If you are paying salary, tax laws require you deduct TDS before you pay your employee. You may be a freelancer or a small company; these rules apply.
[Find out if must deduct TDS from payments you make – click here.]
Steps to calculate & deduct TDS
Step 1 Put together amounts thay you’ll pay to the employee
For example – Basic Salary, any allowance, HRA etc.
Usually as a freelancer, you may choose to pay a single consolidated amount too, without a break up of basic salary or allowance or HRA.
However, if you plan to break it up, do remember that some allowance are tax exempt to an extent and you’ll have to allow that exemption. For example, transport allowance. You can decide to pay any amount as transport allowance, but you must exempt Rs 1600 per month from it. Exemption may be allowed if you pay HRA provided your employee is living on rent and can provide you rent receipts. Use our HRA calculator here to calculate exempt portion. (Also, tax laws require you maintain receipts of rent, ask your employee to prepare rent receipts from here).
So sum up, Basic + (HRA less exempt) + (Allowances less exempt) = Total salary
OR you may have paid a single consolidated amount.
Step 2 Add other incomes declared by the employee. If your employee has rental income and has informed you about such income, you must include it for the purpose of tax calculations. Or if your employee is repaying a home loan, you must allow interest deduction. You can read in detail about how to calculate income from house property in detail here.
Do remember though, not to include any losses, except loss from house property. (those must be claimed by the employee, directly in their tax return).
You must obtain a formal declaration from the employee for other incomes declared. Besides, obtaining proper proofs of interest payment on home loan from lender, ownership certificate, rental income proofs etc.
Step 3 Sum up salary income (from Step 1) and other income (from step 2)
Step 4 Allow deductions under section 80C to 80U. A host of deductions are allowed to individual tax payers which can be claimed from total income. Each deduction has certain conditions attached and limits applicable. Do make sure, you keep those in mind. Additionally, the income tax laws require that proof of these deductions (if allowed by the employer) must be collected & filed safely by the employer. You must therefore, keep a record of all the deductions allowed by you. For example, obtaining PPF passbook photocopies, life insurance premium certificates, interest on home loan payment certificate, ELSS statements (all these are eligible for section 80C deduction.
Step 5 Total from Step 3 less total of Step 4
Step 6 Find out tax on total from step 5. Use tax slabs mentioned here.
Step 7 Add: cess (3%) of tax calculated above. (Surcharge is applicable on total income above Rs 1crore)
Step 8 Less: Tax deducted by others as per information given by the employee. If TDS has been deducted by others on income other than salary, you can reduce that from the total tax dues. You must obtain proper proofs though, such as a Form 16A or details from Form 26AS.
Step 9 Find out total tax liability and make sure in one financial year adequate TDS has been deducted by you. To be able to accommodate these calculations and to make the exercise of proof collection smooth, you can fix a deadline, say end of January or mid-February, mentioning that you will accept proofs only by such deadline or else deduct TDS as applicable. As an employer, it is your responsibility to deduct & deposit TDS on salary you pay.
Those who pay salary and deduct TDS, must issue a proof of payments made and TDS deducted on it. As well as certificate that such TDS has been deposited with the government. This proof is called Form 16. If you have deducted TDS, you must issue your employer a Form 16. Form 16 can be prepared on ClearTDS.
Have any questions? Ask us via comments or drop us an email firstname.lastname@example.org . We’ll be glad to assist you 🙂
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