TDS on Salary – Sec. 192 | When to Deduct, Rate of TDS, Exempted Limit

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TDS on Salary: An employer paying any income chargeable under head ‘salary’ is responsible for deducting TDS on an average rate of income tax based on the prevailing rate during the particular Financial Year by considering the estimated Income of the assessee. Accordingly, all employers making such payments like individuals, HUF, Partnership Firms, Companies, Co-operative societies, trust, and artificial judicial persons are liable to deduct TDS.

TDS on Salary – Sec. 192

The following are the pre-requisites for TDS deduction u/s 192 (TDS on Salary)

  1. There exist an employer – employee relationship between deductor and deductee and the payment is in the nature of salary
  2. Any person responsible for making payment to resident / non-resident employees
  3. Payment is made by the employer to the employee
  4. The income under the head salaries is above the maximum amount not chargeable to tax

Who is responsible to deduct TDS on Salary

Any person responsible for paying any income chargeable under the head “Salaries” (i.e. employer) is required to deduct tax at source.

When TDS on Salary shall be deducted

The tax shall be deducted at the time of payment of such income.

Rate of TDS on Salary

The tax shall be deducted at the average rate of tax, computed on basis of prescribed rates in force for the financial year in which payment to the employee is made.

Section Nature of Payment Threshold Limit of Payment Rates
192 Income from Salary
Senior Citizen (60 Years) Rs. 3,00,000
Super Senior Citizen (80 Years) Rs. 5,00,000
Others Rs. 2,50,000
Average rate of Tax + Health & Education Cess (Surcharge if Salary > 50 Lacs) Or, Option to choose between New and Old Tax Slab Regime for Salaried Employees

Following points shall be kept in mind by the person responsible to deduct tax at source u/s 192 –

Maximum exempted limit

The TDS on Salary shall not be deducted if the taxable salary is less than the basic exemption limit.

Payment of tax by the employer

The employer paying any income in the nature of non-monetary perquisite may pay, at his option, tax on such income without making any deduction therefrom at the time when such tax was otherwise deductible. For this purpose, tax shall be determined at the average of income-tax computed on the basis of the rates in force for the financial year, on the income chargeable under the head “Salaries”. It is to be noted that tax paid on non-monetary perquisites by the employer shall not be considered as income of the employee.

Particulars of perquisites

The employer shall furnish a statement to the employee (whose salary exceeds 1,50,000) giving correct and complete particulars of perquisites or profits in lieu of salary provided to employee and the value thereof in Form 12BA provided salary of such employee exceeds ` 2,00,000.

Salary from more than one source

As per Sec. 192(2), where assessee is working simultaneously with more than one employer, he may furnish to any one employer at his choice, details (in Form No. 12B) of income taxable under the head “Salaries” due to or received by him from other employer(s) and such employer shall deduct tax on aggregate salary.

Treatment of other income

As per Sec. 192(2B), where an assessee who receives any income chargeable under the head “Salaries” has, in addition, any income chargeable under any other head of income for the same financial year, he may (or may not) furnish to the employer the particulars (in plain paper) of—

  • such other income (only income and not loss)
  • tax deducted on such other income as per provision of this chapter;
  • the loss, if any, under the head “Income from house property” (Losses under any other head are not to be considered)

Tax deducted u/s 192 shall be higher of the following:

  • Tax deductible from income, that would be so deductible, if loss under the head ‘Income from House Property’, other income (only income) and the tax deducted thereon had been taken into account.
  • Tax deductible from income under the head “Salaries”, that would be so deductible (after adjusting loss under the head Income from house property), if the other income (or loss) and the tax deducted thereon had not been taken into account.

Evidence of claim

The responsible person shall, for the purposes of estimating income of the assessee or computing tax deductible, obtain the evidence or proof or particulars of prescribed claims (including claim for set-off of loss) from the assessee in such form and manner as may be prescribed.

TDS on ESOP

ESOPs have been a significant component of the compensation for the employees of start-ups, as it allows the founders and start-ups to employ highly talented employees at a relatively low salary amount with the balance being made up via ESOPs. ESOPs are taxed as perquisites u/s 17(2). The taxation of ESOPs is split into two components:

  1. Tax on perquisite as income from salary at the time of exercise.
  2. Tax on income from capital gain at the time of sale.

The tax on perquisite is required to be paid at the time of exercising of option which may lead to cash flow problem as this benefit of ESOP is in kind. In order to ease the burden of payment of taxes by the employees of the eligible start-ups or TDS by the start-up employer, it is provided that for the purpose of deducting or paying tax, a person, being an eligible start-up [u/s 80-IAC], responsible for paying any income to the assessee being such perquisite, deduct or pay, as the case may be, tax on such income within 14 days:

  1. after the expiry of 48 months from the end of the relevant assessment year; or
  2. from the date of the sale of such specified security or sweat equity share by the assessee; or
  3. from the date of which the assessee ceases to be the employee of the person;

– whichever is the earlier.

The tax shall be deducted or paid at the rates in force of the financial year in which the said security or sweat equity share is allotted or transferred.

A similar provision is applicable, in case, the employee is paying the tax directly (in case tax is not deducted).

Salary paid in Foreign Currency [Rule 26 & 115]

For the purpose of deduction of tax at source on any income payable in foreign currency, the rate of exchange for the calculation of the value in rupees of such income payable to an assessee outside India shall be the telegraphic transfer buying rate of such currency as on the date on which the tax is required to be deducted at source under the provisions of Chapter XVIIB by the person responsible for paying such income.

It may be noted that this rule is applicable only for determination of TDS. However, in computing the salary income, the rate of conversion to be applied is the telegraphic transfer buying rate on the last day of month immediately preceding the month in which the salary is due or is paid in advance or arrears (Rule 115).

“Telegraphic transfer buying rate (TTBR)”, means the rate or rates of exchange adopted by the State Bank of India.

Issue of Form 16 & Form 12 BA

The TDS deducted to be deposited to Government and a FORM 16 should be issued to employees. The employees claim the TDS amount while submitting tax return against the total tax payable. The cut-off date for issuing Form 16 is 31 May of the Next Financial year in which tax is deducted.

Apart from issue of form 16 Form, Form 12BA is also issued that contains details of perquisites & Profit lieu of salary chargeable under section 17(3) of the Act.

With effect from 1 June 2016, as per Rule 26C, an employee shall furnish to employer evidence or particulars of the claims made in Form No.12BB for purpose of estimation of his income and TDS.

Exemption or relaxation from the provision

When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorizing the payer to deduct no tax or deduct tax at a lower rate. [Refer sec.197]