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TDS on Salary

TDS on Salary

TDS on Salary

Tax Deduction at Source (TDS) or TDS on Salary is mandatory for employers in India paying salaries to employees on which income tax is applicable. For any income chargeable under the “Salaries” classification, the employer must deduct the applicable income-tax on the estimated income of the employee and deposit the same with the Government. In this article, we cover the procedure for TDS on salary and the computation of TDS on Salary.

Tax Deduction at Source (TDS)

Deduction and remittance of income tax by the person paying the income is called “Tax Deduction at Source” or TDS. The person deducting the tax is known as “Tax Deductor”, the person from whom the tax is deducted at source is called “Tax Deductee”. TDS is usually required on the following transaction:

  • Salary payments
  • Interest on securities
  • Dividend payments
  • Interest other than interest on securities
  • Winning from Lottery or Crossword Puzzle
  • Winning from Race Horse
  • Payment to Contractor and Sub-Contractors
  • Insurance Commission
  • Deposits under NSS
  • Repurchase of Units by Mutual Fund or UTI
  • Commission on sale of Lottery Tickets
  • Commission or Brokerage
  • Rent
  • Transfer of immovable property
  • Fees for professional or technical services
  • Income in respect of units
  • Compensation on acquisition of immovable property

TDS on Salary

In case of TDS on salary, the employer is the Tax Deductor and the employee is the Tax Deductee. Prior to TDS on salary, the employer must first obtain TAN Registration. TAN number or Tax Deduction and Collection Account Number is a 10 digit alphanumeric number used for tracking all TDS deduction and remittance by the Income Tax Department.

Computation of TDS on Salary

TDS on salary is mandatory for all employees earning taxable income. TDS on salary is NOT required only for the following persons for AY 2015-16:

  • Persons earning less than Rs.2.5 lakh of estimated annual salary including the value of perquisites.
  • Persons earning less than Rs.3 lakh of estimated annual salary including the value of perquisites – Resident in India and over the age of 60 years.
  • Persons earning less than Rs.5 lakh of estimated annual salary including the value of perquisites – Resident in India and over the age of 80 years.

For all other persons, TDS on salary must be deducted based on the estimated income-tax computed on the basis of the income tax rates in force. Therefore, estimated annual income of the employee is first computed, then other income or losses are deducted along with allowed deductions declared by the employee, income tax is computed on the estimated annual taxable income, the estimated annual income tax is then divided by the number of months applicable and TDS is deducted every month from salary payment. The TDS on salary is then remitted by the employer with the Government Treasury.

Illustration of TDS on Salary Computation
Illustration of TDS on Salary Computation

Form 16 – TDS Certificate

After TDS, the employer is required to remit the TDS amount through internet banking facility or credit or debit card. TDS must be remitted by the employer before the 7th day of the month; in April, TDS on salary must be remitted prior to the 30th day of the month.

Prior to 31st May of each year, the employer is required to provide to the Employee a TDS certificate, i.e., Form 16. Form 16 usually contains the PAN number of the employer, TAN number of the employer, TDS deposit details and details of all quarterly TDS statements.

Non-Compliance with respect to TDS on Salary

If TDS on Salary has been deducted by the Employer but not deposited to the Government, then the employee cannot be called to pay the tax himself, as it is the employer who has defaulted in paying the tax deducted to the Government.

In case TDS on salary was NOT deducted by the Employer, then the employee would be liable to pay the Income Tax due as per Section 191. Further, when TDS is not deducted and remitted by the employer, the entire expenses relating to the salary payment would be disallowed as an expenditure for the Employer, increasing the income tax liability of the Employer. Know more about income tax penalties.