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How TDS is Calculated on Salary & TDS Interest Calculation Formula?
The aim of Tax Deduction at Source (TDS) is to collect tax from the actual source of income. According to this concept, employers shall deduct tax at source u/s192 from their employees’ salary (if the same exceeds the exemption limit) and remit the same to the central government’s account.
Likewise, the employee or taxpayer is entitled to get a credit of the deducted amount based on Form 26AS or the TDS certificate issued by the employer.
Before proceeding with the technicalities of the calculation of interest on TDS, you first need to know what TDS is calculated on.
Table of Contents
What is TDS on Salary?
Tax Deduction at Source or TDS on Salary, as per Section 192 of the Income Tax Act, mandates employers to deduct tax at source from the salary payments made to their employees. TDS amount is deducted based on the applicable income tax slab rates for the financial year. So, the amount of TDS deducted is different for every employee depending on their salary.
Who Can Deduct TDS Under Section 192?
Employers, including companies, firms, individuals, and HUFs (Hindu Undivided Families) who are responsible for paying salaries, are liable to deduct TDS under Section 192 every month. This ensures that the tax is collected at the source and deposited with the government within the specified due date.
Also, as per Section 192 of the Income Tax Act, there must be an employer-employee relationship between the deductor and deductee for TDS deduction on salary.
When is TDS Deducted & TDS Rate Chart for FY 2025-26 (AY 2026-27)
TDS is deducted at the time of actual payment of salary, under Section 192. It means tax will be deducted when your employer pays your salary, whether in advance or on time, or in arrears (late payment).
Tax Deduction at Source calculation depends on the various natures of payments. Therefore, individuals wondering how to calculate TDS on salary, bill amount, or fixed deposits first need to know the different TDS rates.
In the table given below, you will find the new TDS rate chart, as revised by Budget 2025.
TDS Calculation Formula with Example (as per New Tax Regime)
Typically, the employer deducts TDS from his employee’s salary at the ‘average rate’ applicable to his estimated total income.
The TDS formula is:
Average Income Tax Rate = Income Tax Payable (computed through slab rates) / Estimated income for the financial year.
Let’s say you receive a monthly salary of ₹1,00,000 during FY 2025-26.
Under Section 192, TDS on your salary according to the current slab rate will be ₹50,000.
After adding 4% education and higher education cess (i.e. ₹2000), your net payable tax becomes ₹52,000.
So, the average rate of TDS on your salary will be equal to ₹52,000/12,00,000*100 = 4.33%.
Under Section 192, TDS on your salary deducted every month will be 4.33% of ₹1,00,000, i.e., ₹4330
TDS Calculation in Case of Salary from More than One Employer
If you receive a salary from more than one employer, you need to inform each employer about your other employment to ensure correct TDS deduction. To do so, it is mandatory to submit Form 12B to your current employer, providing details about your previous salary and TDS.
This will help consolidate your total income from all employers for accurate TDS calculation. So, when filing your income tax return, include all income sources and TDS to avoid any tax discrepancies and claim refunds if necessary.
However, if you do not provide details of income from the other employer, each employer will deduct TDS only from the salary paid by them respectively.
Different Scenarios of TDS Exemptions
As per the Income Tax Act, here are the scenarios where you are exempted from TDS:
- If you do not need to file IT returns under Section 139.
- In case you give a clear declaration at the beginning of that financial year under Section 15G/15H, and your employer verifies it as per the relevant rules.
- If you are particularly exempted under subsection 3 of Section 194A.
- In case you acquire a certificate under Section 197. This certificate instructs the employer not to deduct or to deduct tax at a lower rate as per its validity and conditions.
TDS Deductions Under Section 89
Section 89 of the Income Tax Act helps you get tax relief if you receive a large amount of salary arrears by providing marginal relief. This means you won't have to pay extra tax just because you received a lump sum payment. It is applicable for employees of the government, companies, co-operative societies, local authorities, universities, and other similar bodies.
To claim this relief, you need to file Form 10E on the official income tax portal.
Time Limit to Deposit the Tax Under Section 192
Under Section 192 of the Income Tax Act, employers must deposit the TDS deducted from employees' salaries within specific time limits to avoid penalties.
For employers other than the government employers, the due date for TDS deducted in March is 30th April of the same year. For TDS deducted in any other month, the due date is the 7th of the following month.
However, for government employees, the TDS deducted has to be deposited on the same day.
How to Calculate Interest on TDS for Late Payment?
Under Section 201(1A), you will have to pay interest in case of late TDS payment. The interest on late payment of TDS is calculated at a rate of 1.5% per month from the due date.
Let’s say your payable TDS amount is ₹5,000, the due date is 13 January, and you pay it on 17 May. Then, as per the TDS late payment interest calculator, the interest you have to pay is ₹5,000 x 1.5% p.m. x 5 months = ₹375.
Keeping the above points in mind will aid in accurate TDS calculation. For absolute accuracy, individuals can use an online TDS calculator.
How Can You Save TDS?
Apart from the conditions mentioned above, TDS will be levied as per Section 194A of the Income Tax Act in all other cases. However, you can do a few things to minimize your tax liability arising from TDS.
1. Leave Travel Allowance
Every taxpayer should incur travel allowance expenses before claiming an exemption. So, if you don’t have travel allowances in your salary break-up, you can request your employer to include Leave Travel Allowance (LTA).
2. Mediclaim Premium
You can provide a Section 80D tax certificate from insurance firms supporting the deduction of your paid premium. You may also have to provide copies of the bank statement, passbook, and routine health check-up receipts as proof.
3. House Rent Allowance
In case your aggregate rent paid in that financial year exceeds ₹1,00,000, you can provide the name, address and PAN of your landlord to claim this allowance. If you don’t have the PAN of your landlord, you need to obtain a declaration in Form 60.
4. Residential Loan Interest
To claim this exemption, you need to provide the lender's name, address, and PAN and the bank certificate having the details like date of availing loan, instalment amount, and chargeable interest.
5. Food Coupons
As per the Income Tax Act, a sum of ₹50 per meal can be exempted from meal vouchers. So, for a month with 25 working days, you can get a tax exemption of ₹2,500.
6. Tuition Fees
For this, you need to provide copies of your tuition fee receipts signed or stamped by the educational institution.
7. Donations
If you have provided certain funds to charitable institutions or authorised trusts, you can submit the receipt of your donation, including all the relevant credentials.
8. National Pension System (NPS)
For NPS you need to submit a copy of the deposit receipt for that financial year along with a copy of the relevant bank statement.
9. Section 80C Benefits
You need to invest in Section 80C and utilise the entire amount to save TDS on your salary. In this regard, investing in a Public Provident Fund (PPF) is a good option since it offers an annual tax rebate of around ₹1,50,000.