Employment related TDS

Section 392 - TDS on Salary

Applicability:Governs TDS on salary payments to employees. Applies to all salaried employees where income exceeds the basic exemption limit.

Timing of Deduction: TDS must be deducted when salary is actually paid, not when it is accrued in books. If salary is paid in advance or arrears, in those cases also TDS applies at that point of payment.

Rate: Employers must estimate the employee’s annual taxable salary and apply the slab rates as applicable.

Threshold: No deduction for the respective employee, if his/her income is below taxable limit.

Steps in computation:

Employer must consider the following in computing tax on taxable income:

1. Basic pay, allowances, perquisites, arrears, bonus, retirement benefits
2. Other income declared by employee (like interest income, house property income etc)
3. Employees can declare loss from house property for it to be adjusted against salary income.
4. Applicable Deductions (standard deduction, exemptions etc) in calculating the taxable income.
5. If employee receives arrears or advance salary, employer must consider relief u/s 89 while calculating TDS. Prevents excess tax burden due to lump-sum payments.
6. If employee is a non-resident and covered under a DTAA, employer may deduct at lower rate or exempt certain allowances.
7. For salary paid in Foreign Currency: tax is calculated based on the prescribed exchange rate for salaries in foreign currency.
8. TDS on ESOPs is deducted at the time of exercise of the option, and the difference between Fair Market Value on the exercise date and the exercise price is treated as a taxable perquisite under salary
9. Rebate u/s 87A to be allowed as direct reduction from tax payable, usually as a benefit for small taxpayers.
10. Adjustments allowed for excess/short deduction across months.
11. Employees must submit declarations (Form 12BB equivalent) for deductions and regime choice. New tax regime applies unless employee opts for old regime.

Compliance:

1. Form 130 (new version of Form 16) to be issued by the company annually to employees.
2. PAN/Aadhaar mandatory for employees.
3. TDS must be deposited with government by 7th of next month.
4. Quarterly return is to be filed by the company in Form 30Q.
5. Employer responsible for timely deposit of TDS.

Exceptions:

1. No TDS if estimated annual taxable salary is below. Employer must still compute and confirm before skipping deduction.
2. If employee obtains a certificate in form 13 (form name still remains the same) from AO, employer can deduct TDS at a lower rate or nil rate.

Section 392(7) - Premature Withdrawal from Provident Fund

Applicability: Governs TDS on Withdrawal of EPF made before completing 5 years of continuous service. It is premature withdrawal. Applies to recognised providend fund under EPF Act

Timing of Deduction: At the time of payment of the PF withdrawal amount to the employee.

Rate: TDS 10% on amount withdrawn if PAN is furnished. Taxed at MMR, if PAN is not furnished to employer.

Threshold: TDS applies amount withdrawn per Withdrawal transaction is > ₹50,000. (Note: It is not aggregate annual withdrawal. Threshold applies for each individual withdrawal transaction).

Steps in computation:

1. Check whether the total continous years of service (across all employers) is <5 years
2. Only the period spent as a permanent employee (on-roll) counts toward the 5-year requirement for PF purposes. Temporary or contract roles dont count.
3. Check whether PF balance withdrawn in a single transaction is ₹50,000 or more
4. If both are Yes, then whole withdrawal amount is subject to TDS at prescribed rate.

Compliance:

1. Form 130A certificate to be issued by the company to the employee.
2. Quarterly return is to be filed by the company in Form 30Q.
3. While TDS is on the full withdrawal amount, at the time of filing return, employee has to classify the components (contribution from EE, ER and interest) under the correct heads of income. The exact EE/ER/Interest split shall be available in EPFO passbook or settlement order.

Exceptions:

1. TDS is not deducted on withdrawals by employee with less than 5 years of total service, if the service is terminated due to the employee's ill health or closure of business by emmployer or due to cause beyond the control of the employee (like downsizing)
2. No TDS if employee transfers PF balance to NPS or from one employer to another employer, instead of withdrawal.
3. No TDS if withdrawal < ₹50,000.
4. If employee’s total income (including the PF withdrawal) is below the taxable limit and he/she has submitted Form 15G or 15H to avoid any TDS deduction.

Section 393(2) - Superannuation Fund Payments

Applicability: Governs TDS on payments made from approved superannuation funds, to employees. Applies to lump sum or partial withdrawals and commuted pension portions.This section was introduced as part of the 2026 streamlining of retirement‑related TDS provisions.

Timing of Deduction: TDS is deducted at the time of actual payment of the lump sum.

Rate: 10% TDS on the taxable portion of the payment. If PAN is not furnished, taxed at MMR

Threshold: TDS applies if the lump sum exceeds exemption limits applicable for respective type of payment (commuted pension and retirement benefits have specific exemptions).

Steps in computation:

1. Identify the nature of payment
2. Check the exemptions applicable for each type of payment
3. Subtract exempt amounts from total payment and deduct TDS on taxable balance.

Compliance:

1. Trustees to deduct TDS and issue Form 130B to employees.
2. Quarterly reporting to be done by the company in Form 30Q.

Exceptions:

1. On Retirement: Lump sum or annuity received on retirement at the age defined in the scheme rules is exempt.
2. Uncommuted Pension (regular monthly pension) is treated as salary income and subject to TDS under the respective section
3. No TDS if deducted, if commuted portion of pension is within exemption limits.
4. No TDS if payment is transferred to another approved superannuation fund.