TDS on Salaries - Income Tax Department

CHAPTER-3
INCOME UNDER THE HEAD
SALARY
3.1 Introduction: The statute enjoins every employer to
estimate the liability of tax deductible at source and to deduct tax at
an average rate. For this the employer is required to determine the
salary payable to the employee and accordingly compute the tax
liability. The employer must estimate this tax liability at the very
beginning of the financial year in accordance with the following
sequence of steps:
(1) The employer should first compute the gross salary payable
to the employee during the year taking into account any salary
received/receivable by the employee from any other employer/
former employer.
(2) The gross salary is to be reduced by those payments which
are exempt from taxation.
(3) Deductions u/s 16 are to be reduced from the above amount
to arrive at the net salary payable.
(4) Income chargeable under any other head as reported by the
employee is to be added and accordingly the gross total
income(GTI) is to be computed.
(5) Deduction under Chapter VI-A for which the employee is
eligible is to be reduced from gross total income and thus the
total income is to be computed.
(6) On the basis of the rates in force, the tax liability on the total
income of the employee is to be computed.
(7) The tax liability so computed is to be increased by the surcharge
payable( if any) and education cess payable at prescribed
rate, to arrive at the total tax payable.
(8) 1/12th of this total tax payable is to be deducted every month
by the employer.
3.2.1 What is “salary” - Salary is said to be the remuneration
received by or accruing to an individual for service rendered as a
result of an express or implied contract. The statute, gives an
inclusive but not exhaustive definition of salary. As per sec 17(1),
salary includes therein (1) Wages Annuity or pension Gratuity (IV)
fees, commission, perquisites or profits in lieu of salary (v) Advance
salary (vi)Receipt from provident fund (vii) Contribution of employer
to a recongnised provident fund in excess of prescribed limit(viii)
Leave encashment(ix) compensation as a result of variation of
service contract etc.(x) Government contribution to a pension
scheme.
3.2.2 Exceptions to salary income: The existence of an
‘employer-employee’ relationship is a must for a payment to be
taxed under the head salaries. Accordingly, the following class of
payments do not fall under the purview of the head ‘salary’
(i)
(ii)
Salary received by a partner from his partnership firm
carrying on business - This income is taxable under the
head “profits and gains of business and profession”.
Salary received by a person as MP or MLA- This income
is taxable under the head “income from other sources”.
However, the salary received by a person as a Minister of
central government/State Government is chargeable under
the head salaries.
(iii) Family pension that is pension received by the members
of the family of an employee subsequent to his death -
This is taxable under the head “income from other sources”.
However the pension received by an employee from his former
employee is taxable under the head salaries.
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