May 07 2021

Employers have certain responsibilities to address when it comes to filing tax of their employees to the Income Tax Department. They are required to deduct TDS under section 192 from their employees’ incomes every month, at the time it is generated. TDS stands for Tax Deducted from Source, which is deposited to the government account within the prescribed time and format in any of the branches of RBI, SBI, or any authorized bank. As per the tax provision, any individual, trusts, partnerships firms, or company that is making any kind of payments including salary, commission, interest, professional fees, rent, etc are eligible to deduct TDS of their staff. It is also deducted when salary is received in form of advance or arrears payments.

How to Calculate tax deduction under section 192?

As per Section 192, TDS is only deducted when an employee’s estimated salary for a financial year is more than the basic exemption limit. In order to calculate TDS, the investments and expenses of employees that are Tax exempted or eligible for tax deductions are taken into account. Employees must declare these investments at the beginning of a financial year. By the end of the year, employees need to provide proof of these investments, especially those offering any benefits of tax exemption. If an employee fails to do so, the employer is free to deduct the complete tax from the employee’s salary.

Income ScaleTax Rate
0 – 2,5000Nil
2,50,001 to 5,00,0005%
5,00,001 to 10,00,00012,500 + 20% of Income
Above 10,00,0001,12,500 + 30% of Income

The total tax is calculated by reducing the amount of exemption from the total annual salaried income of the employee.

As per the Income Tax Department, the following tax exemptions are permitted for employees with taxable salaries.

  • House Rent Allowance: The rent employee is paying towards accommodation.
  • Standard Deduction: Includes conveyance and medical allowance.
  • Leave Travel Allowance: It is a special type of allowance provided by employers which allow employees to travel on leave from work. The travel expenses are covered by the company.
  • Children Education Allowance: Expenses towards children’s education

Tax declaration for New Recruitments

When employees join an organization in the middle of a financial year, they must declare their previous salary along with the Form 16 issued from their previous Employer. Form 16 is basically an acknowledgment certificate issued by the employer that states that your deducted tax has been deposited with the Income Tax Department.

If a new employee doesn’t declare his/her salary from previous employment, their new employer would calculate the TDS liability only over the present salary. This means, the employee partakes the benefits of the income tax slab in both the cases, new salary and old salary, which could cause immense problems when filling the annual tax returns. Moreover, failing to submit these documents would penalise the employee to pay up to 300% of the tax amount not deposited. It could disrupt the financial planning of the employee to settle this liability.

Once TDS has been deducted by the employer, he/she is required to issue Form 16 to the employee, which certifies that the tax has been paid and the amount that has been deposited.