What is TDS on Salary?
TDS (Tax Deducted at Source) on salary is the income tax that your employer deducts from your salary before paying you. Under Section 192 of the Income Tax Act, 1961, every employer is required to deduct TDS when paying salary to an employee, if the salary exceeds the basic exemption limit. The deducted amount is deposited with the government and credited to the employee’s PAN.
Who is Liable to Deduct TDS on Salary?
Every person (individual, company, firm, trust, government body) who pays salary to an employee is liable to deduct TDS under Section 192. This includes:
- Private companies and LLPs
- Government departments (Central and State)
- Partnership firms
- Hindu Undivided Families (HUFs) if they have employees
- Trusts, societies, and NGOs
Income Tax Slab Rates for FY 2025-26 (AY 2026-27)
New Tax Regime (Default)
| Annual Income (₹) | Tax Rate |
|---|---|
| Up to 4,00,000 | Nil |
| 4,00,001 to 8,00,000 | 5% |
| 8,00,001 to 12,00,000 | 10% |
| 12,00,001 to 16,00,000 | 15% |
| 16,00,001 to 20,00,000 | 20% |
| 20,00,001 to 24,00,000 | 25% |
| Above 24,00,000 | 30% |
Standard Deduction: Rs. 75,000 | Rebate u/s 87A: Up to Rs. 25,000 (if total income ≤ Rs. 7,00,000)
Old Tax Regime (Optional)
| Annual Income (₹) | Tax Rate |
|---|---|
| Up to 2,50,000 | Nil |
| 2,50,001 to 5,00,000 | 5% |
| 5,00,001 to 10,00,000 | 20% |
| Above 10,00,000 | 30% |
Standard Deduction: Rs. 50,000 | All Chapter VI-A deductions (80C, 80D, etc.) available
Step-by-Step TDS Calculation on Salary
Here’s how employers calculate TDS on salary, demonstrated with an example:
Example: Employee with CTC ₹12,00,000/year (New Regime)
| Step | Component | Amount (₹) |
|---|---|---|
| 1 | Gross Salary (Annual) | 12,00,000 |
| 2 | Less: Employer PF Contribution (not taxable) | -86,400 |
| 3 | Taxable Gross Salary | 11,13,600 |
| 4 | Less: Standard Deduction (New Regime) | -75,000 |
| 5 | Net Taxable Income | 10,38,600 |
| 6 | Tax on first ₹4,00,000 | Nil |
| 7 | Tax on ₹4,00,001 to ₹8,00,000 @ 5% | 20,000 |
| 8 | Tax on ₹8,00,001 to ₹10,38,600 @ 10% | 23,860 |
| 9 | Total Tax | 43,860 |
| 10 | Add: Health & Education Cess @ 4% | 1,754 |
| 11 | Total Annual TDS | 45,614 |
| 12 | Monthly TDS Deduction | 3,801 |
How TDS is Calculated Each Month
Employers don’t simply divide the annual tax by 12. The process works like this:
- April (start of FY): Estimate the employee’s total annual salary based on their pay structure
- Consider declarations: Account for investment declarations submitted by the employee (80C, 80D, HRA, etc.) under Old Regime
- Compute annual tax: Apply the chosen tax regime’s slab rates
- Divide by remaining months: Spread the annual TDS equally across remaining months
- Adjust monthly: If the employee submits additional proof or their salary changes (bonus, increment), recalculate for remaining months
- February/March: Final reconciliation — any excess or shortfall is adjusted in the last months
TDS on Different Salary Components
| Component | TDS Treatment |
|---|---|
| Basic Salary | Fully taxable |
| HRA | Exempt up to the calculated limit under Section 10(13A) |
| Special Allowance | Fully taxable |
| LTA | Exempt for domestic travel (twice in 4-year block) |
| Bonus / Commission | Fully taxable, TDS deducted in the month of payment |
| Reimbursements | Not salary, no TDS (if supported by bills) |
| Gratuity | Exempt up to Rs. 20 lakh under Section 10(10) |
| Leave Encashment | Exempt up to Rs. 25 lakh on retirement under Section 10(10AA) |
| Employer PF Contribution | Exempt up to 12% of Basic + DA |
Investment Declarations & Proof Submission
To reduce TDS, employees can submit investment declarations at the start of the financial year and proof of investments before January/February:
- Section 80C (up to Rs. 1.5L): PPF, ELSS, LIC premium, EPF, children’s tuition fees, home loan principal
- Section 80D: Health insurance premium — up to Rs. 25,000 (Rs. 50,000 for senior citizens)
- Section 80E: Education loan interest — no upper limit
- HRA Exemption: Rent receipts and landlord PAN (if rent > Rs. 1 lakh/year)
- Home Loan Interest (Section 24): Up to Rs. 2 lakh on self-occupied property
- NPS (Section 80CCD(1B)): Additional Rs. 50,000 deduction
Note: These deductions are available only under the Old Tax Regime. Under the New Regime, only Standard Deduction and employer NPS (80CCD(2)) are available.
TDS Due Dates and Compliance
| Activity | Due Date |
|---|---|
| TDS deposit to government | 7th of the following month (30th April for March) |
| Quarterly TDS return (Form 24Q) | 31st July (Q1), 31st Oct (Q2), 31st Jan (Q3), 31st May (Q4) |
| Issue Form 16 to employees | 15th June of the assessment year |
| Annual filing of Form 24Q (Q4) | 31st May following the financial year |
Common TDS Mistakes Employers Make
- Not updating regime choice: Deducting TDS under Old Regime when employee has opted for New Regime (or vice versa)
- Ignoring mid-year increments: Not recalculating TDS when salary increases due to appraisals or bonuses
- Wrong PAN in returns: Leading to TDS not reflecting in employee’s Form 26AS
- Late deposit: Penalty under Section 234E (Rs. 200/day) and interest under Section 201(1A) (1.5% per month)
- Not considering previous employer salary: When an employee joins mid-year, their previous salary must be considered for correct TDS calculation
Automate TDS Calculation with INDPayroll
Manual TDS calculation across different regimes, variable pay, and mid-year changes is error-prone. INDPayroll handles it all:
- Dual regime support: Auto-calculate TDS under both Old and New Regimes based on employee’s choice
- Investment declaration portal: Employees submit declarations and proof online
- Auto-adjustment: TDS recalculates automatically for increments, bonuses, and revised declarations
- Form 24Q generation: Auto-generate quarterly TDS returns ready for filing
- Form 16 generation: One-click Form 16 for all employees
- 26AS reconciliation: Match TDS deposits against Form 26AS data
Try INDPayroll Free → Auto-calculate TDS on salary with 100% compliance.
Frequently Asked Questions
Can I choose between Old and New Tax Regime every year?
Yes. Salaried employees can switch between the Old and New Regime every financial year. You need to inform your employer at the start of the year so they deduct TDS accordingly. The final choice is made when filing your ITR.
What if excess TDS has been deducted?
If more TDS is deducted than your actual tax liability, you can claim a refund when filing your Income Tax Return. The refund is processed by the Income Tax Department, usually within 1-3 months of ITR processing.
Is TDS deducted on the notice period recovery amount?
Yes. If an employee pays notice period recovery (buy-out), the employer should reduce it from the gross salary before computing TDS. However, practices vary — clarify with your employer and CA.
What is the TDS rate if PAN is not provided?
If an employee does not provide PAN, TDS is deducted at the rate of 20% or the applicable slab rate, whichever is higher (Section 206AA).
