TDS (Tax Deducted at Source)

Before we get into the topic of TDS we need to understand a few terminologies related to TDS.
So first we will understand them and then proceed to understand TDS.

1. Direct Tax and Indirect Tax: Direct tax is that tax whose liability and incidence happens
with the taxpayer on whom the tax is levied. It is a progressive tax which means the rate
increases with income and direct tax cannot be transferred to somebody else. The
purpose of direct taxes is for development of nation and redistribution of wealth.eg:
Income tax, Wealth tax, estate tax etc.
Indirect tax is where the liability of the payment of tax can be
transferred to somebody else and the actual payer of the tax is the end consumer in
terms of higher prices..It is collected by one person and paid by another person. An
indirect tax is levied on goods and services which increases the price of the goods and
services.It is considered a regressive tax as everybody- rich and poor has to bear the
same amount of taxes.ex: customs duty, excise, GST.

2. Budget: It is the annual statement of revenue and expenditure of the government. The
finance minister presents the budget every year in the parliament and after discussions
and amendments it is approved by the parliament. Annually in the budget the finance
minister proposes introduction of new taxes, amendment/ withdrawl and changes in the
existing taxes and presents a plan of revenue to be raised in the next financial year and
where and how it will be spend.

3. FY and AY: Financial year is the year in which the income is generated and assessment
year is the next year when the assessment of the income and expenditure is done and
thereby estimation of tax payable or refund is carried out. Accordingly, the Assesment
year is the year following the financial year. Financial year runs from 1st april tol 31st
march. Hence if the Financial year( FY) is 2017-18 then Assesment year will be 2018-
19. Pls also not e that the due date for estimation and payment of tax is 31st July. So for
FY 17-18 the estimation and payment of taxes is to be done by 31st July 2018.

4. Exemptions and deductions: Exemptions are those income which is not included in the
total income while computing income tax.There are allowances which are completely
exempted and others like HRA which are partially exempted based on certain conditions
(ex: HRA).Sectin 10 of income tax act provide a plethora of provisions for exemptions
many of which are applicable for the salaried class.

The government wants investments in certain products, sectors or industries( eg:

housing, infrastructure) .Investment in such tools/ products allows you to deduct the invested
amount from the taxable income and thereby reduce your net taxable income. By using a
judicious mix of exemptions and deductions, one can substantially reduce the net taxable
income and thereby the tax payable.
5. CBDT and IRS: IRS is the administrative revenue service of the Central Civil Services of
the Government of India. The Service functions under the Department of Revenue in
the Union Ministry of Finance and is concerned with the collection and administration of
the various direct and indirect taxes accruing to the Union Government. IRS comprises
two branches - IRS (Income Tax) and IRS (Customs and Central Excise), now
Customs and GST (Goods and Services Tax) which are controlled by two
separate statutory bodies, viz., Central Board of Direct Taxes (CBDT) and Central Board
of Indirect Taxes and Customs (CBIC) respectively. IRS serves the nation through
discharging one of the most important sovereign functions i.e., collection of revenue for
development, security and governance.

6. Form 16: Form 16 is provided by the employer to the employee. The form 16 is in 2 parts:
part A and part B. Part A comprises of details like name of the organization, Address of
the organization, PAN no. ,TAN no, Name and address of the employee and the
employee’s PAN number. It also mentions the taxable income and the applicable TDS
quarter wise. If the employee has changed Jobs during the FY then the employee has to
take form 16 from each of the organizations. Part B of the form 16 provides the total
income , exemptions, deductions , taxable income, and net tax payable.In a form 16 the
net tax payable will always be zero and won’t include income from other sources and will
include income from salary only. If the employee has changed jobs then employee can
provide part B of form 16 to the new employer and they can provide a consolidated part B

7. PAN/ TAN: Each Income tax assesee needs to have PAN ( permanent account number)
and each organisation needs to have TAN or Tax Deduction and Collection Account
Number is a 10 digit alpha numeric number required to be obtained by all persons who
are responsible for deducting or collecting tax. It is mandatory to quote Tax Deduction
Account Number (TAN) allotted by the Income Tax Department (ITD) on all TDS returns

8. Refund/ Fine: If the TDS deducted throughout the year is more than the tax applicable
then on filing the ITR the assesee will get a refund of the excess tax deducted. In case of
late filing of ITR, there is a fine applicableas per the delay in filing of ITR.

9. Income tax slabs: The income tax slab applicable for males ( non senior citizens) is as
follows:

0-2.5 lakhs- NIL

2.5 lakhs- 5 lakhs- 5%
5 lakhs- 10 lakhs- 20%
Greater than 10 lakhs- 30%

The tax computation is on incremental basis which means moving from one slab to the
other incremental amount will be taxed at the tax rate. For ex: If A is having net taxable
income of 12 lakhs pa. then the tax computation will be as follows:
0-2.5 lakhs- nil
 2.5 lakhs- 5 lakhs- 5% so tax will be 5% of ( 5 lakhs- 2.5 lakhs)= 12,500/-
5 lakhs- 10 lakhs- 20% so tax will be 20% of ( 10lakhs- 5 lakhs) =1,00000/-
Greater than 10 lakhs- 30% so tax will be 30% of ( 12lakhs- 10 lakhs)= 60,000/-
So total tax payable= 12500+100000+60000= 172500/-

10.There are various sections pertaining to tax deduction but will concentrate on few
sections on tax payment like section 10, section 80, and section 24.Section 10 as we
have discussed earlier, pertains to exemptions, section 80 to investments ( deductions)
and section 24 for deduction towards interest on home loan.
Under section 10, besides exemptions on LTA, medical allowance, Travel allowance,
agricultural income( with certain conditions),exemption on arrears income etc are
applicable from our point of view.
Under section 80, there are many sections like 80c, 80D, 80 E, 80 CCC, 80GG, 80TTA
which are important from our perspective.

80C comprises of investment options like:

i) PF
ii) PPF
iii) NSC
iv) KVP
v) Life insurance policies
vi) Term plan
vii) Tax saver FDs
viii) Infrastructure bonds
ix) ULIP plans
x) Sukanya samriddhi yojana
xi) Tution fees of children ( upto 2 children)
xii) ELSS ( equity linked savings scheme)
xiii) Principal repayment of home loan
xiv) Senior citizen savings scheme.
xv) Contribution to notified annuity plan of LIC.

The limit is 1,50,000/- in a year.

80 D : Under this one can claim a deduction of 25k if the premium is paid for purchasing a medical
policy for self, spouse and two children. If the policy is taken for the parents, an additional 50k
can claimed as deduction.so a max of 75k

80E: Under this, the entire interest paid on the educational loan can be taken as deduction. But
the loan should get extinguished within 8 years. Interest paid after 8 yrs is not eligible for
deduction.No limit on the amount.

80 CCC: The entire amount contributed towards NPS can be taken as deduction.

80GG: Applicable for salaried people who donot have HRA as part of salary and self employed
persons based on the conditions (seen earlier in HRA section)
 80TTA: Interest on the savings account upto a limit of 10,000/- can be taken as deduction.

Steps to calculate Income Tax and TDS:

i) Calculate gross Annual salary

ii) Calculate Taxable salary after applying exemptions as under sec 10
iii) Reduce Professional tax
iv) Apply Deductions as per Sec 80,24 etc
v) Balance amount is taxed as per income tax slabs

Exemptions from salary under section 10:

Component Monthly Yearly Documents reuired

HRA Based on Yes

calculation
Medical 1250 15000

Conveyance 1600 19200 Not required

Education 100 or 300 1200 or 3600 Yes for 300/3600

allowance

Sodexo 2200 26400 Yes

Internet fees 2000 24000 Yes

Telephone 1500 18000 Yes

Washing 2000 24000 Yes

allowance
Driver 900 10800 Yes
allowance
Cash or gift 417 5000 Yes
vouchers

Other exemptions under section 10

• LTA

• Life insurance proceeds

• Gratuity for those covered under Payment of Gratuity Act upto Rs.20,00,000

• Leave encashment (upto 3 lakh)

• Compensation under VRS

• PF on retirement

• HRA subject to calculation

Exemption on agricultural income:

Agricultural income is considered for rate purposes while computing the income tax liability, if
following two conditions are cumulatively satisfied.

 Net Agricultural income exceeds Rs. 5,000/- for previous year, and
 Total income, excluding net Agricultural income, exceeds the basic exemption limit.

Once the aforementioned conditions are satisfied then we shall compute the Tax liability in the
following manner:

First, include the Agricultural income while computing your income Tax liability.

Example – Let us say that an Individual Assessee has a Total income of INR 7,50,000/- (excluding
Agricultural income) and a Net Agricultural income of INR 100,000/-. Then, per this step, Tax shall
be computed on INR 7,50,000/- + INR 1,00,000/- = INR 8,50,000/-. Thus, income Tax amount as
per this step shall be INR 95,000/- for an individual who is below the age of 60 Years.

Second, add the applicable basic tax slab benefit, as applicable, to the Net Agricultural income.
Thus, per our example mentioned above, we shall add INR 2,50,000/- to INR 1,00,000/- as the
applicable Tax slab benefit available to an individual below 60 Years of age is INR 2,50,000/-Now
we will compute income Tax on INR 3,50,000/- (Tax slab benefit 2,50,000 + Net Agricultural
income 1,00,000). The amount of Tax shall be INR 10,000/-.

Third, subtract the Tax computed in Second step from the Tax computed in First step = INR
85,000/-. Thus, this is the income Tax liability subject to deductions, Education Cess etc., as
applicable.
Tax exemption on salary arrears:

Step 1 Calculate tax payable on the total income, including additional salary – in the year it is
received.

Step 2 Calculate tax payable on the total income, excluding additional salary – in the year it is
received.
You can get the amount of the additional salary (Arrears) from the arrear document given by
your employer.
Step 3 Calculate difference between Step 1 and Step 2

Step 4 Calculate tax payable on the total income of the year to which the arrears relate, excluding
arrears

Step 5 Calculate tax payable on the total income of the year to which the arrears relate, including
arrears

Step 6 Calculate difference between Step 4 and Step 5

Step 7 Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note that if amount at Step 6 is more than amount at Step 3 no relief shall be allowed.