Module 5: TDS on Salary – Section 192
Complete Guide to Salary Structure, Monthly TDS Calculation & Compliance
Introduction
Among all TDS provisions, TDS on Salary under Section 192 is the most sensitive and closely scrutinised area. Even small mistakes in salary TDS calculation can lead to employee dissatisfaction, excess tax deduction, refund issues, and departmental notices.
In Module 5 of our TDS Course, we explain salary components, monthly TDS calculation method, treatment of perquisites and allowances, investment declarations, Form 12BB, and handling bonuses or arrears. After this module, HR teams and employers can confidently manage salary TDS end-to-end.
Quick Summary (Module Snapshot)
- Salary TDS is governed by Section 192
- No fixed TDS rate — slab-based deduction
- Employer must estimate annual taxable income
- Investment proofs play a crucial role
- Incorrect handling leads to excess TDS or notices
Table of Contents
- What is Salary Under Income Tax?
- Salary Components Under Income Tax
- Monthly TDS Calculation Method
- Perquisites & Allowances
- Investment Declaration & Proofs
- Form 12BB Explained
- Bonus, Arrears & Salary Restructuring
- Conclusion
What is Salary Under Income Tax?
Under Income Tax Act, salary includes any payment received by an employee from an employer due to employer-employee relationship.
Salary is taxable on:
- Due basis or
- Receipt basis, whichever is earlier
📌 Even advance salary and arrears are taxable.
Salary Components Under Income Tax
Common Salary Components:
1. Fully Taxable Components
- Basic salary
- Dearness allowance (DA)
- Bonus
- Commission
- Overtime
2. Partly Exempt Allowances
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Children education allowance
- Transport allowance (limited cases)
3. Fully Exempt (if conditions met)
- Employer contribution to EPF (up to limit)
- Gratuity (subject to limits)
- Leave encashment (on retirement)
Correct classification is critical for accurate TDS.
Monthly TDS Calculation Method
Employers must calculate salary TDS on an annual basis, then deduct it monthly.
Step-by-Step Process:
- Estimate gross annual salary
- Add taxable perquisites
- Reduce exempt allowances (HRA, LTA, etc.)
- Deduct standard deduction (₹50,000 or as applicable)
- Reduce eligible deductions under Chapter VI-A
- Calculate tax as per applicable slab
- Add cess
- Divide total tax by remaining months
📌 Salary TDS must be evenly spread across months unless changes occur.
Perquisites & Allowances
Perquisites (Taxable Benefits):
- Rent-free accommodation
- Company car
- Free utilities (electricity, gas)
- Employer-paid personal expenses
Perquisites must be valued as per Income Tax Rules and added to taxable salary.
Allowances:
- HRA exemption based on rent paid, salary, and city
- LTA exempt only for actual travel expenses
- Allowances without bills are usually taxable
📌 Incorrect perquisite valuation is a common audit observation.
Investment Declaration & Proofs
Employees submit investment declarations at the start of the year and proofs later.
Common Sections:
- 80C – PF, LIC, ELSS, PPF
- 80D – Medical insurance
- 80CCD – NPS
- 80E – Education loan interest
- 24(b) – Home loan interest
📌 Employer should not allow deductions without proof.
Form 12BB Explained
Form 12BB is a declaration by employee for claiming:
- HRA
- LTA
- Home loan interest
- Chapter VI-A deductions
Why Form 12BB is Important:
- Mandatory for employer records
- Basis for salary TDS computation
- Helps during departmental verification
Improper or missing Form 12BB can lead to incorrect deductions.
Bonus, Arrears & Salary Restructuring
Bonus
- Fully taxable
- TDS deducted in the month of payment
Arrears
- Taxable when received
- Relief under Section 89(1) may apply
- Employer must compute relief if employee submits details
Salary Restructuring
- Mid-year restructuring affects TDS recalculation
- HR must re-estimate annual income and revise monthly TDS
📌 Failure to adjust TDS after restructuring causes year-end mismatches.
Conclusion
TDS on salary is not just about deducting tax — it requires accurate estimation, documentation, and continuous monitoring. Employers who handle salary TDS correctly avoid disputes, refunds, and employee dissatisfaction.
This module equips HR teams and employers to handle salary TDS confidently and compliantly under Section 192.
Call to Action
If you need assistance with:
- Salary structuring & TDS optimisation
- Payroll compliance
- Handling excess or short salary TDS
- Rectification of Form 16 issues
📞 Contact Verotus Finlegal Solutions LLP
for professional payroll & TDS advisory.
🌐 Visit: www.verotusllp.com
