In the scheme of TDS (Tax deduction at Source) the payer has obligation to deduct Income Tax of the payee at a rate specified in the Income Tax Act. In case of salaried employee, employer has an obligation to deduct tax at the time of payment of salary. The article below explains the scheme of TDS on salary.
At the beginning of a financial year, employer requests his employees to submit declarations about their estimated investments that can help them save on tax. Accordingly, employees submit details of their proposed investments.
They also submit information about any other income they would earn apart from salary. Based on these estimations, employer calculates tax liability of the employees. Assuming that the employee will honor his declaration, tax is deducted every month from his salary. Normally, in the month of December, employee is required to submit proofs and details of investments for the declarations made by him earlier. Based on the documents submitted by the employee, investments and incomes are considered and tax liability is re-calculated. When the re-calculated tax is compared with the estimated tax computation, employee may be eligible of further tax relief or additional tax burden.
For example, if an employee had not predicted that he will go for a home loan while submitting his declarations; he will be eligible for further tax relief when he submits the proof of repayment and there might be no TDS deductions from his salary in the subsequent months.
Similarly, if he had declared that he would do certain investments that are eligible for tax rebate, and he could not honor his commitment, he may face increase in TDS. The difference between the re-calculated tax amount and the estimated tax deduction is factored in and is deducted as TDS from the month of December to March.
The employer has to deposit amount of TDS deducted to the Central Government. TDS deducted is to be mentioned against the PAN of the employee. After filing of TDS returns, employee gets the claim of TDS deducted, which can be verified in FORM 26AS. At the end of year, normally after 15th May, employee gets FORM 16 which is used to file Income Tax Returns.