As a salaried employee, one of the foremost question on your mind could be how to calculate TDS on your salary. TDS on your salary is deducted by your employer before depositing the salary into your account. This amount is then deposited to the Government by your employer. Here are the following steps you need to follow to calculate it:
- Calculate gross monthly income: This is the sum of your basic income, allowances and prerequisites.
- Calculate basic exemptions: Section 10 A of IT Act provides exemptions on allowances made by your employer on HRA, medical and travel.
Reduce exemptions from gross monthly income
Multiply the above figure by 12 (as TDS is calculated on yearly income): What you arrive at is your annual taxable income.
Deduct sources of other income: If you have any other source of income such as income from house rent, etc., or incur a loss on housing loan interest repayment, deduct it from your taxable income (in step 4).
Calculate your investments for the year and deduct it from your gross income (as arrived at in step 5): Investments made in instruments such as home loan repayment, ELSS, PPF, tax savings deposits, etc. are eligible for exemption of up to Rs 1.5 lakh under Section 80 C.
Reduce the maximum allowable income tax exemption on your salary: Income up to Rs2.5 lakhs is fully tax exempt from taxes. Income in the range of Rs2.5 lakhs to Rs5 lakhs is subject to 10% TDS and income in the range of Rs5 lakhs to Rs6.33 lakhs is subject to 20% TDS.
Now let us understand this with a numeric example:
Steps 1 and 2
Let’s assume your monthly income is Rs80,000. This includes the following:
Basic pay: Rs50,000
Medical allowance- Rs1,250
Child education allowance- Rs200
Other allowances totalling Rs12,750
Steps 3 and 4
Now let’s assume you own your house and stay in the same property, your monthly exemption from allowances is Rs2,250.
Therefore, your yearly taxable income comes to Rs80,000-2,250 x 12= Rs9,33,000.
Let’s say you experience a loss of Rs 1.5 lakhs on housing loan interest repayments. This will have to be deducted from your gross income Rs9,33,000-1,50,000. So your taxable income now becomes Rs7,83,000.
You have made investments to save taxes i.e Rs1.2 lakhs in investments that qualify for exemption under Section 80 C and Rs30,000 for investment in categories that fall under 80D. Thus, the resulting Rs1.5 lakhs will now be deducted from your taxable income. Therefore, your final taxable income stands at Rs6,33,000.
Thus the final TDS to be deducted on your annual income (according to tax slab you fall in) will be Rs25,000 + Rs 26,600, which equals Rs51,600.
Now that you know how to calculate your TDS, you can make informed investment decisions to reduce your taxable income.