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 old regime (also available in 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.

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

This only applies under the old tax regime. If you're under the new regime, deductions in Step 4 are not available, but the standard deduction (Step 2) still applies.

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 87A rebate if applicable (full rebate up to ₹12,500 if taxable income ≤ ₹5 lakh under old regime; full rebate up to ₹60,000 if taxable income ≤ ₹12 lakh under new regime as per Budget 2025)

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 2025-26 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. Underpayment of tax (where self-assessment tax exceeds ₹1 lakh after considering advance tax paid) attracts interest under Section 234A, 234B, and 234C.

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
• No Chapter VI-A deductions (no 80C, no 80D, no HRA)
• Lower slab rates applied

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

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 + 15% on ₹1.25L = ₹20K + ₹40K + ₹60K + ₹18,750 = ₹1,38,750 + 4% cess = ₹1,44,300. Monthly TDS: ₹12,025.

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: ₹1,38,750 + cess = ₹1,44,300. Monthly TDS: ₹12,025.

New regime TDS is actually lower (₹12,025 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) provides relief if the arrears push you into a higher bracket than you would have been if paid in the correct years — you can claim this relief in your ITR.

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:

• If within 12 months of exercise: STCG at 20%
• If after 12 months: LTCG at 12.5% above ₹1.25L
• The cost basis for capital gains is the FMV at the time of exercise (the value already taxed as perquisite)

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: If you withdraw EPF before 5 years of service and the amount exceeds ₹50,000, TDS at 10% is deducted. If you don't submit PAN, TDS is at the maximum marginal rate (20%).

Section 192B — Salary to directors: Directors receiving salary from a company are treated like employees for TDS purposes — TDS at slab rates under Section 192.

Section 194J — Professional fees: When a company pays a freelancer or consultant, TDS of 10% is deducted under Section 194J. 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 (up to ₹10,000 exempt)

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 new regime with no deductions (just standard deduction). All over-deducted TDS flows to a refund at ITR filing — which is fine, but it means you've parted with money unnecessarily for 10-12 months.

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This article is for educational purposes only. TDS calculation rules, slabs, and rates change with each Budget. Consult a qualified chartered accountant for personalised tax advice.