How to deduct correct TDS - For Salaries and Non-Salaries

Hello and Welcome. In this post, we will see the steps to deduct correct TDS. We will cover the following:

The Sections 192 to 196 of Income Tax Act, directs that “Any person responsible for paying any income chargeable to tax” to deduct income tax thereon at the rates specified respectively.

Salaries:

While making the payment of Salary, the deductor should consider the following and deduct correct TDS from the payment being made.

  • In the first step, the employer needs to calculate the annual Approximate / Actual Salary.
    • You need to calculate the Exact Taxable Salary amount paid / payable till current month for the particular financial year.
    • Calculate the approximate salary that will be paid for the rest of the FY, assuming the current month salary for the rest of the yearly salary.
  • Add any other income reported by the Assessee [Employee].
  • Deduct if any Loss declared by the employee from the annual taxable salary. Note that, only House property loss (interest in case of Self Occupied House Property) should be considered.
  • You need to deduct the allowed deductions declared by the employee under Section 80C, 80D, 80G, etc.
  • Also, calculate the Income Tax, Surcharge, and cess on the Net Income, as per the “Rates in Force”.
  • Deduction of rebate u/s 88E or Relief u/s 89 is to be done as applicable.
  • Keeping it as total tax, now deduct the TDS made till last month from it.
  • Divide the net TDS by “Remaining number of months in the FY, including current month”.
  • After deducting TDS, deduct the total amount from employees Salary.

Non Salaries:

A deductor should follow the below points while making each payment.

  • The deductor should categorize each payment to the relevant “type of Payment” or “Section”.
  • Check if the payment is not a payment is being done to Government, Reserve Bank, certain corporations established under Central Act, or Mutual Funds. [comes under Section 196]
  • The deductor should refer the threshold limit section or Type of Payment and consider that limit before deducting income tax.
  • Refer the Rate of Tax
  • Before deducting TDS, the deductor needs to consider the declaration as submitted by the assessee (party to whom you are making the payment) under Section 197A for non-deduction of TDS. [Only for payment of Interest (Securities and Other than securities), Dividends and Interest on NSC, Viz: sections 194, 194A, 193, 194EE].
  • The deductor has to check if the Assessee has submitted a certificate by Assessing Officer under Section 197 for non-deduction of TDS or deduction at a Lower Rate.
  • In order to deduct TDS, check the relevant rate of TDS under the respective type of payment [sections 193 to 196]
  • Get the effective rate TDS, including Surcharge and Cess if any.
  • Deduct the amount as per the effective rate of TDS from the amount being paid.

Consequences of not making the Tax deduction

If the deductor fails to deduct the “whole or any part of the tax” as TDS, then:

  • Any payment made as interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services, or amounts payable to a contractor or sub-contractor, on which TDS is deductible and such TDS has not been deducted or after deduction, has not been paid during the previous year, such amount will be added back to the income chargeable to tax.
  • Simple interest will be payable at 1% per month on the amount of tax [TDS] from the date on which such tax was deductible to the date on which such tax is actually paid. Such interest should be paid before furnishing the quarterly statement for the respective quarter. [Refer Section 201(1A)]
  • It attracts a penalty, which is equal to the amount of tax which such person failed to deduct. There can also be some additional penalty imposable Joint Commissioner.

This ends the post on how to deduct correct TDS. Let us know your opinion by commenting below.