Tax

How to calculate TDS on salaries by a responsible person (step by step)

August 4, 2017
TDS on salaries

Do you work in accounts department? Are you responsible to disburse salary after deduction of tax before salary transfer to the respective bank accounts?

Today in this article, I will discuss with you how to calculate TDS on salaries step by step with a practical example.

Most of the people fear of income tax. They think that the calculation is very complex. So it is not understandable.

Yes, income tax is complex all over the world.

But it is not impossible to understand the calculations.

Generally the calculation of income tax of salaried person is not so complex. If you try then it is easy to understand.

You may already know that tax-free limit for individual taxpayer has been increased to BDT 300,000 from BDT 250,000. And tax rate will start from 5% instead of 10% initially. Tax slab also changes.

These all above major changes will impact your TDS calculation on salaries for the employees of your organization for the income year 2020-21. The TDS calculation on salaries will change significantly.

We assume that Mr Karim, an employee of a private company, will be entitled to get the following benefits from his company for the income year 2020-21:

a. Monthly basic salary BDT 60,000

b. House rent 40% of basic salary i.e. BDT 24,000

c. Medical allowance 10% of basic salary i.e. 6,000

d. Conveyance allowance 10% of basic salary i.e. BDT 6,000

e. Employer’s contribution to Recognized Provident Fund (RPF) is 10% of basic salary i.e. BDT 6,000. Employee also contributes the same amount on this fund.

f. Two festival bonuses equivalent to monthly basic salary

Mr Karim will also be entitled to enjoy other benefits as per company policy.

Here our main focus is with these figures. We will first calculate taxable income from salary because a taxpayer pay tax on his taxable income not his total income. We find out the taxable income by deducting exemption from the total income as per tax law.

After that in second step, we will calculate investment allowance and tax rebate. You my know that tax rebate reduced the tax liability of a taxpayer significantly. But a taxpayer shall invest or donate in the certain areas as per tax law.

And in final stage,  we will find out the monthly TDS amount which will be deducted from the gross monthly salary during the disbursement of salary to the employee designated bank account.

So let’s start!

Step 01: Taxable Income Calculation 

As I said earlier that tax is calculated on taxable income. As per our above example, there are specific limit for each benefits like house rent, medical allowance, conveyance etc.

After deducting all the exemption from each benefits as per Income Tax Rules, taxable income is come out. To reduce the length of article, we are directly sum up the taxable income BDT 954,000.

There is an online tax course ‘TDS Calculation on Salaries‘ where we have showed in details the calculation of taxable income considering the exemption. If you are looking for a best online tax course at very low price then I will recommend you to buy the course.

The most benefit for the course is that you will get unlimited access for a certain period. You will have access to the course as many times as you want from anywhere, anytime! 

Step 02: Investment Allowance and Tax Rebate Calculation

In case of TDS Calculation on salaries, the actual investment amount is not available but you have to consider the maximum limit of investment allowance which is calculated on total taxable income.

When we have calculated his total income we have seen he has contributed RPF. And his employer also contributed this fund.

Both are eligible for tax credit.

Besides these he may personally invest in other eligible sectors which are also entitled to get tax credit. In a separate article, I have discussed the areas where you could invest your money to get tax rebate.

You may not know all those investments.

So it is better to assume the total amount for which he is eligible to get as an investment allowance.

Guess you know the maximum limit for investment allowance.

It is 25% of total taxable income.

So his total investment allowance on total taxable income on salaries is BDT 238,500 (BDT 954,000X25%).

On this amount he will get tax credit @ 15%.

So his total tax credit will be BDT 35,775 which will be deducted from his total tax liability.

Don’t know how to calculate tax rebate? Don’t worry. A separate article is published where I have discussed in details about how to calculate tax rebate. You may read that article for details.

You may ask a question now, how I will understand that he has or will invest the exact amount?

It is the responsibility of the taxpayer.

You know he has to submit return of income to NBR in Bangladesh before 30 November in each calendar year.

In that time if he does not invest as you assume then he will have to pay tax on that amount at the time of filing return of income to the NBR.

Step 03: Monthly TDS Calculation

So now finally we will calculate the total tax liability born by him from total income from salaries.

As per Finance Act 2020, tax-free limit for a male taxpayer is BDT 300,000 and now we will calculate the tax liability of male salaried person.

Income

Rate

Tax (BDT)

On first BDT 300,000

0%

On next BDT 100,000

5%

5,000

On next BDT 300,000

10%

30,000

Balance BDT 254,000

15%

38,100

Total

 

73,100

Tax rebate (954,000X25%X15%)

 

(35,775)

Net tax liability

 

37,325

So Mr Karim’s total tax liability will be BDT 37,325 for the income year 2020-21.

We have done a lot of calculations. We have get lots of figures.

But ultimately all these are for one amount to get and it is the monthly TDS on salaries.

His total yearly tax liability is BDT 37,325.

Divide it by 12 months and the monthly TDS on salaries will be BDT 3,110.42.

You may round off the amount at BDT 3,000 at reduced because there is an option to increase/decrease the TDS amount on the last month of financial year i.e. June.

Every month after deducting the amount as TDS on salaries you have to transfer the monthly salary to the employees’ bank accounts.

Oh, of course you have to deduct other deductable or any other charges as per your company policy.

Please adjust your calculation if any changes occurred during the year due to increment or other benefits. A video tutorial has been prepared based on this article which is embedded below for you.

Besides this, at the end of the income year i.e. June you may require to finally calculating the actual payment made throughout the year and may require to adjust the monthly TDS on salaries.

If you see that you have deducted more or less TDS on salaries than actual requirement then adjust the figure.

So, hope now you will be able to calculate monthly TDS on salaries or you may also check our online tax course.

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17 Comments

  • Reply Mohammed Jamal Hossain August 5, 2017 at 11:20 AM

    Very nice and important collection.

  • Reply Dhiman November 5, 2017 at 3:36 PM

    Thank you very much Sir for your wonderful knowledge sharing.I appreciate you & hope that you will keep it up for greater benefit for those who we are want to learn in online.

    Thanks you again.

  • Reply Md. Ashraful Alam November 7, 2017 at 10:23 AM

    Excellent…..

  • Reply Dipendi November 15, 2017 at 2:11 PM

    Thank you so much for making the calculation so simple to understand. But I have 1 question, which I can’t find. From where did you find tax credit BDT 33,775? I have calculated total tax credit is BDT 35,775. Did I miss any calculation? Thank you so much in advance.

  • Reply Sameer January 18, 2018 at 1:05 PM

    Thanku very much for the elaborated TDS detail given.
    Just a small query is there a separate calculator for a non resident !

    • Reply jasimrasel February 19, 2018 at 1:17 PM

      Yes

  • Reply Aftab June 29, 2018 at 10:44 AM

    Many thanks for providing this hand-on tips. It was really helpful.

  • Reply Syed Tamim Ahmed July 19, 2018 at 10:42 PM

    it’s really a great knowledge shearing website.
    hope you will continue shearing more related topice based on finance.
    thank you very much.

  • Reply Ashique Adnan July 23, 2018 at 11:53 PM

    Thank you for your detailed explanation on all these matters. You are a great help to people who want to understand and prepare their own tax returns.

    • Reply Firoz August 9, 2018 at 11:41 AM

      If any employee works for 6 months in a company, how his much tax will be exempted and deducted from his Basics, House rent , Medical and conveyance by the company ?

  • Reply Delowar September 3, 2018 at 9:50 PM

    Thank you very much sir.

  • Reply Md. Nurul Amin Sumon September 11, 2018 at 2:41 PM

    my salary fixed 50000 per month so how much pay tax please

  • Reply SHORIFUL ISLAM October 17, 2018 at 11:00 AM

    Very easy to understand. Thank you a lot

  • Reply Shamim October 24, 2018 at 8:56 PM

    Very comprehensive, thanks for sharing.

  • Reply Andrew November 13, 2018 at 12:34 PM

    How to calculate Salary TDS, if
    1) Less than 12 month (for ex. from 09/2018,
    2) If only Basic salary, as per contract,
    3) may I split Basic to components and reduce TDS (it no components in the contract)

  • Reply A .K.M. Serajul Islam November 14, 2018 at 2:03 PM

    Excellent

  • Reply jai narayan January 30, 2019 at 7:40 PM

    Excellent

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