Category: Payroll Tips

Introduction

TDS on salary in India is the tax your employer deducts from your monthly pay and deposits directly with the Income Tax Department on your behalf. In 2026, your employer calculates TDS on salary in India based on your estimated annual income, applicable tax slab, and eligible deductions under the Income Tax Act. Moreover, your employer issues Form 16 at year-end to summarise all TDS deducted throughout the financial year.

Every salaried employee in India has seen “TDS Deducted” on their payslip. However, most employees do not fully understand how that figure arrives. If you have ever wondered why your take-home pay falls below your CTC, TDS on salary in India is likely the main reason.

Section 192 of the Income Tax Act, 1961 governs this tax deduction mechanism in India. Furthermore, it works as a pay-as-you-earn system — the government collects tax in monthly instalments through your employer rather than in a lump sum. According to the Income Tax Department, TDS from salaries contributes over 40% of total direct tax collections in India — making it one of the most critical compliance obligations for employers.

This guide targets salaried employees, HR professionals, and payroll managers who want a clear, step-by-step understanding of TDS on salary in India in 2026. Specifically, we cover the latest slab rates, exemptions, deductions, and calculation methods.

What Is TDS on Salary in India?

TDS on salary in India refers to the portion of your monthly wages that your employer withholds and pays to the government as advance income tax. It stands for Tax Deducted at Source and falls under Section 192 of the Income Tax Act, 1961. Consequently, rather than asking you to pay all your tax at year-end, the government collects it monthly through your employer.

Think of TDS on salary as your employer acting as a tax collector on behalf of the Income Tax Department. Your employer credits this amount against your total income tax liability when you file your ITR. Therefore, if your employer deducted more TDS than your actual tax liability, you receive a refund. If your employer deducted less, you pay the balance.

Real-world example: Suppose your gross salary totals ₹12,00,000 per year and your employer estimates your tax liability at ₹1,20,000. As a result, your employer deducts ₹10,000 per month (₹1,20,000 ÷ 12) as TDS throughout the year.

Who Is Responsible for Deducting TDS on Salary?

Your employer bears sole responsibility for calculating, deducting, and depositing TDS on salary — the employee has no obligation to deposit TDS directly. Under Section 192, any person responsible for paying salary — whether a company, firm, government entity, or individual — must deduct TDS if the employee’s estimated income exceeds the basic exemption limit. This applies to all types of employers, from large corporations to small startups.

Moreover, your employer must obtain a TAN (Tax Deduction Account Number) before deducting TDS. Your employer must also deposit TDS with the government by the 7th of the following month (or 30th April for March deductions). Additionally, your employer must file quarterly TDS returns using Form 24Q.

Did you know? Failure to deduct or deposit TDS makes the employer liable for interest at 1% per month (for non-deduction) or 1.5% per month (for non-deposit), along with a penalty equal to the TDS amount not deducted.

What Are the TDS on Salary Rates in India for 2026?

TDS on salary in India does not follow a flat rate — it uses the same income tax slab rates that apply to individual taxpayers. India currently offers two tax regimes: the Old Tax Regime and the New Tax Regime. Specifically, the New Tax Regime, updated in the Union Budget 2025-26, serves as the default regime now. Employees must actively opt into the Old Tax Regime to claim deductions like HRA, 80C, and 80D.

New Tax Regime Slab Rates (FY 2025-26 / AY 2026-27)

Annual Income	Tax Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹7,00,000	5%
₹7,00,001 – ₹10,00,000	10%
₹10,00,001 – ₹12,00,000	15%
₹12,00,001 – ₹15,00,000	20%
Above ₹15,00,000	30%

Note: A standard deduction of ₹75,000 applies under the New Regime. Additionally, individuals with income up to ₹12 lakh enjoy full tax relief under the new rebate from Budget 2025. For a detailed comparison, read our guide on the New vs Old Tax Regime for salaried employees.

Old Tax Regime Slab Rates (FY 2025-26)

Annual Income	Tax Rate
Up to ₹2,50,000	Nil
₹2,50,001 – ₹5,00,000	5%
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

Both regimes attract a 4% Health and Education Cess on the final tax your employer calculates.

How Is TDS on Salary Calculated Step by Step?

Your employer calculates TDS on salary in India by estimating your total annual income, subtracting eligible deductions, applying slab rates, adding cess, and dividing by 12. Here is the exact step-by-step method your employer follows each financial year:

Step 1: Calculate Gross Salary

First, your employer adds all salary components: basic pay + HRA + special allowance + LTA + other allowances + the value of perquisites.

Step 2: Add Other Declared Income

Next, if you declare income from other sources (like rent or interest), your employer adds this amount to gross salary for calculation purposes.

Step 3: Subtract Exemptions

Then, your employer removes exempt allowances such as the HRA exemption under Section 10(13A), LTA exemption under Section 10(5), and children’s education allowance under Section 10(14).

Step 4: Subtract Standard Deduction

After that, your employer subtracts ₹75,000 under the New Regime or ₹50,000 under the Old Regime as the standard deduction allowed for all salaried employees.

Step 5: Subtract Chapter VI-A Deductions (Old Regime Only)

Under the Old Regime, your employer also subtracts declared investments: up to ₹1,50,000 under Section 80C, up to ₹25,000 under Section 80D, and up to ₹50,000 under Section 80CCD(1B) for NPS contributions.

Step 6: Apply Slab Rates, Add Cess, and Divide by 12

Finally, your employer calculates tax on the Net Taxable Income using the applicable slab table, adds 4% cess, and then divides by 12 to arrive at the monthly TDS amount to deduct from your salary.

Example Calculation (New Regime, FY 2025-26)

Item	Amount (₹)
Gross Annual Salary	15,00,000
Less: Standard Deduction	(75,000)
Net Taxable Income	14,25,000
Tax on ₹14,25,000	1,62,500
Add: 4% Cess	6,500
Total Annual Tax	1,69,000
Monthly TDS	₹14,083

Which Allowances and Perquisites Are Taxable?

Not all salary components attract TDS on salary in India — some allowances are fully exempt, some are partially exempt, and others are fully taxable. Understanding this breakdown helps you see exactly what your employer uses as the taxable base.

Fully Exempt Allowances

HRA qualifies for exemption under Section 10(13A) subject to specific conditions. LTA covers actual travel expenses twice in a block of four years. Gratuity remains exempt up to ₹20 lakh for non-government employees.

Partially Taxable Allowances

Children’s education allowance exempts ₹100 per month per child for a maximum of two children. Similarly, hostel expenditure allowance exempts ₹300 per month per child for a maximum of two children. Transport allowance for disabled employees exempts ₹3,200 per month.

Fully Taxable Allowances

Special allowance, city compensatory allowance, dearness allowance (DA), and overtime allowance attract full tax. In other words, your employer includes all these amounts in the taxable salary base when computing TDS.

Perquisites like free accommodation, a company car for personal use, interest-free loans above ₹20,000, and ESOPs also attract tax. Your employer values these as per Rule 3 of the Income Tax Rules and adds them to your taxable salary.

What Deductions Can Reduce Your TDS on Salary?

Declaring eligible deductions to your employer at the start of the year is the most legal and effective way to reduce TDS on salary in India every month. Your employer factors in declared investments to calculate a lower monthly TDS. Therefore, a timely investment declaration at the beginning of the financial year saves you significant money throughout the year.

Key Deductions Under the Old Tax Regime

Under Section 80C, your employer deducts up to ₹1,50,000 for EPF, PPF, ELSS mutual funds, life insurance premiums, home loan principal, five-year fixed deposits, NSC, and Sukanya Samriddhi Yojana contributions.

Under Section 80D, your employer deducts up to ₹25,000 for health insurance premiums (₹50,000 if parents are senior citizens). Moreover, under Section 80CCD(1B), an additional ₹50,000 for NPS contributions beyond the 80C limit reduces your taxable income further.

The HRA exemption equals the least of: actual HRA your employer pays, rent you paid minus 10% of basic salary, or 50% of basic salary in metro cities (40% in non-metro cities). Furthermore, home loan interest under Section 24b deducts up to ₹2,00,000 for a self-occupied property.

Pro tip: Even under the New Regime, your employer’s NPS contribution under Section 80CCD(2) remains deductible and can significantly reduce your taxable income without requiring you to switch regimes.

What Is Form 16 and Why Does It Matter?

Form 16 is the TDS certificate your employer issues annually, summarising all salary paid and TDS deducted during the financial year. Your employer must issue it by June 15 of the assessment year. Consequently, it becomes one of the most important documents you need to file your ITR accurately.

Form 16 contains two parts: Part A shows TDS details with the acknowledgement number, and Part B breaks down your salary components and deductions. Furthermore, your employer generates Form 16 only after actually depositing TDS with the government. If your income falls below the taxable threshold and your employer deducted no TDS, your employer has no obligation to issue Form 16.

Why it matters: Banks, housing finance companies, and visa officers regularly ask for Form 16 as proof of income. It also simplifies ITR filing because all salary and TDS figures carry government verification.

How to Check Whether Your Employer Has Deposited TDS?

You can verify TDS deposits by checking Form 26AS or the AIS (Annual Information Statement) on the Income Tax e-filing portal at incometax.gov.in. Form 26AS links to your PAN and shows all TDS your employer deducted and deposited throughout the year. In contrast, if TDS appears on your payslip but your employer has not deposited it, the amount will not appear on Form 26AS — and this creates a problem when you file your ITR.

To check, log in to incometax.gov.in, go to “e-File”, click “Income Tax Returns”, and select “View Form 26AS”. Alternatively, check the AIS under “Annual Information Statement.” Then cross-check the TDS figures there with what your Form 16 shows to confirm your employer deposited everything correctly.

What Happens If TDS Is Not Deducted or Deposited?

Non-compliance with TDS provisions attracts severe interest, penalties, and even prosecution for employers who fail their obligations.

For Employers

If your employer fails to deduct TDS, the government charges interest at 1% per month from the date tax should have been deducted to the date of actual deduction. If your employer deducts TDS but fails to deposit it, the interest rate rises to 1.5% per month. Additionally, the government levies a penalty under Section 271C equal to the TDS amount not deducted. In serious cases, Section 276B authorises prosecution with rigorous imprisonment from 3 months to 7 years.

For Employees

If your employer fails to deposit the TDS already deducted from your salary, you cannot claim that credit in your ITR until your employer deposits and reconciles it. Consequently, you may have to pay the same tax twice in that situation. Therefore, check your Form 26AS regularly throughout the year — do not wait until ITR filing season to discover discrepancies.

Conclusion

Understanding TDS on salary in India is not just about knowing why your take-home is lower — it means taking active control of your tax planning throughout the year. Here are three key takeaways:

• TDS on salary in India calculates on your estimated annual taxable income, not just basic salary — every exemption and deduction you declare reduces your monthly TDS amount.
• The New Tax Regime is now the default in 2026, with a standard deduction of ₹75,000 and zero tax for income up to ₹12 lakh — choose your regime wisely based on your investment profile.
• Always verify your TDS credits on Form 26AS — do not assume your employer deposited what they deducted from your salary each month.

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Frequently Asked Questions

Q1. Is TDS on salary mandatory for all employees in India?

Only if annual income exceeds the basic exemption limit: ₹3 lakh under the New Regime or ₹2.5 lakh under the Old Regime.

Q2. Can I ask my employer to deduct less TDS?

Yes. Submit Form 13 to the Income Tax Officer for a lower or nil deduction certificate, then hand it to your employer.

Q3. What if my employer deducts more TDS than my actual tax liability?

You can claim a refund by filing your ITR before the due date and reporting the excess TDS your employer deducted.

Q4. Is TDS the same as income tax for salaried employees?

TDS acts as an advance collection mechanism for income tax. Your final tax liability is determined only when you file your ITR.

Q5. Can salaried employees switch between Old and New Tax Regime every year?

Yes. Salaried employees can switch regimes each financial year by informing their employer at the start of that year.

Q6. What is the TDS rate for salary above ₹1 crore?

The 30% slab rate applies, plus a 15% surcharge on income tax, plus 4% cess — your employer calculates all three components.