TDS or tax deduction at source is a mandate from the salary of the salaried taxpayer under section 192 of the income tax Act. And after the deduction is made, balance amount is paid to the employee.
Calculation of TDS on salary
TDS amount is deducted on the basis of average income tax rate of the taxpayer for that financial year. And for the calculation of average rate of income tax, slab rate in force for a particular financial year are taken into account. Here is an illustration explaining the calculation of average rate of income tax.
Say Mr. X who is aged less than 60 years earns Rs. 8.4 lakhs a year, then as per the income tax slab rate of FY 2018-19 (AY 2019-20) falls in the 20% slab rate. He also claims a deduction of Rs. 1 lakh for the FY and hence the total tax payable on his salary considering 4% of income tax as health and education cess comes to be as though:
20% of (7,40,000- 5,00,000) + 5% of (5,00,000- 2,50,000) + (4% of income tax)
= 48,000+12,500 + (4% of 60,500) = Rs. 62,920
So, average rate of tax on salary income is computed = Total tax payable / Total salary * 100
Therefore in the above illustration TDS will be deducted at the rate of 7.49%. So, for Mr. X, TDS @ 7.49% of 70,000 will be deducted; Rs. 5243.33 will be deducted as TDS on a per month basis for Mr. X who is earning income from salary.
For each of the financial year, the rate of TDS varies in accordance with the taxpayers estimated income as well as slab rate he or she falls in as per the prescribed rate for that financial year.