According to the income tax act, (section 92), every employer is eligible to deduct TDS from the salary of his (or her) employee if it crosses the basic exemption limit.
Every employer has been asked to deduct the tax (also termed as TDS), and credit the remaining salary into the employee’s account. Deducting a certain amount of your income for tax is mandatory. So, it is better to understand how much will be deducted and how these deductions happen.
Here is a complete guide which will help you to understand how TDS affects your salary.
What is the rate of tax deduction from your income?
The current laws do not have a pre-determined rate for TDS deduction. The deduction rate is majorly dependent on your salary and under which slab your salary lies. The amount to be deducted is calculated by the employer using, “Average rate of income tax.”
Speaking in financial language, the average rate is defined as total tax liability divided by the total income of the employee. To know the tax liability of the employee, the employer must first consider the tax-saving schemes done by the employee.
How to calculate the average rate of income tax?
Read the following example carefully to understand the calculation:
- Salary income: 10,00,000
- Less (given by the employee): 1,50,000
- Total taxable income: 8,50,000
- Tax to be paid: 82,500
- Health and education @ 4%: 3,300
- Net tax liability: 85,800
- The average rate of income tax: 8.58%
From the above calculations, we can deduce that TDS at 8.58% is deducted from the net salary income. Calculation of cess is not considered for income other than salary like professional or interest income.
The average rate of income tax remains constant for a year for an individual. It is calculated at the beginning of the financial year based on the salary income of an employee and his (or her) tax-saving investments. The employee must submit proofs and documents at the start of the financial year, which will help in calculating TDS. The TDS may be modified depending on the scenario.
Modifications in TDS deductions
The employer deducts TDS, based on the salary of the employee and tax-saving schemes taken up him/her. TDS is calculated using documents and proofs regarding salary and tax-saving schemes are submitted by the employee. TDS might change based on:
- An increment or bonus gained by the employee.
- Submitting document regarding tax-saving schemes; which wasn’t submitted earlier.
- Tax-saving scheme amount is lower than the declarations made at the start of the year.
- Changing jobs
If the above cases occur, then the amount is deducted from the following months, or if the extra amount has been deducted in the past months, compensation would be given. If there is any default on the part of the employer is submitting the tax to the government, then heavy fines or penalties are laid.
TDS when jobs are switched within a year
If an individual, shifts from one job to another in a year, then he will receive salary income from different employers. The new employer must calculate the TDS for the employee. The employee is expected to submit form 12B to the new employer. The form will have the information regarding your salary and tax deducted by your previous employer.
If the details are not submitted, the rate of TDS will depend on your current salary. Note that, if you do not wish to reveal your previous salary details to your new employer, you would not be fined.