How to Calculate TDS on Salary?

One can calculate TDS (Tax Deducted at Source) on income with following steps:

  1. Firstly you need to calculate monthly income (gross) by adding up the allowances and perks (perquisites) to the basic income.
  2. Next step is to calculate the monthly available exemptions under section 10 of IT Act which are given on certain allowances like medical, HRA, travel, etc up to a certain limit.
  3. Subtract the amount of exemptions calculated in step 2 from the gross monthly income calculated in step 1.
  4. Tax is an annual phenomenon; hence you need to convert monthly calculations to annual by multiplying the amount with 12. After multiplying the amount calculated from step 3 with 12, you get annual taxable income from salary.
  5. If you have rent income, you need to convert it in annual form and add to the annual taxable income from salary calculated in step 4. Similarly, if you are paying house loan, the interest paid during the years needs to be subtracted.
  6. If you have invested in avenues listed in Section 80C of IT Act, the total amount invested needs to be deducted from income under step 5 with a maximum of Rs 150,000. These investment avenues may be PPF, life insurance premiums, mutual funds, ELSS, NSC, etc. You will get your taxable income.
  7. Now you need to do the main calculations. An income of Rs 250,000 is exempted from tax, above which one needs to pay 5% income tax up to 5 lakh and 20% from 5 lakh to 10 lakh, income beyond 10 lakh is levied with 30% tax.
Examples
  • If one has an annual income of Rs 240,000 it will not be levied with any tax as income below 250,000 is exempted from tax.
  • If one has an annual income of Rs 400,000, 5% is charged on income above 250,000 i.e. 5% income tax is
    payable on (400,000 – 250,000).
  • If one has an annual salary of Rs 600,000, then it will be charged under 2 slabs. 5% income tax is chargeable on (500,000 – 250,000) and 20% is charged on (600,000 – 500,000).
  • If one as an annual income of Rs 12 lakh, it will be charged under 3 slabs. 5% IT is charged on (500,000 – 250,000), 20% is charged on (1, 000,000 – 500,000) and 30% is charged on (1,200,000 – 1,000,000).
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