TDS on salary is the income tax deducted by an employer before paying salary to an employee. Unlike many other TDS provisions, salary TDS is not deducted at one fixed percentage. The employer estimates the employee’s taxable income for the complete year, applies the appropriate tax regime and tax slabs, and deducts the estimated tax over the remaining salary payments. Salary changes, bonuses, investment declarations, previous-employer income and other taxable income can therefore change the monthly TDS amount. Sharda Associates assists employers and salaried individuals with payroll tax calculations, TDS compliance, return filing, tax reconciliation and year-end salary tax review.
What Is TDS on Salary?
TDS stands for Tax Deducted at Source. In the case of salary, the employer is responsible for estimating the tax payable by an employee and deducting it from salary before making payment.
For salary paid from 1 April 2026 onwards, salary TDS is governed by the provisions of the Income-tax Act, 2025.
The important point is that the employer does not simply apply a fixed TDS rate to the employee’s basic salary. Tax is calculated on the estimated annual taxable income.
For example, an employee may have basic salary, allowances, bonus and taxable perquisites. Eligible deductions and exemptions are considered according to the tax regime selected. The resulting taxable income is then used to calculate the annual tax liability.
How Is TDS on Salary Calculated?
The calculation can broadly be understood through the following process:
Annual Salary → Eligible Exemptions → Standard Deduction → Eligible Deductions → Other Declared Income → Taxable Income → Tax Slabs → Cess → Monthly TDS
The employer may revise this calculation several times during the year if the employee’s income or declarations change.
Step 1: Calculate the Estimated Annual Salary
The first step is to calculate how much salary the employee is expected to receive during the complete tax year.
This may include:
- Basic salary
- Dearness allowance
- Bonus
- Commission
- Taxable allowances
- Taxable perquisites
- Salary arrears
- Advance salary
- Other taxable employment benefits
The employer should consider the complete salary package rather than only the basic component.
If an employee joins during the middle of the year, salary from the previous employer should also be considered where it is properly reported to the current employer.
Step 2: Consider Eligible Exemptions
The next step is to identify salary exemptions available under the tax regime selected by the employee.
Under the old tax regime, eligible employees may be able to claim benefits such as House Rent Allowance and Leave Travel Allowance, subject to applicable conditions.
The new tax regime provides fewer exemptions, so an amount cannot automatically be excluded from taxable salary simply because it has been separately shown in the salary structure.
Employees should therefore understand which salary components are actually exempt under their chosen regime.
Step 3: Apply the Standard Deduction
Standard deduction reduces taxable salary without requiring the employee to make a particular investment.
For the current framework:
Tax Regime | Standard Deduction |
New Tax Regime | Up to ₹75,000 |
Old Tax Regime | Up to ₹50,000 |
For many salaried individuals, this deduction itself has an important impact on taxable income.
Step 4: Consider Eligible Tax Deductions
Employees choosing the old regime may be able to reduce their taxable income using eligible investments and payments.
These may include qualifying contributions or payments relating to provident funds, life insurance, NPS, health insurance, housing loans, education loans and eligible donations, subject to the relevant conditions and limits.
Most of the commonly used deductions available under the old regime are not available in the same manner under the new tax regime.
The employee should therefore compare both regimes before making the final choice.
Step 5: Include Other Income Declared by the Employee
Salary may not be the employee’s only source of taxable income.
An employee may also have:
- Bank interest
- Fixed deposit interest
- Rental income
- Previous-employer salary
- Other taxable receipts
If such income is declared to the employer, it may be considered while calculating salary TDS according to the applicable rules.
Previous-employer salary is particularly important when an employee changes jobs during the year.
If the current employer is unaware of previous salary, both employers may independently calculate tax using the lower tax slabs. This can result in insufficient TDS and additional tax becoming payable later.
Step 6: Apply the Applicable Income Tax Slabs
Under the current new tax regime, the slabs are:
Taxable Income | Tax Rate |
Up to ₹4 lakh | Nil |
₹4 lakh–₹8 lakh | 5% |
₹8 lakh–₹12 lakh | 10% |
₹12 lakh–₹16 lakh | 15% |
₹16 lakh–₹20 lakh | 20% |
₹20 lakh–₹24 lakh | 25% |
Above ₹24 lakh | 30% |
An eligible taxpayer may choose the old regime instead, subject to the applicable rules and conditions.
The employer must calculate tax according to the regime applicable to the employee.
Step 7: Consider Rebate and Cess
Under the current new regime, an eligible resident individual can receive a tax rebate where the applicable taxable income does not exceed the prescribed threshold.
For normal-rate income, taxable income up to ₹12 lakh can qualify for the applicable rebate, subject to the conditions.
This means that an eligible salaried person earning up to ₹12.75 lakh may have no tax under the new regime where the ₹75,000 standard deduction reduces taxable income to ₹12 lakh and all other applicable conditions are satisfied.
After calculating income tax, Health and Education Cess at 4% is generally added to the tax amount.
Step 8: Calculate Monthly TDS
Once annual tax liability is determined, the employer reduces any tax already deducted.
The remaining amount is normally spread across the salary payments left during the year.
For example, if ₹60,000 remains payable and six salary months remain, the employer may broadly deduct around ₹10,000 per month, subject to adjustments.
Monthly TDS does not therefore have to remain exactly the same throughout the year.
Why Can Salary TDS Change During the Year?
Employees are sometimes surprised when TDS suddenly increases in the final months of the year.
This can happen because of:
- Salary increment
- Performance bonus
- Joining a new employer
- Previous salary being reported
- Investment proof not being submitted
- Tax exemption being disallowed
- Additional income being declared
- Tax regime correction
- Short TDS in earlier months
The employer can generally adjust the deduction during the year so that the correct estimated tax is deducted by year-end.
What Documents Should Employees Keep?
Depending on the regime and tax claims, employees should maintain supporting documents such as:
- Rent receipts
- Landlord details, where required
- Home-loan interest certificate
- Insurance premium receipts
- Eligible investment records
- NPS contribution details
- Donation receipts
- Previous-employer salary details
- Previous TDS details
- Other-income information
- Supporting documents for eligible exemptions
Claims should always be based on genuine payments and investments.
Common Salary TDS Mistakes
A common mistake is calculating TDS only on basic salary and ignoring bonuses, allowances or taxable perquisites.
Employees who change jobs may also forget to report previous-employer salary.
Another frequent issue is selecting a tax regime without comparing the actual tax liability under both options.
Employees should also avoid making investment declarations at the beginning of the year and then failing to provide the required proof. This can lead to higher TDS during the final months.
Employers should review payroll calculations regularly instead of waiting until March to correct all differences.
Frequently Asked Questions
Q1. Is there a set proportion of salary TDS deducted?
No. Estimated yearly taxable income, the relevant tax system, income-tax slabs, allowable deductions, rebates, and cess are the basis for salary TDS.
Q2. Does TDS only apply to base pay?
No, when calculating annual taxable income, taxable allowances, commissions, bonuses, perquisites, arrears, and other taxable pay components may also be taken into account.
Q3. Is it possible for monthly salary TDS to fluctuate during the year?
Yes, pay increases, bonuses, investment declarations, income from prior employers, additional income, or changes for prior months can all affect TDS.
Q4. What happens if a worker switches positions throughout the fiscal year?
To improve the accuracy of the calculation of total taxable income and TDS, the employee should give the present employer information about their previous employer’s salary and TDS.
Q5. Is it possible for an employee to select between the old and new tax systems?
Yes, if allowed by the relevant regulations. Before making the appropriate statement, the employee should compare the tax due under the two regimes.
Q6. Does the new tax system allow for the ₹75,000 standard deduction?
Indeed, subject to the relevant rules, qualifying salaried taxpayers may claim a basic deduction of up to ₹75,000 under the current new tax structure.
Q7. Is there no tax for a salaried individual making ₹12.75 lakh?
If the ₹75,000 standard deduction raises taxable income to ₹12 lakh and the relevant rebate requirements are met, an eligible resident salaried taxpayer under the new regime may have zero tax on normal-rate income.
Q8. What occurs if an excessive amount of TDS is subtracted from a worker’s pay?
If necessary, the employer may modify the deduction during the year. When filing the income tax return, you can usually claim any qualified excess tax as a refund.
Q9. What occurs if too little TDS is subtracted?
Depending on the situation, the employee may be required to pay additional taxes when submitting the return and may also be subject to appropriate interest.