TDS Calculation Formula Explained

TDS and TDS Rates

TDS stands for Tax Deducted at Source, which means collecting tax on income in the form of salary, rent, asset sales, dividends, etc., by requiring the payer to deduct income tax due on such income and deposit it to the government on behalf of the payee.

TDS Rates
The TDS Rate depends on the nature of payment, deductee, and PAN submission. There are different sections in the Income Tax Act that specify different TDS rates, nature of payment, and threshold limits for TDS.

Most Common TDS Rates:

• For payment of salary, the TDS rate is the standard slab rate or the new tax regime slab rate as opted by the employee.
• For interest on securities, the TDS rate is 10%.
• For dividend income, the TDS rate is 10%.
• For interest on post office deposits, bank deposits, or cooperative society deposits, the TDS rate is 10% for senior citizens (threshold limit ₹50000 and others (threshold limit ₹ 40,000).
• For payment to contractors or subcontractors, the TDS rate is 1% for individuals or HUF and 2% for others (threshold limit Rs. 30,000 for single transactions and Rs. 1,00,000 for aggregate transactions).
• For rent of plant and machinery, the TDS rate is 2% (threshold limit Rs. 2,40,000).
• For rent of land or building or furniture or fitting, the TDS rate is 10% (threshold limit Rs. 2,40,000).

For Complete TDS rates, follow our TDS Rate Chart

TDS Calculation Formula

General formula to calculate TDS on salary:

Average Income Tax Rate = Income Tax Payable (computed using slab rates) / Estimated earning for the financial year

How to calculate TDS on salary U/S 192

Step 1: Estimate your total taxable income for the particular financial year. This should include your salary, any other income you earn (such as rental or interest income), and any exemptions you are eligible for (House Rent Allowance, Medical Expenses, and investment deductions)

Step 2: Calculate payable Income Tax through applicable tax slabs. Read our guide “Income Tax Slabs for FY 2023-24 (AY 2024-25)”

Step 3: Divide your payable income tax by the number of months of employment to calculate the monthly TDS amount.

For example, if your estimated total taxable income for the current financial year is ₹10,00,000 and you are employed for 12 months, your monthly TDS amount would be ₹10,00,000 X 30% / 12 = ₹25,000.

Note:- This guide can help you to calculate TDS on salary under Section 192. Your Actual TDS may vary depending on applicable tax slab. It is always advisable to consult with our tax advisor to get personalized advice.

Some additional points to keep in mind when calculating TDS on salary:

• If you do not have a PAN card, your employer will deduct higher TDS at a rate of 20% plus 4% cess on other incomes, such as interest from fixed deposits, dividends, winnings from lottery or games, etc.
• If you have submitted a declaration to your employer opting for the new tax regime, your TDS will be calculated using the new tax slabs and deduction rules.
• You can claim a refund of TDS if you have overpaid tax.

How to calculate TDS for other than Section 192

To calculate TDS under different sections, you need to follow these steps:

Step 1: Identify the nature of income and the relevant section that applies to it.

Step 2: Check the threshold limit for that section. If the income exceeds the threshold limit, then TDS is applicable. Otherwise, no TDS is required.

Step 3: Apply the prescribed TDS rate for that section on the income amount. If there is no PAN of the payee, then apply a higher rate of 20% plus cess.

How to Save TDS

Some of the tips to save TDS as follows:

• Claim all the deductions you are eligible for. This includes deductions for HRA, medical expenses, investment deductions, and education expenses. You can claim these deductions by providing the relevant proofs to your employer.
• Invest in tax-saving instruments. There are a number of tax-saving instruments available in India, such as Employee Provident Fund (EPF), Public Provident Fund (PPF), National Pension System (NPS), and Equity Linked Savings Scheme (ELSS). Investing in these instruments will reduce your taxable income and, thereby, your TDS liability.
• Opt for the new tax regime. The new tax regime offers lower tax rates than the old tax regime. However, it also offers fewer tax deductions. If you do not have many deductions to claim, you may be able to save TDS by opting for the new tax regime.

Here are some additional tips for saving TDS:

• Plan your tax savings in advance. This will help you to make the most of the different tax-saving options available.
• Keep track of your income and expenses. This will help you to estimate your taxable income and TDS liability accurately.
• File your income tax return on time. If you file your income tax return on time, you can claim a refund of any excess TDS that has been deducted from your salary.