Calculation of TDS on Employee Salary Income


The concept of Tax Deducted at Source (TDS) was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.

Rates for deduct of tax at source Taxes shall be deducted at the rates specified in the relevant provisions of the Act or the First Schedule to the Finance Act. However, in case of payment to non-resident persons, the withholding tax rates specified under the Double Taxation Avoidance Agreements shall also be considered. Usually, every employer deducts Tax Deducted at Source (TDS) from the salary, what is known as the ‘average rate of income tax’ of the employee for the year. It is denoted as the average income tax rate equal to income tax liability (arrived at based on slab rates) divided by the employee’s predictable income for the assessment year.

“Filing TDS returns is mandatory for all the persons who have deducted TDS,” stated Archit Gupta, Founder & CEO of Clear. The TDS return must be filed on a quarterly basis and must include a number of details, including the TAN, the amount of TDS deducted, the type of payment, the deductee’s PAN, etc. Furthermore, depending on the reason for the TDS deduction, distinct forms must be used when submitting returns.” In accordance with Section 206AA of the Income Tax Act,1961 the deductor will deduct TDS at the higher of the rates specified in the applicable Act provisions or 20% if you fail to provide your Permanent Account Number (PAN). TDS is withheld in accordance with Section 192 of the Income Tax Act at the time salary is actually paid, not when salary is accruing.

It indicates that whether your employer pays your wage upfront, on schedule, or in arrears (late payment), tax will be withheld. Calculation of taxable Income of the employee Step 1: First, the employer estimates the employee’s salary for the relevant financial year. This should include basic pay, dearness allowance, perquisites granted by the employer, other allowances granted by the employer like HRA, LTA, meal coupons, etc., EPF contributions, bonus, commissions, gratuity, salary from the previous employer, if any, etc. Step 2: The employer next computes exemptions in accordance with Section 10 of the Income Tax Act.

Allowances such as HRA, uniform costs, travel expenses, and children’s education allowances are all exempt from the rules. Reduce the entertainment allowance, professional tax paid, and the normal deduction of Rs 50,000 as well. Step 3: The net amount is regarded as taxable salary income after the employer deducts such exemption from the gross monthly income. Step 4: If the employee has provided information about other incomes, such as rental income from house property, bank deposits, etc., such amounts should be added to the net taxable salary. Further, the interest paid on housing loans is deducted from the house property income, but if there is no income from the house property, there will be a negative figure under the head’s income from the house property.

After adding or reducing the said amounts, the calculated figure will be the employee’s gross total income. Step 5: Now, the employer reduces the investments for the year, which fall under Chapter VI-A of the Income Tax Act declared by the employees as per the investment declaration submitted. The declaration may include the amounts of investments such as PPF, employee’s provident fund, ELSS mutual funds, NSC, and Sukanya Samridhi account. It may also include income expenditures such as home loan repayment, life insurance premiums, NSC, Sukanya Samridhi account, etc.


The employer may deduct income tax in accordance with the chosen tax regime. Furthermore, the majority of the exclusions and deductions permitted under the previous tax regime are prohibited under the Income Tax Act if the employee has indicated that they would calculate their income tax in accordance with the current tax regime. As a result, the employer will determine the net taxable income under the employee’s selected income tax system.

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