TDS on Salary Journal Entry

Tax Deducted at Source:

Tax deducted at Source is income tax deducted by the Employer when paying salary to their employees. The Employer is paying tax to the government on behalf of the employee. Let’s understand some basics before learning the TDS on Salary Journal Entry.

Employers are required to deduct tax when paying salaries to employees. The applicable tax rates are the normal slab rates. The details are on the income tax website.

Note that this TDS concept is in the context of Salary Income.

Further, the employee must declare the details of his/her other income to the employer annually. Based on the information furnished by the employee, TDS is deducted from the salary every month before the salary payments.

TDS Example:

We will try to understand this TDS concept with a scenario. Mr. A works for XYZ Company and has a gross monthly salary of Rs . 50,000. Assume an income tax rate of 10% is applicable here. So, Mr. A is liable to pay Rs. 5,000 to the government as income tax. XYZ Company directly pays Rs . 5,000 to the government by deducting the same from its salary.

So, the Employer pays tax instead of Mr. A. The salary received by Mr. A is Rs . 45,000.

Runners Insight:

Tax is deducted at the time of payment. Since salary is paid monthly, TDS is deducted while paying the amount.

Let’s consider a scenario of weekly or biweekly payments. By definition, tax is deducted at the source, so tax needs to be deducted at the time of payment, whether weekly or monthly.

TDS on Salary Journal Entry

Every journal entry will have at least two GL Accounts. There shall be a minimum of one debit and one credit account to balance the entry. There are three accounts: Salary, Salary Payable, and TDS Payable.

Let’s understand the nature of each GL relating to the Salary Journal Entry.

Salary is an expense account
Salary Payable is a liability
TDS payable is the liability to pay to the government/income tax department

What’s the basis for recording the Journal entry?

The golden rules of accounting are the basis for recording the journal entry. Those rules are for three categories of accounts. Refer to the table below for accounting rules.

The next step is identifying the category under which these 3 GL accounts fall. As Salary is an expenditure account, it falls into the nominal account category. The remaining two accounts are liabilities payable and belong to personal accounts. This is because the payment of liability is to Persons (Natural Person – Employee and Representative – Government)

We will now post the journal entries in the salary expenses, salary liability, and TDS liability accounts.

Salary Expense Entry with TDS component

Entry for Salary Payment

Entry for TDS Payment

(Employer pays the amount directly to the government through the NSDL Website)

Also Read: Benefits of Filing Income Tax Return

Runners Insight:

The Salary Journal Entry will also include Professional Tax, ESI (if Applicable), and Provident Fund GLs. However, those are ignored to facilitate understanding of the TDS entry.

Conclusion:

TDS deductions happen before salary payments to employees are credited. The Catch here is whether the TDS GL account will be on the debit or credit side of the entry.

If the journal entries are recorded in the employer’s books, then the total salary is the expense, and we need to apportion the payments between the employee and the government in the form of tax. So, it’s evident that TDS will be on the credit side.

As stated earlier, employer liability isn’t increased because employers pay tax on behalf of their employees. I hope this gives a good understanding of the TDS on a salary journal entry.

Wanna purchase accounting software?

So, you can check out Tally and Zoho accounting software through these links.

TDS on Salary Journal Entry

Tax Deducted at Source:

TDS Example:

TDS on Salary Journal Entry