Tax Deducted at Source (TDS) is a mechanism introduced by the Government of India to facilitate the collection of taxes at the source of income. In the context of salary income, it is essential for both employers and employees to understand the functioning of TDS to ensure compliance with tax regulations and avoid penalties.
Section 192 governs TDS on salary and mandates that employers calculate income tax on salaries when an employee’s earnings exceed the basic exemption limit. Employers are required to deduct TDS on salary payments accordingly. TDS on salaries serves as a prepayment of the employee’s annual income tax liability. Which is reconciled when the employee files their tax return.
TDS is deducted at the time of actual salary payment, not at the time the salary accrues. This means that tax will be withheld when your employer disburses your salary, whether paid in advance, on time, or in arrears (if delayed). The relevant section does not specify a fixed TDS rate; instead, the deduction will be based on the income tax slab rates applicable to the taxpayer for the financial year in which the salary is paid. Following the introduction of the new tax regime under Section 115BAC, employees will have the option to choose between the old and new tax regimes at the beginning of the financial year. Accordingly, income tax will be calculated on the total income, considering applicable exemptions, deductions, and other factors.
Role of Employer
Employers can be Companies (Private or Public), Individuals, HUF, Trusts, Partnership firms, Co-operative societies. There must be an employer-employee relationship between the deductor and deductee for the deduction of tax at source.
Calculating TDS: Employers must assess the employee’s taxable income and determine the TDS based on the applicable tax slabs. They also factor in exemptions like House Rent Allowance (HRA), leave travel allowance, and other deductions like those under Section 80C.
Employers are responsible for:
Monthly Deduction: TDS is deducted monthly from the salary, ensuring a consistent tax flow. The employer calculates the tax based on the employee’s income for that month and deducts the appropriate amount.
Depositing TDS: Once the TDS is deducted, the employer is responsible for remitting the deducted amount to the government. This is done through online challans with the Central Board of Direct Taxes (CBDT).
Issuing Form 16: At the end of the financial year, the employer provides Form 16. Which summarizes the salary paid, TDS deducted, and other details. This document is essential for employees when filing their income tax returns.
Role of the Employee
Employees need to be proactive in managing their TDS:
Provide Accurate Information: Employees must provide their employers with accurate details regarding exemptions, deductions, and investments under sections like 80C, 80D, etc., to reduce their taxable income.
Review TDS Deductions: Employees should keep an eye on their payslips to ensure that the TDS is being calculated correctly. If there are any discrepancies, they must inform their employer immediately.
Claim Refunds: If excess TDS is deducted, employees can claim a refund when they file their tax returns. This is often the case when employees provide valid proof of exemptions or deductions that the employer has not accounted for.
File Income Tax Returns: At the end of the financial year, employees must file their income tax returns. Adjusting the TDS already paid. The TDS deducted from the salary is reflected in Form 26AS, which employees can cross-check before filing their returns.
Understanding TDS on salaries is crucial for both employers and employees. Employers must ensure compliance with tax regulations by accurately calculating and remitting TDS. While employees should carefully review their deductions and provide the necessary information to optimize their tax liabilities. Through collaboration. Both parties can ensure seamless compliance, prevent tax-related issues, and enhance the transparency and efficiency of the entire process.
