How to calculate and reduce TDS on salary?

We know how our in-hand salary never matches the CTC. While this may be because of various components of the salary, one of the major reasons is TDS or Tax Deducted at Source.

But, what is TDS?

It is that part of your salary that never reaches your bank account, rather, it directly goes to the government.

As the name suggests, TDS is a way of income tax collection where tax is deducted before the payment is made to you. So, whenever you earn any income, such as a salary, interest, or commission, the entity that pays you deducts a certain amount in the form of TDS before handing it over to you, which is then deposited with the government on your behalf.

This way, the government ensures that we are paying our fair share of taxes on time and there’s less room for any default.

What is the TDS rate on salary?

In case of salary income, the TDS rate depends on the income tax slab that you fall in. This would be different for both new and the old regime.

How to calculate TDS on salary?

To calculate your TDS:

  • Firstly you will have to calculate your gross total salary. This would include your basic pay, allowances like HRA & LTA, and any perquisites that you receive.
  • Second, subtract all the exempt allowances and deductions.
  • The resulting salary would be your taxable salary. On this, you can further reduce ₹50,000 as a standard deduction.
  • Lastly, identify the income slab in which your net taxable income falls (based on your tax regime) and calculate the tax liability for the year.
  • Then divide the amount by 12 to determine your monthly TDS.

Let’s understand better with an example.

Say, you have a salary of ₹12L per annum. You have invested ₹1.5L in ELSS funds and have taken a home loan on which you pay an interest of ₹2L every year. Your TDS calculation under both the old and new regimes would be as follows:

As observed, because of the deductions, TDS under the old regime was lower than in case of the new regime. However, if you didn’t have the above deductions, the new regime would have been more beneficial.

This is why, it also becomes necessary to calculate and analyse your liability under both the regimes. Then, you can inform your employer about your regime preference and investments so that they can deduct the TDS accordingly.

How can you reduce TDS and increase your in-hand salary?

To reduce the TDS on salary, you’ll have to reduce your taxable income and this can be done by claiming various allowances and deductions. Here are a few common ones:

  • HRA (House Rent Allowance): This is a common salary component most employers provide. If you live in a rented premises, a part of HRA is exempted. Here’s a thread on HRA and its calculation.
  • LTA (Leave Travel Allowance): An allowance employers give to their employees for vacations within India, whether they travel solo or with family. If you claim LTA, it becomes a tax-free component.
  • Flexi-Benefits Plan: Some employers provide allowances in the form of a flexi-benefits plan where you can customise your CTC based on what allowances you need, and these are then reduced from your taxable salary.
  • Chapter VI-A deductions: This covers all your deductions like 80C for tax saving investments, 80D for medical insurance premiums, 80G for donations, 80E for education loan interest, 80GG for house rent, etc.

What if your employer still deducts excess TDS?

Now, if you miss out on the declarations and your employer deducts excess TDS from your salary, you can claim a refund of the same while filing the ITR. You can report the eligible deductions or even switch the regimes, and the differential amount would be issued to you as a refund.

Here’s a video for you!