Skip to main content

How Tax Deducted at Source (TDS) works?

 

 

THE tax season is here. And if you are an employee you can't blame your employer for deducting large chunks of money from your salary towards tax deducted at source (TDS), which he is legally obliged to do.

Your bank will also deduct some percentage from your FD interest of Rs 10,000 or more towards TDS! So what is this TDS all about? How is it computed? Are there any changes this year? Read on...

What is TDS?


TDS reduces your taxable income and could even provide tax relief! The TDS collections account for 40 percent of the total taxes collected in the country. As the name suggests TDS is the amount of tax that is deducted at source in certain
types of income. The TDS thus collected is deposited in the Government treasury within a specified time.

How is it computed?


Some of the types of income where TDS is applicable include salary, interest, rental fee, interest on securities, insurance commission, dividends from shares and UTI/Mutual Funds, commission and brokerage, prize money won from lotteries,
horse races, etc, payments to non-resident sportsmen or sports associations, commission on sale of lottery tickets, fees for professional and technical services and the like, compensation for compulsory acquisition, income from units of an offshore fund and income from foreign currency bonds or shares of Indian Companies (unless specified as tax-free) and others.

The process of calculating the TDS involves these steps:
1. Estimate the gross salary paid to the employee for the whole year;
2. Find out and estimate the exemptions if any from the total salary income;
3. Add other income of the employee as disclosed by him like rental income, capital gains etc.
4. Consult employee to calculate deductions, if any, from the salary income;
5. Arrive at the employee's net income and calculating the tax on the same;
6. Deduct the tax equally over 12 months of the year;
7. Pay the TDS every month and file e-TDS return every quarter; and finally
8. Ensure the employee is issued with Form 16 (TDS certificate).

How does it benefit salaried people?
Basically the TDS process saves the employee the time and the hassles of going through the cumbersome procedures involved in filing separate tax papers. On the salary part which is made up of many components, some monthly and some yearly there is income tax applicability in each component.

 

Salary components

Explanation

Taxability status

Basic

Many deductions are based on this component
including your PF and your employer's PF contributions.
Core part of monthly salary

Taxable

Dearness Allowance

Paid out monthly to offset the increase in cost of
living due to inflation

Taxable

Incentive/Bonus

Monthly or yearly depending on the company.
Usually paid out to encourage the employees

Taxable

Conveyance allowance

Paid every month to meet expenses related to
commuting to office.

Up to Rs 800 per month
or Rs 9,600 in a year is
exempt from tax.

HRA

House rent allowance is a percentage of your basic
and paid monthly

Tax free subject to
certain conditions

Medical allowance

Monthly or yearly pay out to meet medical expenses

Fully taxable; however
reimbursement upon
submission of bills up to
Rs 15,000 per year is
tax free

LTA/LTC

Leave travel allowance/concession is paid once a
year to meet traveling expenses for you and your family

Tax free subject to
certain conditions


Vehicle/telephone/
special allowance

Paid out monthly to maintain your vehicle/telephone/
and any other expenses not covered under the above heads

Taxable


What are the possible deductions for tax under TDS?


The possible deductions on the employee's gross salary after exemptions are taken into account come under Section 16 of the IT Act. These include dues paid as professional tax, deductions for investing in various tax saving investments like PPF, life insurance premium, pension schemes by life insurers, Mediclaim premium, interest on loans for education, house rent paid and deductions under Section 80U.

 

Are there any changes this year?


In the last budget in 2009, the Government had abolished levying the employer for the fringe benefit tax or simply FBT and instead put it on the hands of the employees. There are some changes regarding FBTs for instance on housing and Esop or
employee stock option perquisites. With this change the companies would now have to take into consideration the value of perquisites in calculating the taxable income of their employees.

This year the Income Tax Department in the country will take a special interest on tax deducted at source or simply TDS. Well, the intention is to turn in maximum collections from this segment this fiscal year! From the taxpayer's perspective starting next fiscal you might shell out more tax if you do not quote the Permanent Account Number (PAN) in transactions subject to TDS.


Popular posts from this blog

How to generate a UAN Online

Best SIP Funds Online   In order to make Employees' Provident Fund (EPF) accounts portable, the Employees' Provident Fund Organisation (EPFO) had launched the facility of Universal Account Number (UAN ) in 2014. Having a UAN is now mandatory if you have an EPF account and are contributing to it. So far, you got this number from your employer and every time you changed jobs, you had to furnish this number to the new employer.  However, in order to make it easier for you to get a UAN , and without your employer's intervention, the EPFO now allows you to go online and generate a UAN on your own. This facility can be used by freshers, or new employees, who are joining the workforce as well as by employees who have older EPF accounts but do not have a UAN as yet. As a new employee, you can simply generate a UAN and provide the number to your employer at the time of joining, when you need to fill up forms for your EPF contribution. As per a circula...

Reliance Regular Savings Fund - Debt Option

Reliance Regular Savings Fund - Invest Online     The scheme aims to generate optimal returns consistent with moderate levels of risk. It will invest atleast 65 per cent of its assets in debt instruments with maturity of more than 1 year and the rest in money market instruments (including cash or call money and reverse repo) and debentures with maturity of less than 1 year. The exposure in government securities will generally not exceed 50 percent of the assets. The fund uses a mix of relatively low portfolio duration with active investments in higher-yielding corporate bonds. It does not take aggressive duration calls but tries to improve returns by cherry-picking corporate bonds. This is reflected in the fund's returns matching the category and benchmark for five years - at 8.4 per cent - but lagging behind the category during a raging bull market in bonds in the last one year. The fund has been a consistent but not chart-topping performer in the income category. Despite its ...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IIFL NCDs

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India) IIFL NCDs IIF's six-year unsecured NCD 2012 Risk-wary investors should stay away from this issue, and even, risk-taking ones should think twice It is a public issue of unsecured redeemable non-convertible debentures ( NCDs ) by India Infoline Finance ( IIF ), an unlisted company, which is a 98.9 per cent subsidiary of India Infoline, a listed company. The issue seeks to raise Rs 250 crore with an option to retain over-subscription up to Rs 250 crore taking the total potential issue amount to Rs 500 crore. It will be open for public subscription from September 5 to September 18 with a minimum application size of Rs 5,000 in the form of five NCDs of face value Rs 1,000, TENURE & RATES: IIF will redeem the NCDs at the end of six years, and investors wanting out before six years will be able to sell the...

Income Tax Basics for beginners

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Tax is a compulsory payment made to the Government, but there are ways to optimise it   Income tax is an instrument used by the government to achieve its social and economic objectives. Simply put, tax is duty or tariff that income earning individuals pay to the Government in exchange of certain benefits such as law and order, healthcare, education and a lot more. With proper planning, your tax liability can be reduced and optimised effectively, leaving you with a greater share of your income in your hands than being paid out as tax. Income earned in the twelve months contained in the period from 1st April to 31st March (Financial Year) is taken into account when calculating income tax. Under the Income Tax Act this period is called the previous year.   ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now