How to Calculate TDS on Salary: Step-by-Step Guide

TDS on salary is not deducted at one fixed percentage. The employer first estimates the employee’s total taxable income for the complete tax year, calculates the applicable income tax, and then deducts the estimated balance tax from the monthly salary.

An incorrect salary declaration, missing previous-employer income or unreported interest income can result in excess TDS, insufficient deduction, or additional tax at the time of filing the income tax return.

Sharda Associates helps employers and salaried taxpayers with salary tax calculations, payroll review, TDS return filing, Form 16 reconciliation, and income tax compliance. Professional review can help identify incorrect declarations, tax-regime errors, and mismatches before the year-end calculation is completed.

Quick Answer: To calculate TDS on salary, estimate the employee’s annual taxable salary, add declared taxable income from other sources, subtract eligible exemptions and deductions, apply the chosen tax-regime slabs, add surcharge and 4% cess where applicable, and reduce tax already deducted. The remaining tax is normally divided across the remaining salary payments.

What Is TDS on Salary?

TDS means Tax Deducted at Source. In the case of salary, the employer deducts tax before paying the employee and deposits it with the government.

For salary paid from April 1, 2026, TDS is governed by Section 392(1) of the Income Tax Act, 2025. Salary paid up to March 31, 2026 was governed by Section 192 of the Income-tax Act, 1961. In both cases, the basic method is to deduct tax at the average rate calculated on the employee’s estimated annual salary income.

This means TDS is not calculated only on one month’s basic salary. The employer considers the complete expected annual income.

When Is TDS Deducted from Salary?

Salary TDS is deducted at the time salary is actually paid.

An employer may not deduct the same amount every month. Monthly TDS can change when:

  • The employee receives a bonus or salary increase

  • Investment proofs are not submitted

  • The employee changes the tax regime

  • Previous-employer income is reported

  • Taxable perquisites are added

  • Other income is declared

  • Excess or short TDS from earlier months is adjusted

The employer can increase or reduce later deductions to correct an excess or deficiency during the same tax year.

How to Calculate TDS on Salary Step by Step

Step 1: Estimate the Annual Gross Salary

Start with the complete salary expected during the tax year.

It may include:

  • Basic salary

  • Dearness allowance

  • Bonus

  • Commission

  • Taxable allowances

  • Taxable reimbursements

  • Taxable perquisites

  • Advance salary

  • Arrears

  • Leave encashment, where taxable

Salary income includes taxable allowances, perquisites, bonuses, pensions, and other amounts covered under the head “Salaries.”

Step 2: Reduce Eligible Exemptions

The exemptions available depend on the selected tax regime and the nature of the salary component.

Under the old regime, an employee may claim eligible exemptions such as House Rent Allowance or Leave Travel Allowance, subject to the applicable conditions and supporting documents.

The default regime allows fewer exemptions and deductions. Employees should not claim an exemption only because the amount appears separately in the salary structure.

Step 3: Claim the Standard Deduction

For Tax Year 2026-27:

Tax Regime Standard Deduction
Default new tax regime Up to ₹75,000
Optional old tax regime Up to ₹50,000

The deduction is restricted to the amount of salary where salary is lower than the applicable limit.

Step 4: Consider Eligible Deductions

Under the old regime, eligible deductions may include investments or payments covered by the applicable provisions, such as qualifying provident-fund contributions, life insurance, health insurance, home-loan interest and eligible donations.

Under the default regime, most commonly claimed deductions are not available, although specified deductions and benefits may still be allowed.

The employee should compare both regimes using actual income and eligible claims instead of assuming that one regime is always better.

Step 5: Add Other Income Declared by the Employee

An employee may inform the employer about taxable income such as:

  • Bank interest

  • Fixed-deposit interest

  • Rental income

  • Previous-employer salary

  • Other taxable receipts

Details of tax already deducted on such income may also be provided.

Where an employee changes jobs during the year, previous salary and TDS should be declared to the current employer. Otherwise, both employers may independently allow slab benefits, resulting in insufficient total TDS.

Step 6: Calculate Tax Using the Applicable Slabs

For Tax Year 2026-27, the default tax-regime slabs are:

Total Taxable 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%

These are the default rates under Section 202 of the Income-tax Act, 2025. An eligible taxpayer may choose the alternative old regime according to the applicable option and conditions.

Step 7: Apply Rebate, Surcharge and Cess

A resident individual under the default regime may receive a rebate of up to ₹60,000 where total taxable income does not exceed ₹12 lakh, subject to the applicable provisions.

Health and Education Cess is charged at 4% on income tax plus surcharge, where applicable.

For a salaried resident with only normal-rate income, gross salary of up to ₹12.75 lakh may result in no tax under the default regime after the ₹75,000 standard deduction reduces taxable income to ₹12 lakh.

This result may change where the employee has special-rate income, additional taxable income or other adjustments.

Step 8: Calculate the Monthly TDS

After calculating annual tax:

Annual tax liability
Less: TDS already deducted
Less: Other eligible tax credit reported
Equals: Balance TDS

The employer normally divides the balance across the remaining salary payments.

Salary TDS Calculation Example

Assume an employee has the following details for Tax Year 2026-27:

Particular Amount
Annual gross salary ₹15,00,000
Standard deduction ₹75,000
Taxable income ₹14,25,000

Assume the employee uses the default regime, has no other income and does not have any special-rate income.

Tax calculation:

  • Tax up to ₹4,00,000: Nil

  • Tax on ₹4,00,001 to ₹8,00,000 at 5%: ₹20,000

  • Tax on ₹8,00,001 to ₹12,00,000 at 10%: ₹40,000

  • Tax on ₹12,00,001 to ₹14,25,000 at 15%: ₹33,750

Income tax is ₹93,750.

Health and Education Cess at 4% is ₹3,750.

Total annual tax: ₹97,500

If deducted equally over 12 months:

Monthly TDS: ₹8,125

The actual monthly amount may vary because of rounding, bonus payments, salary revisions, or adjustments made during the year.

What Documents Should an Employee Submit?

An employee should provide only genuine and relevant information.

Depending on the selected regime and claims, the employer may require:

  • Rent receipts and landlord details

  • Home-loan interest certificate

  • Eligible investment proofs

  • Health-insurance receipts

  • Donation receipts

  • Previous-employer salary and TDS details

  • Other-income declaration

  • Evidence supporting permitted exemptions

  • PAN and tax-regime declaration

Form 12BB has traditionally been used for employee claims such as HRA, travel concession, home-loan interest and tax-saving investments under the earlier law. For Tax Year 2026-27, employers should follow the forms and references prescribed under the Income-tax Act, 2025 and the current payroll rules.

Responsibilities of the Employer

The employer should:

  • Obtain the employee’s tax-regime declaration

  • Estimate annual taxable salary

  • Verify prescribed evidence

  • Recalculate tax when salary changes

  • Deduct and deposit TDS within the applicable time

  • File the prescribed quarterly salary-TDS statement

  • Issue the applicable salary TDS certificate

  • Correct reporting errors when a mismatch is identified

For salary relating to Tax Year 2026-27, employers must reset payroll TDS calculations from April 1, 2026, and use the new Act’s section references and prescribed forms.

Common Salary TDS Mistakes

Common errors include:

  • Calculating tax only on basic salary

  • Ignoring bonuses and taxable allowances

  • Not reporting previous-employer income

  • Choosing a tax regime without comparison

  • Claiming deductions without proof

  • Ignoring bank-interest income

  • Applying the rebate above the eligible income limit

  • Forgetting 4% cess

  • Using outdated tax slabs

  • Not checking the final tax certificate and tax-credit statement

Employees should compare the employer’s year-end salary statement with the available tax-credit information before filing the return.

Conclusion

Salary TDS should be calculated on estimated annual taxable income, not by applying a standard percentage to each monthly salary. Employees should declare previous salary, other taxable income and genuine claims on time. Employers should use the applicable tax slabs, deductions, rebate and cess and revise the calculation whenever the employee’s income changes.

Sharda Associates provides professional assistance with salary TDS calculation, payroll review, TDS return filing, tax-credit reconciliation, and income tax compliance.

Call or WhatsApp: +91 89899 7776

Frequently Asked Questions

1. Is salary TDS deducted at a fixed rate?

No. It is based on the estimated annual taxable income and applicable slab rates.

2. Is TDS calculated on gross salary or basic salary?

It is calculated on taxable salary after considering taxable components, eligible exemptions and deductions.

3. Can monthly TDS change during the year?

Yes. It may change after a bonus, increment, investment-proof review, job change or tax recalculation.

4. Is there no tax on salary up to ₹12.75 lakh?

Under the default regime, a resident salaried person with only normal-rate income may have nil tax where ₹12.75 lakh salary is reduced by the ₹75,000 standard deduction and the resulting ₹12 lakh taxable income qualifies for rebate.

5. Can an employee choose the old tax regime?

An eligible salaried employee may choose the alternative regime according to the applicable option and conditions.

6. What happens if excess TDS is deducted?

The employer may adjust it during the same year. Otherwise, the employee may claim the eligible refund through the income tax return.

7. What happens if insufficient TDS is deducted?

The employee may have to pay the balance tax, along with applicable interest, while filing the return.

8. Should the previous employer’s salary be reported?

Yes. It helps the current employer calculate tax on the complete annual salary.

9. Is Form 16 the same as a salary slip?

No. A salary slip shows monthly earnings and deductions. The salary TDS certificate contains annual salary and tax information reported by the employer.

10. Can Sharda Associates help with salary TDS?

Sharda Associates assists with payroll tax computation, TDS returns, salary certificates, employee tax reconciliation and income tax compliance for employers and salaried taxpayers.9