Income Tax (TDS) Calculations
Tax Deducted at Source (TDS) is a core component of payroll processing. Employers are legally responsible for deducting income tax from employee salaries and depositing it with the government. Accurate TDS calculations ensure compliance, reduce errors, and build employee trust.
As Albert Einstein said: “The hardest thing in the world to understand is the income tax.”
But with structured processes, TDS can be simple and accurate.
How TDS is Calculated
TDS depends on:
- An employee’s estimated annual income
- Applicable tax slab rates
- Declared investments, exemptions, and deductions
Formula for TDS Calculation:
TDS per month= {(Gross Annual Income−Exemptions−Deductions)×Applicable Tax Rate} ÷ 12
Step-by-Step Process
- Determine Gross Salary: Sum of basic pay, HRA, allowances, bonuses, etc.
- Subtract Exemptions: Eligible exemptions like HRA, LTA, and special allowances.
- Apply Deductions: Investments under 80C, 80D, etc.
Compute Taxable Income:
Gross salary – exemptions – deductions.
- Apply Slab Rates: Use latest IT slab (old or new regime).
- Monthly TDS: Divide annual tax liability by the number of remaining months in the year.
Handling Exemptions, Deductions, and Slabs
Exemptions
- House Rent Allowance (HRA): Based on rent paid, salary, and city of residence.
- Leave Travel Allowance (LTA): Exempt as per income tax rules.
- Special Allowances: For education, uniforms, etc.
Deductions
- Section 80C: PF, PPF, ELSS, LIC, etc. (up to ₹1.5 lakh).
- Section 80D: Medical insurance premiums.
- Section 80E/80G: Education loan interest and donations.
Slab Rates (Example – Old Regime, FY 2023-24)
- Up to ₹2.5 lakh → Nil
- ₹2.5 lakh – ₹5 lakh → 5%
- ₹5 lakh – ₹10 lakh → 20%
- Above ₹10 lakh → 30%
(Plus 4% cess on the tax amount)
Example Calculation
Employee details:
- Gross Annual Salary = ₹8,00,000
- HRA Exemption = ₹50,000
- Section 80C Investments = ₹1,20,000
- Section 80D (Health Insurance) = ₹20,000
Taxable Income:
8,00,000−50,000−(1,20,000+20,000)=6,10,000
Tax Calculation (Old Regime):
- 0 – 2.5 lakh → Nil
- 2.5 – 5 lakh → 2.5 lakh × 5% = ₹12,500
- 5 – 6.1 lakh → 1.1 lakh × 20% = ₹22,000
Total = ₹34,500
4% cess = ₹1,380
Final Tax = ₹35,880
Monthly TDS:
35,880 ÷ 12 = ₹2,990
So, the employer deducts ₹2,990 per month as TDS.
Tips & Tricks for Accurate TDS
Use payroll software that updates tax slabs and exemptions automatically.
Maintain employee investment declarations early to avoid miscalculations.
Reconcile TDS monthly with bank deposits and IT portal filings.
Educate employees on taxable vs non-taxable allowances for transparency.
Self-Check Questions
- Have you considered all exemptions and deductions before calculating TDS?
- Are you using the latest tax slabs applicable for the financial year?
- Do you update monthly TDS calculations when employee salaries or investments change?
- Is the employee aware of deductions via clear payslips?
- Are TDS deposits and filings submitted on time to avoid penalties?
TDS = (Gross Salary – Exemptions – Deductions) × Slab Rate ÷ 12