Formula & Process to Calculate TDS

  • Author :
  • TATA AIG Team
  • Published on :
  • 21/11/2023

In the Income Tax framework, one of the most important terms that each one of us comes across while making a payment or receiving an income is the TDS (Tax Deducted At Source).

The TDS system is introduced by the Government to collect the income tax at the source of income. It is applicable to salary income, interest income, rent payments, commission, or other income.

So, if you are a person looking out for TDS computation and the process, here is a blog to help you out!

Before we get started with the TDS calculation formula, we will understand the general TDS process.

TDS Process

Under the TDS working system, if you are the person (deductor) making a payment that is applicable for the TDS, you are required to deduct a certain percentage of the amount before paying it to the recipient (deductee). It is the income tax that is liable to be paid to the Government.

After deducting the TDS from the amount, you need to deposit it with the Government on behalf of the recipient.

If you are the deductor, it is your responsibility to collect the applicable income tax and deposit it with the Government. The deductee can file a claim for the TDS against their total income tax liability.

Failure to deduct and deposit the applicable tax in time can invite penalties and serious legal consequences.

TDS is applicable to specific Sections under the Income Tax Act, and the rates at which it is deducted vary based on the categories of payment and the type of deductor, whether individuals or businesses.

Rates For TDS Amount Calculation

Some of the common TDS rates based on the different types of payments are as follows:

Nature Of Payment Income Tax Act Section Threshold Limit (₹) TDS Rate (%)
Salary payment 192 2.5 lakhs applicable to individuals less than 60 years of age Applicable income tax slab rate
EPF withdrawal (Before the completion of 5 continuous years)  192A 50000 10
Interests applicable to financial securities 193 5000 10
Dividend payments from companies 194 5000 10
Interest income from post-office, banks, cooperative society 194A 40,000 (50,000 for senior citizens) 10
Amount received after winning a game or lottery 194B 10000 30
Amount received after winning online games 194BA NA 30
Amount received after winning horse race 194BB 10000 30
Payment made to contractors or subcontractors 194C 30000 1 for individuals or HUFs
2 for Others
Insurance Commission 194D 15000 5 for individuals
10 for Company
Life Insurance maturity benefits that are not exempted under Section 10 (10D) 194DA 1,00,000 5
NSS (National Savings Scheme) 194EE 2500 10
Commission payments on the sale of lottery tickets 194G 15000 5
Commission or Brokerage amount received except for insurance commission 194H 15000 5
Rent of Machinery, Plant, or Equipment 194I 2,40,000 2
Rent of immovable property 194I 2,40,000 10
Purchase of immovable property 194IA 50 lakhs 1
Rent paid by individuals or HUFs 194IB 50000 5
Payments made as Professional Fees 194J 30000 2 for FTS and certain Royalties, 10 for others
Dividends from Mutual Funds 194K 5000 10

How To Calculate The TDS Using TDS Formula?

The process of calculating the TDS is straightforward for all Sections except for Section 192.

The steps to calculate TDS for all applicable payments under the various Sections except Section 192 of the Income Tax Act are as follows:

Find the nature of payment and the applicable Section under the Income Tax Act.

Check for the threshold limit to understand if the TDS is applicable.

Apply the TDS rate on the applicable amount and deduct it from the actual payment to be made. If PAN is not available for the payee, a higher rate of 20% plus 4% cess will be applicable.

TDS Calculation Formula
TDS = TDS Rate x Applicable amount to be paid

How To Calculate The TDS On Salary Under Section 192?

The steps to calculate the TDS on your salary under Section 192 are as follows:

Determine your total taxable income for the respective financial year. Calculate it by including all the different sources of your income and consider the possible deductions and exemptions.

Calculate the income tax liability based on the corresponding income tax slab, considering your age.

Divide the income tax liability by the total number of months of employment to derive the monthly TDS amount.

If this process is cumbersome, you can calculate TDS on salary online using the TDS calculator.

Pointers To Consider

If you want to benefit from the new tax regime, you can inform your employer of the same to reduce the tax liability.

If the TDS is higher than the actual amount, you can claim a TDS refund.

** Example**

Rithesh, 40 years old, works for an Advertising Agency, and his annual income is ₹8,00,000. He has invested in financial instruments of up to ₹1,00,000 that qualify for a tax deduction under Section 80C.

His taxable income is as follows:

Particulars Amount
Annual Income ₹8,00,000
Standard Deduction ₹50,000
Applicable deductions ₹1,00,000
Total taxable income ₹6,50,000

His income tax liability based on the income tax slab under the old tax regime is as follows:

Particulars Calculation
Income Tax Slab ₹12,500 + 20% of the amount above ₹5,00,000
Income Tax ₹42,500
Educational Cess ₹1,700
Total Income Tax Liability ₹44,200
TDS on your salary deducted every month ₹44,200/12 = ₹3,683

Tips To Save TDS On Your Salary?

Invest in tax-saving financial instruments Invest in tax-saving financial instruments to benefit from tax deduction benefits under Section 80C, such as Life Insurance, Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Pension Scheme (NPS), etc.

The maximum allowable deduction limit under this Section is ₹1,50,000. Therefore, analyse your requirements, compare the different financial instruments, and make well-informed decisions.

Purchase a health insurance plan The premium paid for a health insurance plan qualifies for a tax deduction under Section 80D. Medical insurance can be availed for yourself, your spouse, and dependent children. The maximum allowable limit is ₹25,000 for individuals below 60 years of age and ₹50,000 for senior citizens.

In addition, you can also purchase the health insurance plan for your parents and avail of the tax deduction benefit. Therefore, the total applicable tax deduction allowable under this Section is ₹1,00,000.

You can compare health insurance plans and choose the most flexible and best option for extensive coverage and tax deduction benefits.

Choose the right income tax regime Opt for the old tax regime if you have purchased or invested in the various financial instruments and the new tax regime otherwise to lower your income tax liability.

Make timely payments and file your ITR Ensure to deduct the applicable TDS, make the payment to the Government and file your ITR on time to avoid unnecessary penalties and legal consequences.

Conclusion

Tax Deducted At Source (TDS) is a tax payment process that involves deducting the applicable income tax at source and depositing it to the Government before making the payment to the recipient.

TDS applies to specific sections under the Income Tax Act, and the rates at which it is deducted vary based on the payment categories.

The TDS computation is simple and less time-consuming if you know the TDS formula and the different calculation methods. Enhance your knowledge about the TDS amount calculation and make the necessary payments to avoid unnecessary penalties and legal consequences.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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