To calculate the TDS for each employee, an employer typically follows these steps:

Estimating the gross salary for the entire year;
Estimating the exemptions from the salary income;
Adding any other income, declared by the employee;
Calculating the amounts of deductions from the salary income based on the declaration given by the employee;
Calculating the tax on the net income of the employee;
Deducting the tax equally over 12 months of the year;
Paying TDS to the government every month by the 7th of next month, filing e-TDS return every quarter;
Issue Form 16 (TDS certificate) to each employee.
Computing salary income: To compute total income under the head of 'income from salaries', there are various items of income that form part of salary. Salary includes the basic salary, advance salary, the wages, pension, fees, commissions, bonus, taxable gratuity, leave salary, leave encashment salary (not otherwise exempt), profits in lieu of salary, taxable house rent allowance and other taxable allowances.

Not all allowances and perquisites received by an employee are liable to income tax. Some of the allowances and perquisites are totally exempt from income tax, some are partially exempt, while others are fully taxable. There are separate limits and conditions for exemptions for various allowances.

For example, house rent allowance (HRA), leave travel allowance (LTA), medical reimbursements, conveyance allowance each have a different limit and a different set of rules. An employer has to apply each set of rules and limits before deciding what is exempt and what is not.

Tax to be evenly deducted: What is important for an employee to understand is that the employer is supposed to deduct tax equally over the entire 12 months. Thus, if the total tax to be deducted from the salary for the year is Rs 12,000, then the employer is supposed to deduct Rs 1,000 every month and pay that to the government. If he fails in this, he is penalised.

TDS on other income: A salaried person is also liable to pay income tax on income from other sources like interest, capital gains and rental income. These are computed under different sections of the Income Tax Act. An employee has the option of declaring his other income to the employer, so that the tax on that income can also get deducted from the salary income. By doing so, the employee can avoid the formalities of paying advance tax (which would have to be paid if the tax is not deducted at source).

Answered by subu , an ibibo Specialist, at 4:03 PM on May 24, 2008

hi seema :-
The following incomes would be chargeable under the head Salaries on which the tax should be deducted at source:-

1. any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not.

2. any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.

3. any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Answered by shepherd , an ibibo Master, at 2:22 PM on May 20, 2008

The following incomes would be chargeable under the head Salaries on which the tax should be deducted at source:-
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not.
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Answered by Nagendra , an ibibo Master, at 12:27 PM on May 18, 2008