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

Real Returns in Investing

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 Real Returns in Investing     A Anil Singh (name changed), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table. Anil's savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table. Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The v...

Budget 2014 Highlights for Saving

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   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

ICICI Prudential MIP 25 - Invest Online

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   ICICI Prudential MIP 25     (CRISIL Rank 2)   This scheme was launched March 2004. Please see the chart below for the one, two, three and five years annualized returns from this scheme. The minimum investment in the scheme is Rs 5,000. The asset allocation of the portfolio is 24% equity, 72% debt and 4% cash equivalent and others. Please see the chart below for the monthly dividends declared by the scheme, on a per unit basis, over the last 5 years.   For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mai...

Franklin India Smaller Companies Fund - Invest Online

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   Franklin India Smaller Companies Fund   While the universe of small-cap stocks in India is vast, there are very few equity funds which take on the task of sifting through this space for good long-term bets. Franklin India Smaller Companies Fund has managed this with aplomb. What we like about this fund is its significant out-performance of its category and benchmark over the last four years, and its ability to moderate portfolio risk despite investing in the riskiest segment of the equity market. This fund's stock selection strategy, like that of Franklin India Prima Fund is focused on finding companies that generate positive cash flows across business cycles. High return on investment and manageable leverage are also filtering criteria. Says R. Janakiraman, fund ma...

How to open a Capital Gains Account?

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   How to open a Capital Gains Account? You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account. Investment in Specified Bonds Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the ...
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