AUBSP Description

Tax Deduction at source (TDS) on Salary

Tax deduction at source for the salary purpose is materially different from the other provisions of TDS as prescribed in chapter XVII of the Income tax Act, 1961.

TDS on Salary
As per the Income Tax Act, 1961 whatever the tax liability arise to an assessee, the payment of such tax is to be made in the following manners viz. a) Tax Deducted at Source (TDS); b) Tax Collected at Source (TCS); c) Advance Tax; d) Self-Assessment Tax; and e) Tax on Regular Assessment.

Tax deduction at source for the salary purpose is materially different from the other provisions of TDS as prescribed in chapter XVII of the Income tax Act, 1961.

For better understanding and accurate calculation and deduction of TDS from salary, one has to know the main three core areas viz. Time of payment, Annual estimation of Income, and average rate of income-tax.

As per section 192(1), any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

In other words you may say that the estimated income of employee is to be determined for the relevant financial year and then total tax is to be calculated thereon on the basis of the rates in force for the financial year in which the payment is made and after that the total tax so calculated is divided by the number of months of his employment during that particular Financial Year.

Who is responsible for TDS on Salary?

As per section 204(i), the expression used in the TDS provision of salary as "person responsible for paying" means in the case of payments of income chargeable under the head "Salaries", other than payments by the Central Government or the Government of a State, the employer himself or, if the employer is a company, the company itself, including the principal officer thereof.

Thus, following are the responsible person for deduction of tax at the source on salary:

In case of
Responsible Person for
TDS on salary


Proprietorship concern:
The proprietor of the said concern.


HUF
Karta of the HUF


Firm
The managing partners/partner of the firm.


Trusts
Managing trustees thereof.


Central/State Government/P.S.U
The designated drawing and disbursing officer.


Private and Public Companies
The company itself and also the principal officer thereof


NOTE: In respect of Companies, the Income Tax Act Section 2(35) has specified principal officer to mean:
(a) Secretary, Treasurer, Manager or agent of the company.
(b) Any person connected with the management or administration of the company or upon whom the Assessing Officer (AO) has served a notice of his intention to treat him as the principal officer.


When TDS on Salary to be deducted:

As we had already discussed that the responsibility to deduct tax from salaries arises only at the time of payment. However, no tax is required to be deducted at source, unless the estimated salary income exceeds the maximum amount not chargeable to tax applicable in case of an individual during the relevant financial year.

Thus in simple words you may say that the statute essentially requires the TDS on salary when:

(a) Payment is made by the employer to the employee.
(b) The payment is in the nature of salary and
(c) The income under the head salaries is above the maximum amount not chargeable to tax.

NOTE: When advance salary and arrears of salary has been paid, the employer has to take the same into account while computing the tax deductible.

What will be the rate of deduction of tax on Salary:

In Section 192 of Income Tax Act, 1961, it is clearly stated that the employer is required to deduct tax at source on the amount payable at the average rate of income tax.  This average rate of income tax is to be computed on the basis of rates in force for the financial year in which payment is made. Every month, 1/12 of this net tax liability as computed above is required to be deducted.

Note: The rates for TDS on salary in a Financial Year are the same as given for Advance Tax for the relevant Assessment Year in Part III of the First Schedule of the relevant Finance Act.

Certificate of TDS:

Every person deducting tax is duty bound to furnish TDS certificate in Form No. 16 to the person from whose income/payment the tax has been deducted.    All categories of deductor (Individuals, HUF, Firms, companies, Government, etc.) can request from TIN just after login to its TAN Registration Account with user id, password and TAN.

However, you may verify the genuineness of TDS certificate in Form 16 generated from TIN website (available from F.Y. 2011-12 onwards) issued by Employer to the Employee by clicking on “Verification of TDS certificate”. In case of any discrepancies or mismatch please contact your employer to file a correction statement to rectify the same.

Actually, TDS certificate has two parts:-
PART-A: This part contains the details of tax deducted and deposited by the employer to the credit of Central Government.
PART-B: The details of income of the employee and tax thereon are stated therein.

This TDS certificate in Form No. 16 is to be furnished by the employee with his income tax return after which he gets the credit of the TDS in his personal income tax assessment. However, if you are exempt to file Income Tax Return (ITR) then this TDS certificated will do the work of ITR and you are just required to submit TDS Certificate i.e. Form-16 to the Income Tax Department.

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