subject: How to calculate TDS on Salary and issue Form 16 TDS Certificate to Employee's [print this page] How to calculate TDS on Salary and issue Form 16 TDS Certificate to Employee's
As per Income Tax Act 1961 in India an employer should deduct TDS (Tax deducted at source) on all the salary related payments to the employees.
The broad components of salary under Indian Income Tax is divided into :-
Types of Salary (Advance Salary, Arrear salary, Leave Salary, Annuity)
1) Basic salary
2) Allowances
DA
Entertainment Allowances
House Rent Allowance
Medical Allowances
Travel Allowance
Education Allowance
City compensatory Allowance
Special Allowance
Perquisites like : Free rental Accommodation, Free use of Car Telephone etc
3) Profit in lieu of salary
4) Retrenchment Compensation
After claiming the deduction and benefit allowed under different heads of salary ,Gross Taxable salary is calculated.
From Gross Taxable Salary Assess is allowed deductions under chapter VI-A which includes various deduction available to employee/ assessee towards investments made by him.
Income tax is calculated after allowing the initial deduction of Rs.185000/= (threshold limit A.Y 2011-12) which has been increased from the earlier limit of Rs.160000/=
After calculation of tax with the help of different slabs of Income Tax, final income tax liability is calculated. Employer company will deduct the tds under section 192 C from the salary given to employee and shall be deposited with Government on every month. At the end of the year Form 16 (commonly known as TDS certificate) is issued to employee and quarterly TDS return is filed by the employer company, various taxation software like taxmann and webtel is available in the market to facilitate the work. Many companies find it very easy to use user-friendly taxation software however many accountants still prefer to their tasks manually.
Some time Payroll softwares do provide facility of deducting TDS automatically and printing of challans alongwith issue of form 16 to employee, however not many payroll software supports this function, accountants working in the organisation maintains payroll record separately for employee data and relevant information and TDS is deducted by using another software like taxmann or webtel. TDS (Tax deducted at source) will be deposited in 7 days in theimmediately next month for example TDS is deducted on 15-04-11 and it should be deposited on or before 07-5-2011 as per Indian Income Tax Act 1961 without attracting any penalty. TDS on salary is calculated on average rate however TDS on other types of payment is calculated on predefined rates for example TDS rate on Rent payment is 20% in case of company assessee and 15% in case of non company assessee.
