Tax Deducted at Source (TDS) plays a crucial role in India’s tax collection system, ensuring taxes are deducted at the time salaries are paid. Under Section 192 of the Income Tax Act, employers are required to deduct TDS from salaries if an employee’s projected annual income exceeds the prescribed exemption limits. This mechanism helps in timely tax collection and directly impacts an employee’s take-home salary. The provision applies across the board to all employers—government, private companies, public sector undertakings, partnerships, trusts, and even Hindu Undivided Families (HUFs).
For employees, understanding TDS under Section 192 is vital for effective financial planning, while for employers, it is a matter of strict compliance to avoid penalties.
Key Highlights
- TDS applies when annual salary exceeds the basic exemption limit.
- Employers must deposit TDS with the government by the 7th of the following month.
- Applicable to all employers, regardless of sector.
- Penalties and interest apply for late payments or non-compliance.
- Accurate TDS calculation helps employees optimise tax planning.
What is TDS on Salary?
TDS on salary refers to the deduction of a portion of an employee’s pay by the employer, which is then deposited with the government against the employee’s tax liability. Under Section 192, the employer estimates the employee’s annual taxable income and deducts tax accordingly. For individuals under 60, no TDS applies if annual income is below ₹2.5 lakh.
Impact on Take-Home Pay
TDS deductions reduce the monthly salary credited to an employee’s account. For instance, an annual taxable income of ₹8,26,600 could result in a monthly TDS of ₹6,742, lowering monthly disposable income.
Section 192 Exemption Limits
- Below 60 years: ₹2.5 lakh
- 60 to 80 years: ₹3 lakh
- Above 80 years: ₹5 lakh
Under the new tax regime, all taxpayers get a ₹3 lakh basic exemption.
Example: For an annual salary of ₹12 lakh:
- Old regime: Tax ₹1,17,000; monthly TDS ₹9,750
- New regime: Tax ₹85,800; monthly TDS ₹7,150
When and How TDS is Deducted
TDS is deducted at the time of actual payment of salary, based on projected annual earnings. The calculation involves:
- Estimating gross salary (basic pay, allowances, bonuses).
- Applying exemptions under Section 10.
- Calculating taxable income.
- Applying the relevant tax slab rates.
- Dividing annual tax by 12 for monthly deduction.
Salary Components Considered for TDS
- Basic salary
- House Rent Allowance (HRA)
- Travel and medical allowances
- Dearness allowance
- Special allowances
TDS Rates and Tax Regimes
For FY 2023-24, rates vary depending on the chosen regime:
- Income up to ₹2.5 lakh: Nil
- ₹2.5 lakh–₹5 lakh: 5%
- ₹5 lakh–₹10 lakh: 10% (new regime) / 20% (old regime)
- Above ₹10 lakh: 30%
Employees can opt for the old or new regime depending on which offers better tax benefits.
Depositing TDS
Employers must deposit TDS by the 7th of the following month, except for March, when the deadline is April 30. Compliance requires filing quarterly TDS returns via Form 24Q. Late filings attract a penalty of ₹200 per day until the total TDS amount is reached.
Form 16: Proof of Tax Deduction
Employers issue Form 16 annually, detailing salary paid and TDS deducted. Part A contains TDS details and TAN of the employer; Part B lists salary breakdown and deductions claimed. Form 16 is essential for filing Income Tax Returns and claiming refunds.
Penalties for Non-Compliance
- Late filing fee: ₹200 per day (up to the TDS amount).
- Interest on late deposit: 1.5% per month for delayed payment, 1% per month if TDS was not deducted on time.
Why This Matters
Section 192 ensures taxes are collected efficiently and that employees’ tax liabilities are addressed throughout the year. Employers must stay compliant to avoid financial penalties, while employees should monitor deductions to optimise tax planning and maximise take-home income.
FAQs
What is TDS on salary? It is tax deducted by employers from employees’ salaries and deposited with the government.
Who must deduct TDS under Section 192? Any employer paying a salary above the exemption limit.
When is TDS deducted? At the time of salary payment.
How is it calculated? Based on projected annual taxable income after exemptions.
What is Form 16? A certificate from the employer showing salary and TDS details for the year.
What if employers fail to deduct or deposit TDS? They face penalties and interest.
How do tax regimes affect TDS? The chosen regime changes applicable tax rates and, in turn, TDS deductions.