TDS on Salary: How It's Calculated and What You Can Do About It

TDS on salary is not arbitrary — it follows a specific calculation that your employer is legally required to perform every month. Understanding how it works helps you ensure the right amount is deducted (not too much, not too little), and what actions reduce or eliminate excess deduction.

The Legal Framework

Under Section 192 of the Income Tax Act, every employer paying salary above the exemption threshold must estimate the employee's annual income, calculate the approximate annual tax liability, and spread that liability across 12 monthly instalments, deducting the proportionate amount each month.

Unlike TDS on interest or professional income (which has fixed percentages), TDS on salary has no fixed rate — it's based on each employee's specific tax situation.

How the Calculation Works

The employer calculates projected annual tax each month (usually at the beginning of the year or when there's a change). Here's the structure:

Step 1: Calculate projected gross salary for the year Take the annual CTC, identify the salary components — basic, HRA, special allowance, LTA, reimbursements, etc.

Step 2: Subtract exemptions Some salary components are partially or fully exempt from tax:

• HRA exemption (calculated based on rent declared by employee)
• LTA (Leave Travel Allowance) for actual travel — can be claimed twice in a 4-year block
• Standard deduction: ₹50,000 per year under the old regime; ₹75,000 under the new regime
• Other specific allowances that are fully or partially exempt (conveyance, meal vouchers, uniform)

Step 3: Add other income declared by employee Salary TDS accounts not just for salary but also for other income the employee declares — rental income, interest income, etc. You can proactively declare these to your employer for TDS computation.

One asymmetry is worth knowing before you declare anything. Under Section 392(4) of the Income-tax Act, 2025, the particulars you hand your employer can only increase the tax deducted, with exactly two exceptions: a loss under "Income from house property", and tax already deducted or collected elsewhere. Declaring your FD interest will raise your TDS. Declaring a capital loss will not lower it.

Step 4: Subtract deductions declared by employee This is where your declarations matter:

• Section 80C (ELSS, PPF, EPF, life insurance, school fees, home loan principal)
• Section 80D (health insurance premiums)
• Section 80TTA (savings account interest up to ₹10,000)
• Section 80CCD(1B) (additional NPS contribution up to ₹50,000)
• Section 24(b) (home loan interest up to ₹2 lakh for self-occupied)
• Any other applicable deductions

Most of Step 4 applies only under the old tax regime. Under the new regime 80C, 80D, 80TTA and 80CCD(1B) all fall away. But the standard deduction in Step 2 still applies, and so does your employer's NPS contribution — the new regime is not the blank slate it is usually described as. The exact list of survivors is set out below.

Step 5: Calculate annual tax on the taxable income

Apply the slab rates to the remaining taxable income. Add:

• 4% Health and Education Cess on tax
• Subtract the Section 87A rebate if applicable. Section 156 of the Income-tax Act, 2025 gives up to ₹12,500 where taxable income is ₹5,00,000 or less under the old regime [s.156(1)], and up to ₹60,000 where it is ₹12,00,000 or less under the new regime [s.156(2)(a)]

Do not stop the rebate dead at ₹12 lakh. Under Section 156(2)(b) of the Income-tax Act, 2025, an employee whose new-regime taxable income is only just over ₹12 lakh pays no more than the amount by which that income exceeds ₹12 lakh. At ₹12,50,000 taxable the slab tax is ₹67,500, but the tax payable is ₹50,000 plus 4% cess = ₹52,000. The relief runs out at ₹12,70,588 of taxable income. Payroll that ignores this over-deducts by thousands a month for exactly the employees least able to absorb it, so check it whenever a declaration lands an employee in the ₹12,00,000–₹12,70,588 band.

Step 6: Spread over remaining months

Annual tax liability ÷ number of remaining months in the year = monthly TDS.

If the calculation is done in April, it's divided by 12. If done in September, by 7. If you get a bonus or salary hike mid-year, the employer recalculates and adjusts.

Worked Example

Annual salary details:

• Gross salary: ₹12,00,000
• HRA received: ₹2,40,000; annual rent paid: ₹1,80,000; city = non-metro; basic = ₹6,00,000

HRA exemption calculation:

• Rule 1: ₹2,40,000
• Rule 2: ₹1,80,000 − 10% of ₹6,00,000 = ₹1,80,000 − ₹60,000 = ₹1,20,000
• Rule 3: 40% of ₹6,00,000 = ₹2,40,000
• HRA exemption: ₹1,20,000 (minimum of three)

Taxable salary after exemptions: ₹12,00,000 − ₹1,20,000 (HRA) − ₹50,000 (standard deduction) = ₹10,30,000

Deductions under old regime:

• 80C: ₹1,50,000
• 80D: ₹25,000 (health insurance for self and family)
• 80CCD(1B): ₹50,000 (NPS)

Taxable income: ₹10,30,000 − ₹2,25,000 = ₹8,05,000

Tax under old regime (FY 2026-27 slabs):

• Up to ₹2.5 lakh: Nil
• ₹2.5–5 lakh: 5% on ₹2.5 lakh = ₹12,500
• ₹5–10 lakh: 20% on ₹3.05 lakh = ₹61,000
• Total tax: ₹73,500
• Cess (4%): ₹2,940
• Total annual tax: ₹76,440

Monthly TDS: ₹76,440 ÷ 12 = ₹6,370

What You Must Submit to Your Employer

Most employers have an investment declaration process, typically in April or May. You declare your planned investments and claimed exemptions. This allows the employer to deduct reduced TDS throughout the year.

Declaration stage (usually April–May): Declare what you expect to invest/spend during the year. This adjusts TDS for the next 8–9 months.

Proof submission stage (usually November–February): Submit actual proofs — ELSS fund statements, PPF receipt, rent receipts and rent agreement, home loan certificate, insurance receipts, school fee receipts, health insurance receipt, NPS statement.

After proof submission, the employer recalculates annual liability based on confirmed deductions and adjusts the remaining months' TDS.

If you don't submit proofs: The employer ignores the declaration and deducts TDS as if no deductions were claimed. This increases TDS in the last 2-3 months of the year.

What Goes on Form 16

Form 16 is the TDS certificate your employer issues by June 15 each year. It has two parts:

Part A: TDS amounts deducted quarter-by-quarter, as certified by TRACES. This is what appears in Form 26AS.

Part B: Detailed computation of your taxable salary — the actual calculation the employer performed, showing gross salary, exemptions applied, deductions considered, taxable income, and tax calculated.

Use Part B of Form 16 as the primary input for your ITR filing. It saves significant time compared to recalculating everything from scratch.

When TDS Is Excess (and How to Get It Back)

Excess TDS is refunded when you file your ITR. If your actual tax liability is less than what was deducted, the difference is your refund.

Refunds are processed after ITR processing is complete — typically within 3–6 weeks if the return is filed early, longer if filed near the deadline. The refund is credited directly to the bank account linked to your PAN.

If the refund doesn't arrive within the expected time, you can check its status on the income tax portal under 'Refund/Demand Status.'

When TDS Is Short (and What to Do)

If your actual tax liability is higher than what was deducted through TDS, you'll need to pay the difference as self-assessment tax before filing your ITR.

Common reasons for short TDS:

• You didn't declare other income (freelancing, rental, FD interest) to your employer
• You changed jobs and the new employer didn't account for income from previous employer correctly
• You received a large bonus that wasn't factored into the monthly projection
• You have capital gains that aren't captured in salary TDS at all (because TDS only covers salary — capital gains are your responsibility to account for through advance tax)

Pay the shortfall via Challan 280 on the income tax portal before filing. Interest is a separate question from the tax itself, and the three charges have different triggers — they are not one combined penalty:

• Section 234B (Section 424 of the Income-tax Act, 2025): 1% a month, charged when the advance tax you actually paid comes to less than 90% of the assessed tax.
• Section 234C (Section 425): charged on each quarterly instalment you underpaid during the year, even if you settled up by 31 March.
• Section 234A (Section 423): charged only if you file the return after the due date. Filing on time avoids it regardless of how much tax was outstanding.

Salary TDS normally keeps you clear of 234B and 234C. It is undeclared side income and capital gains — the things your employer never saw — that trip them.

New Regime vs Old Regime in TDS

From FY 2023-24, the new tax regime became the default. Your employer will default to computing TDS under the new regime unless you explicitly opt for the old regime by submitting a declaration.

If you benefit more from the old regime (because your deductions are large), submit your regime choice in writing to your employer at the beginning of the financial year. Employees can switch regimes once per year by submitting the declaration when joining a new employer or at the start of the year.

Whatever regime you declare to your employer for TDS purposes, you can switch when filing your ITR — you're not permanently locked in by what you told your employer. But filing under a different regime than your employer used for TDS may result in a mismatch that requires explanation.

TDS on Salary: The New Regime Default Impact

From FY 2023-24, your employer defaults to computing TDS under the new tax regime unless you explicitly opt for the old regime. Here's why this matters:

Under new regime TDS computation (employer's default):

• Standard deduction: ₹75,000 applied automatically
• Lower slab rates applied
• Most of Chapter VI-A is gone — no 80C, no 80D, no 80CCD(1B), no HRA, no LTA
• But a short list of deductions survives, and one of them is worth real money

Under old regime TDS computation (you must request this):

• Standard deduction: ₹50,000
• All declared exemptions and deductions applied
• Higher slab rates but deductions reduce taxable base

What the new regime does not actually take away

"No deductions in the new regime" is the most expensive simplification in Indian payroll advice, and it is not what the statute says. The Income-tax Act, 2025 does not switch off Chapter VIII (the successor to Chapter VI-A) wholesale. Section 202(2)(a)(xii) disallows Chapter VIII "other than the provisions of sections 124(1) and 124(2), or 125(2) or 146" — a named list of survivors. Read literally, here is what an employee still gets under the new regime.

Your employer's NPS contribution — Section 124(1), the old 80CCD(2). This is the one that matters, and it is the one people wrongly believe they have lost. Where your employer pays into your account under the notified Central Government pension scheme, that contribution is deducted from your total income. The cap is a percentage of "salary", which Section 124(13)(b) defines as basic pay plus dearness allowance where the terms of employment provide for it, and excludes every other allowance and perquisite.

The twist is that the cap is larger under the new regime, not smaller. Section 124(1)(b) sets 10% of salary for a non-government employer, but Section 124(2) says that where your income is taxed under Section 202(1) — the new regime — you read that "10%" as "14%". A Central or State Government employer is at 14% either way under Section 124(1)(a). So a private-sector employee moving to the new regime sees this particular deduction rise from 10% to 14% of basic plus DA.

Agniveer Corpus Fund — Section 125(2). The Central Government's contribution to an Agniveer's account remains deductible. Narrow, but real.

Section 146 (the old 80JJAA). This survives the disallowance too, but it is a deduction of 30% of additional employee cost against business profits, available to employers who get their accounts audited. It never appears in an employee's salary TDS, so do not go asking payroll for it.

Two more things survive that sit outside Chapter VIII and get swept up in the same myth:

• The ₹75,000 standard deduction (Section 19(1), Table Sl. No. 2(a)) — the new regime figure, against ₹50,000 in the old.
• Retirement money. Section 202(2)(a)(iv) switches off only Sl. No. 1 of the Section 19(1) table, which is the deduction for professional tax. Everything else in that table stands: gratuity, commuted pension, leave encashment, retrenchment and VRS compensation keep their exemptions under the new regime. Professional tax, by contrast, genuinely is lost — old regime only.
• A prescribed handful of allowances. Section 202(2)(a)(ii) disallows the Schedule III allowance entries "other than those as may be prescribed for this purpose", so a small notified list of duty-related and cost-of-living allowances stays exempt. Ask payroll which ones they apply rather than assuming zero. HRA (Schedule III, Sl. No. 11) and LTA (Sl. No. 8) are not on it — those two really are gone.

What this costs if you get it wrong: an employee who believes employer NPS is unavailable simply never asks for it. Take Ananya below at ₹18 lakh gross with a ₹9,00,000 basic. If her employer routes 14% of basic — ₹1,26,000 — into NPS, her new-regime taxable income drops from ₹17,25,000 to ₹15,99,000, and her annual tax falls from ₹1,50,800 to ₹1,24,644. That is ₹26,156 a year, or roughly ₹2,180 a month of TDS she was never required to pay.

One honest caveat: this is not free money. The employer contribution comes out of your CTC, and it is locked into NPS until the scheme's own withdrawal rules let you take it out. It is a restructuring decision, not a form you tick. Ask payroll whether the company runs the corporate NPS model at all — many do not — and whether your CTC can be re-cut to use it.

Example: Ananya earns ₹18 lakh gross. She pays substantial rent and has a home loan.

New regime TDS: ₹18L − ₹75K = ₹17.25L taxable. Tax: ₹20K + ₹40K + ₹60K + 20% on ₹1.25L (the ₹16–20L slab) = ₹20K + ₹40K + ₹60K + ₹25,000 = ₹1,45,000 + 4% cess = ₹1,50,800. Monthly TDS: ₹12,567.

Old regime TDS (declared HRA exempt ₹1.5L, 80C ₹1.5L, 80D ₹25K, home loan ₹2L): Taxable = ₹18L − ₹50K − ₹1.5L − ₹2L − ₹1.5L − ₹25K = ₹12,25,000. Tax on ₹12.25L: ₹12,500 + ₹1,00,000 + 30% on ₹2.25L = ₹12,500 + ₹1,00,000 + ₹67,500 = ₹1,80,000 + cess = ₹1,87,200. Monthly TDS: ₹15,600.

To be clear, here is the correct side-by-side comparison:

Old regime: ₹18L − ₹50K standard − ₹1.5L HRA exempt = ₹16L; then Chapter VI-A: ₹1.5L 80C + ₹25K 80D + ₹2L 24(b) = ₹3.75L deductions. Taxable = ₹16L − ₹3.75L = ₹12.25L. Tax: ₹2.5–5L: ₹12,500; ₹5–10L: ₹1,00,000; ₹10–12.25L: 30% × ₹2.25L = ₹67,500. Total ₹1,80,000 + cess = ₹1,87,200. Monthly TDS: ₹15,600.

New regime: ₹18L − ₹75K = ₹17.25L. Tax: ₹0–4L: nil; ₹4–8L: ₹20,000; ₹8–12L: ₹40,000; ₹12–16L: ₹60,000; ₹16–17.25L: 20% × ₹1.25L = ₹25,000. Total ₹1,45,000 + cess = ₹1,50,800. Monthly TDS: ₹12,567.

New regime TDS is actually lower (₹12,567 vs ₹15,600). At ₹18 lakh with this deduction set, the new regime wins. Ananya should stay on new regime.

If she also had no home loan (so drops ₹2L deduction from old), old regime becomes even worse. Only if she added NPS 80CCD(1B) ₹50K and had higher HRA exemption would old regime potentially compete.

The point: run both calculations with your actual numbers. Don't assume one regime is better without calculating.

TDS on Bonus, Arrears, and ESOP

Bonus: Bonus is salary income. When your employer pays a bonus, they must account for it in TDS in the month it's paid. The employer recalculates annual projected income including the bonus and adjusts TDS accordingly — which is why TDS may spike in the bonus month.

Salary Arrears: If you receive arrears for previous years (e.g., increment backdated from April to October is paid in October), it's added to the current year's income and taxed at current year rates. Section 89(1) — Section 157 of the Income-tax Act, 2025 — provides relief if the arrears push you into a higher bracket than you would have been in had the money been paid in the correct years. The relief is not automatic: Section 157(1) grants it on an application, so the prescribed relief form has to go in before you file the ITR. Your employer can also build it into your TDS during the year, because Section 392(4)(a)(ii) lets you declare it to them.

ESOP (Employee Stock Options): When you exercise ESOPs (buy shares at the option price), the difference between the option price and the fair market value (FMV) at exercise is a perquisite — added to your salary and taxed at slab rates. Your employer must compute this perquisite and deduct TDS. Form 16 should reflect this.

When you subsequently sell the shares, the cost basis is the FMV at the time of exercise — the value already taxed as perquisite. The rate then depends on whether the shares are listed, and the difference is large:

• Listed shares sold on an exchange with STT paid: held 12 months or less, short-term gains at 20%; held longer, long-term gains at 12.5% on the amount above ₹1.25 lakh (Section 196 for the short-term rate, Section 197(2)(a) for the long-term rate and the ₹1.25 lakh exemption, Income-tax Act, 2025).
• Unlisted shares — which is most startup ESOPs: the short-term line is 24 months, not 12, and short-term gains are taxed at your slab rate, not 20%. Section 2(101) grants the 12-month holding period only to listed securities and a few categories of fund units.

Applying the listed-share numbers to unlisted stock is a common and costly error, so check the listing status as at your date of sale.

How to Read Your Monthly Salary Slip TDS Line

Your salary slip shows "TDS" or "Income Tax" as a deduction. This is 1/12th of the projected annual TDS (recalculated each month).

Why TDS changes month to month:

• Salary increment received in August → employer recalculates annual projection upward → remaining 8 months' TDS increases
• Bonus paid in October → annual income increases → TDS for October spikes
• Investment proofs submitted in November → employer recalculates downward → TDS for remaining months reduces
• December/January: many employees see TDS spike because end-of-year calculation reveals earlier months were under-deducted

Interpreting your slip: If January shows ₹25,000 TDS vs ₹8,000 in previous months, it means the employer's year-to-date calculation shows you owe more tax than has been deducted so far, and they're catching up in the last 2-3 months.

The only way to avoid this spike is to submit investment proofs early (November rather than January) so the recalculation uses your actual deductions when computing the remaining months' TDS.

TDS on Other Salary-Like Payments

Section 192A — PF withdrawal (Section 392(7) under the Income-tax Act, 2025): If you withdraw EPF before five years of continuous service and the payment is ₹50,000 or more, TDS at 10% is deducted. If you do not give your PAN, the rate is 20%, not 10% — Section 397(2)(b)(i) makes the deductor apply the higher of the 10% set by Section 392(7) and a 20% floor. For a resident nothing is added on top: the Finance Act 2026 imposes the surcharge on this deduction only where the payee is a non-resident, and expressly excludes the 4% health and education cess where the payee is resident in India. So 20% flat is the entire deduction — not the "maximum marginal rate", and not 34.608%. The maximum-marginal-rate proviso that sat in Section 192A of the 1961 Act was not carried into the 2025 Act.

Salary to directors: A director who is also an employee is treated like any other employee — TDS on that salary runs through Section 192 (Section 392), at the average rate rather than a flat percentage. Note that "192B" is not a section of the Act at all; it is the challan code payroll software uses for salary paid to non-government employees, which is why it turns up on TDS statements and confuses people. Director's fees, sitting fees and commission are not salary and do not go through Section 192: they fall under Section 393(1) (Table Sl. No. 6(iii)(c)) at 10%, and unlike professional fees they carry no threshold at all — tax comes off the first rupee.

Section 194J — Professional fees: When a company pays a freelancer or consultant, TDS comes off under Section 194J — Section 393(1) (Table Sl. No. 6(iii)) of the Income-tax Act, 2025, which took effect on 1 April 2026. There are two rates in that entry and payers regularly apply the wrong one: professional services are deducted at 10%, purely technical services at 2%. The threshold is ₹50,000. This is not "salary TDS" (Section 192), but the freelancer must account for it in advance tax calculations.

The Form 12BB: Your Annual Investment Declaration

Form 12BB is the standardised declaration form salaried employees submit to their employer for TDS purposes. It covers:

1. HRA: Landlord name, PAN (if rent > ₹1L/year), address, monthly rent
2. LTA: Amount and nature of travel claim
3. Home loan interest: Lender name, address, PAN, outstanding loan balance, interest for the year
4. Chapter VI-A deductions: Amounts and details under each section (80C, 80D, 80CCD, 80E, 80G, etc.)
5. 80TTA: Savings account interest (deduction of up to ₹10,000 — old regime only)

Form 12BB is submitted at declaration time (typically April-May) with estimates, and again at proof submission time (November-February) with actual amounts and supporting documents. Your employer uses Form 12BB data to compute TDS throughout the year.

If you don't submit Form 12BB, your employer defaults to the new regime and applies only what it can without a declaration from you — the ₹75,000 standard deduction, and the employer's own NPS contribution if your CTC already includes one. All over-deducted TDS flows back to you as a refund at ITR filing, which is fine, but it means you have parted with the money for 10-12 months for no reason.

For your specific regime choice or a declaration your employer is disputing, a CA's read is worth more than a general explainer.