TDS calculation methodology
1. Base process
Step | Activity | Explanation |
1a | Calculate
Salary as per provisions contained in section 17(1) | This
includes all components of salary paid or to be paid to the employee by the
employer except those which are handled separately below. If a component of
salary has Basis = Variable or is an Annual head which is to be paid in
future then it is not added to the salary till it is paid |
1b | Value
of perquisites under section 17(2) | If
perquisites are given to employee this component is also added |
1c | Profits
in lieu of salary under section 17(3) | Payments
can be made under this head as Adhoc payment or Post Separation payment |
1d | Reported
total amount of salary received from other employer(s) | Based
on Previous Employer declaration given by the employee |
2. | Allowances
exempt under Section 10 are deducted | HRA
exemption 10(13A), LTA rebate 10(5), Tax free Leave
encashment 10(10AA) and Gratuity 10(10) are adjusted, if any other
exemption u/s section 10 then it will be adjust as "Exemption u/s 10
Other". |
3. | Deductions
under Section 16 are deducted | Standard
deduction 16(ia), Entertainment allowance 16(ii), Professional tax 16(iii)
are adjusted. Max Limit for 16(ii) is 5000.00 and for 16(iii) is 2500.00 per
annum. |
4. | Other
Income added | If
other income is declared including loss from house property it is added to to
the overall income |
5. | Deduction
under Chapter VIA reduced | Till
verification process is not released the declarations are used and afterwards
the verified amount is used for calculation. This includes deductions under
sections - 80C, 80CCC, 80CCD(1), 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80G, 80U |
6. | Total
taxable income | After
considering all inputs above this figure is calculated |
7. | Tax
on total income | Calculated
as per Gender, Age and prevailing slabs |
8. | Rebate
under 87A | If
applicable then it is adjusted |
9. | Surcharge if applicable | This
is for total income more than 50 lakhs / 1 crore / 2 crore / 5 crore |
10. | Health
and Education Cess | This
is calculated on the total tax to be paid |
2. Tax slabs
3. Specific scenarios
For example - Suppose
Total Annual Tax liability = 120,000
Current month = July
Tax paid so far till June = 60,000
Additional Payout in July = Rs 60,000 (this could be arrears, annual head, variable or any adhoc payout)
Revised Tax liability = 12,000
Tax deducted in July = 32,000
When previous employer details are included the TDS and Cess figures might not be in line with the government norms as these figures are declared by the employee and taken as an input. The system will add the TDS and Cess as TDS paid and recalculate Cess based on the total tax liability.
Employee has joined the company on 1-June
Total TDS liability = 30,000
Total Cess liability = 1,200 (4% rate)
Tax deducted in June = 3,000 (only current employer)
Cess deducted til June = 120
Now employee declares previous employers income which has the following figures
TDS paid at previous employer = 10,000
Cess paid at previous employer = 1,000
Income at previous employer = 420,000
Based on these figures when July payroll is run system calculates
Total TDS liability = 48,000
TDS paid so far = 13,000 (including previous employer)
TDS to be paid = 35,000
TDS for July = 3889 (35000 / 9 remaining months)
To calculate Cess liability the steps are
TDS paid till July = 16,889
Total Cess liability on this TDS = 676
Cess paid so far = 170
Cess to be paid in July = 506
3.3 If employee does not has a PAN or if PAN is inoperative
If employee's PAN
number is not available and parameter "20% TDS if no PAN" is Yes or if employee's PAN is inoperative. then
a) if taxable income below the tax limit then no impact on tax deduction and
total TDS liability will be zero
b) if taxable income above the tax limit then
i) System will calculate TDS slab wise on taxable income
ii) System will calculate TDS based on 20% rate taxable income
And then deduct the higher TDS from of the two in payroll. Cess will not be deducted
if 20% rate is applied.
If an employee has not declared PAN even then for the purpose of comparing the
TDS @20% and TDS as per tax slabs the marginal relief if applicable is given.
3.4 If extra tax has been deducted in earlier months
There
might be some cases where higher than required tax has been deducted for an employee.
This might be due to a salary reduction in the middle of year of higher tax saving
submission when compared to tax saving declaration. In such scenarios the tax
for the month is calculated while considering the total tax which is deducted
with the proportion of tax which had to be deducted till that month.
Based on the taxable income in April employee's annual tax liability is 36,000
Payroll is processed and tax is deducted till December. Tax deducted = 9x3000 = 27,000
In January employee submits tax savings proofs which reduces his tax liability to 30,000
Based on these figures when January payroll is run system calculates
Total Tax liability = 30,000
Tax paid so far = 27,000
Tax to be paid till January = (30000/12 x 10) = 25,000
Tax to be deducted in January = 0 (As total tax deducted is more than 25,000)
3.5 Surcharge for Higher Income slabs
Surcharge applicable
on super rich employees which taxable income more than Fifty lakhs. Surcharge
rate as applicable in FY 2024-25 for Old Regime are given below -
Taxable Income Surcharge (%)
Income above Rs 50 lakh but below Rs 1 crore
10
Income above Rs 1 crore but below Rs 2 crore
15
Income above Rs 2 crore but below 5 crore
25
Income above Rs 5 crore
37
If taxable income as per table then surcharge will be deducted as per slab. Surcharge will be then calculated on the calculated tax amount.
Marginal relief on surcharge : As per law employee is provided a marginal relief to set off additional tax liability if the total additional tax due to surcharge is exceeding the additional taxable income. Refer to the attached excel for some sample calculations of marginal relief.
Marginal relief in New Regime for income above 7 lakhs : As per law marginal relief is provided to employees who have taxable income above 7 lakhs to ensure that their tax liability is not increased disproportionately. This is applicable from financial year 2023-24.
3.6 Change in Tax / Surcharge / Cess
1. Manual updation of TDS - while running payroll we allow to manually update Tax amount, this amount is a total of Tax and Surcharge.
- when the amount to be recovered is reduced then first Surcharge amount is reduced and only after Surcharge becomes zero Tax amount is reduced
- when the amount to be recovered is increased then only the Tax amount is increased and Surcharge amount is left unchanged
2. Automatic reduction in Tax to avoid negative salary - if the net salary before
TDS and Cess deduction is low and these deductions are leading to a negative
take home then system will automatically reduce the Tax and Surcharge amount.
First Surcharge is reduced and only after Surcharge becomes zero Tax amount is
reduced.
Cess is always calculated on the final Tax and Surcharge being recovered in the
month.
3.7 Reduction in deductions to ensure that gross income / taxable income is not becoming negative
a) System will reduce "Deductions under section 16" to ensure that "Income chargeable under the head "Salaries" is >= 0
b) System will reduce "Income (or admissible loss) from house property" to ensure that "Gross total income" is >=0
c) System will reduce "Deductions under Chapter VI-A" to ensure that "Total taxable income" is >= 0
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