in depositing TDS with the government, then the income tax department would levy fines and penalties on the employer.
TDS in case of more than one employer
The employee might switch jobs during the financial year in which case he would earn salary income from two employers. Since the new employer would be required to calculate the average rate of income tax for TDS deduction, the employee would have to submit Form 12B to the new employer. This form states the salary received by the employee from the previous employer and the amount of tax deducted by the previous employer. The new employer will, therefore, calculate the new tax liability of the employee based on the details contained in Form 12B and calculate another average rate of income tax on which it would deduct TDS.
If you do not submit salary details you have received from your previous employer to your current employer, then TDS will be deducted on the basis of the income received by you from your current employer. Do keep in mind that if you do not disclose your previous salary details to your new employer, you will not be penalised.