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salary and tds

kinnary (student) (231 Points)

20 July 2010

hi..i always hear from a software employee that 30% of tax is deducted from his salary every month and the rest is paid to him.i am confused regarding this 30% tax deduction...could you please clarify this??

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CA Seema Kochar (CHARTERED ACCOUNTANT) (636 Points)
Replied 20 July 2010

TDS on salary is deducted at the average Rate .

Average rate is tax payable on his salary income divided by salary income.

In simple terms tds is equal to tax liability.

Company deduct tax @ of 30% to sagegaurd itself from disallowances due to tax deduction at lower rate.

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Shudhanshu Agrawal (Business) (2570 Points)
Replied 20 July 2010

I dont agree with the policy followed by the company. Flat 30% is too much for TDS deduction. Moreover as per Section 192 adjustment can be made for short or excess deduction in the tax deduction liability of the employee.

OldSchool (None) (50 Points)
Replied 22 July 2010

Originally posted by : kinnary
	hi..i always hear from a software employee that 30% of tax is deducted from his salary every month and the rest is paid to him.i am confused regarding this 30% tax deduction...could you please clarify this??

The company should deduct 30% of salary as tax each month only if the employee falls in the 30% bracket, not otherwise.

Companies try to deduct tax in a linear fashion if the salary is stable each month. Let us say, the salary is consistent and the projected tax payable for the year would be 12,000, then the company can make projections and start deducting tax as 1,000 per month. Now, if after 6 months, the employees salary increases for any reason (like night shift allowance), and now if for rest of the 6 months, they need to deduct 9000 rather than 6000(pro-rate for 6 months), they would start deducting tax as 1,500 per month; unless there is some other variation in the salary during that period.

Sometimes, at the start of year (April-May), project medical expenses, telephone expenses as non-taxable(they have to furnish proof for that before year end, when the company asks for them). Also, employee may make projection that he will invest in some tax-saving scheme.

At the end of the year, when the company asks for the employees to submit the documents, employee has to submit them. If he does, it is okay, only normal tax(as discussed above) will be deducted. But if he is unable to furnish the proofs of the same, those items (HRA, medical etc) will become taxable and hence he may have to pay heavy tax in the last months (Feb-March) of the year.

So, realistic projections must be submitted to the company in the year-start.