Calculating TDS on Salaries and Tax Reporting: A Comprehensive Guide for Accountants

If you’re in the accounts department, you’re likely responsible for ensuring employees gets paid correctly, and that includes accurately deducting Tax Deducted at Source (TDS) from salaries.

While income tax can seem daunting, especially with evolving regulations, calculating TDS for salaried individuals doesn’t have to be complicated. This guide will walk you through the process step-by-step, using a practical example and covering essential tax compliance reporting.

Understanding the Basics of TDS on Salaries

The National Board of Revenue (NBR) in Bangladesh regularly updates tax laws. For the upcoming Assessment Year 2026-27 (Income Year 2025-26), significant changes are coming into effect. The tax-free income limit for individuals is increasing to BDT 375,000 from BDT 350,000, and the initial 5% tax rate is being abolished, along with changes to tax slabs. These adjustments will directly impact how you calculate TDS on employee salaries.

Let’s illustrate the TDS calculation with an example. We’ll use the case of Mr. Karim, an employee of a private company, who will receive the following benefits for the Income Year 2025-26:

• Monthly Basic Salary: BDT 60,000
• House Rent: 40% of basic salary (BDT 24,000)
• Medical Allowance: 10% of basic salary (BDT 6,000)
• Conveyance Allowance: 10% of basic salary (BDT 6,000)
• Employer’s Contribution to Recognized Provident Fund (RPF): 10% of basic salary (BDT 6,000). Mr. Karim also contributes the same amount.
• Festival Bonuses: Two bonuses, each equivalent to one month’s basic salary.

Our primary goal is to determine Mr. Karim’s taxable income from salary, as tax is only levied on this amount, not his total income. We’ll then calculate any eligible tax rebate which can significantly reduce his tax liability. Finally, we’ll pinpoint the monthly TDS amount to be deducted from his gross salary.

Step 1: Calculating Taxable Income

To calculate taxable income, we first need to sum up all of Mr. Karim’s salary components for the year.

• Annual Basic Salary: BDT 60,000 x 12 = BDT 720,000
• Annual House Rent: BDT 24,000 x 12 = BDT 288,000
• Annual Medical Allowance: BDT 6,000 x 12 = BDT 72,000
• Annual Conveyance Allowance: BDT 6,000 x 12 = BDT 72,000
• Annual Employer’s RPF Contribution: BDT 6,000 x 12 = BDT 72,000
• Festival Bonuses: BDT 60,000 x 2 = BDT 120,000

Total Annual Salary Income: BDT 720,000 + BDT 288,000 + BDT 72,000 + BDT 72,000 + BDT 72,000 + BDT 120,000 = BDT 1,344,000

Now, we need to apply exemptions as per the Sixth Schedule of the Income Tax Act 2023. The exemption for salary income is the lower of one-third of the total salary income or a maximum of BDT 500,000.

• One-third of Total Salary Income: (1/3) x BDT 1,344,000 = BDT 448,000
• Maximum Exemption Limit: BDT 500,000

Since BDT 448,000 is lower than BDT 500,000, we’ll deduct BDT 448,000 as the exempt amount.

Taxable Income: BDT 1,344,000 – BDT 448,000 = BDT 896,000

Step 2: Calculating Tax Rebate

Investment allowance and tax rebate play a crucial role in reducing an individual’s tax liability. While the actual investment amount isn’t known at the time of TDS calculation, we consider the maximum eligible limit. Mr. Karim’s contributions to the Recognized Provident Fund (RPF) are eligible for tax credit. Additionally, he might invest in other eligible sectors.

For the purpose of TDS calculation, the NBR allows for a deemed investment allowance. A taxpayer is generally eligible for a tax rebate of 3% on their total taxable income.

In Mr. Karim’s case:

Tax Rebate: BDT 896,000 x 3% = BDT 26,880

It’s important to remember that this is an assumed rebate for TDS purposes. If Mr. Karim doesn’t make the assumed investments, he will be liable to pay the difference in tax when filing his income tax return with the NBR by November 30th each calendar year.

Step 3: Calculating Monthly TDS on Salaries

Now, let’s calculate Mr. Karim’s total tax liability based on his taxable income and then determine the monthly TDS amount. As per the Finance Ordinance 2025, for the Assessment Year 2026-27 (Income Year 2025-26), the tax-free limit for a male taxpayer is BDT 375,000. We’ll apply the new slab-wise tax rates:

Now, we apply the tax rebate we calculated earlier:

• Gross Tax Liability: BDT 63,150
• Less: Tax Rebate: BDT 26,880

Net Tax Liability: BDT 63,150 – BDT 26,880 = BDT 36,270

This is Mr. Karim’s total annual tax liability. To find the monthly TDS amount, simply divide this by 12:

Monthly TDS: BDT 36,270 / 12 = BDT 3,022.50

You may round this amount to BDT 3,023 or even BDT 3,000 for administrative convenience. Any minor differences can be adjusted in the final month of the financial year (June). After deducting TDS and any other company-specific deductions, you can then disburse the remaining salary to the employee’s bank account.

Adjustments and Special Considerations

• Salary Changes: If there are any changes to an employee’s salary or benefits during the year (e.g., increments), remember to adjust the TDS calculation accordingly for the remaining months.
• Year-End Reconciliation: At the end of the income year (June), it’s crucial to perform a final reconciliation. Compare the total TDS deducted throughout the year with the actual tax liability based on the full year’s income. Adjustments (either deducting more or refunding excess TDS) should be made in the final salary payment.
• Advance Income Tax (AIT) on Car: If an employee has a personal car and has paid advance tax on it (e.g., BDT 25,000), this AIT can be offset against their total tax liability. In Mr. Karim’s case, if he had paid BDT 25,000 AIT on his car, his net tax liability would become BDT 36,270 – BDT 25,000 = BDT 11,270. His monthly TDS would then be BDT 11,270 / 12 = BDT 939.17.

Essential Tax Reporting Requirements Related to TDS on Salaries

Deducting and depositing TDS is only one part of your responsibility. You also need to submit various statements and returns to the tax authority throughout the year.

• Salary Certificate: You must issue a salary certificate to each employee, detailing their total salary paid, the tax deducted and deposited, the tax challan number and date, income year, and their personal details. The specific information required is outlined in the Withholding Tax Rules 2024.
• Statement of Deduction of Tax Under the Head “Salaries”: This statement is part of the quarterly withholding tax return. It should only include the tax deducted from eligible employees and their detailed salary information for that three-month period. The prescribed format is provided under Rule 15, Schedule (Ga) of the Withholding Tax Rules 2024.
• Statement Regarding the Payment of Salary: This annual statement provides comprehensive information about total salary payments for the entire year. Its format is specified under Rule 15, Schedule (Cha) of the Withholding Tax Rules 2024. It’s vital to ensure the total salary amount reported in this statement reconciles with your company’s audited financial statements to avoid potential scrutiny during tax assessment. This statement shall be submitted to the tax office in September each year.
• Statement Regarding Filing of Return by Employees: This statement needs to be submitted to the tax office in April each year. To prepare this, you’ll require employees to provide acknowledgments that they have submitted their individual income tax returns. The necessary information is typically obtained from these acknowledgment receipts. The prescribed format is found under Rule 15, Schedule (Chha) of the Withholding Tax Rules 2024.

By diligently following these steps and complying with the reporting requirements, you can ensure accurate TDS calculation and maintain good standing with the tax authorities, avoiding potential penalties. Staying updated with the tax compliance calendar is always a good practice!