TDS on salary: how employers calculate and deduct it

What TDS on salary is

Tax deducted at source on salary is the employer's legal obligation to collect the employee's income tax in instalments, out of each salary payment, and pay it to the government. Under the Income-tax Act, 1961 this was Section 192. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbers its sections and forms, so older section and form numbers in this guide are given as 1961-Act references only.

The principle has not changed: the employer estimates the employee's income from salary for the year, calculates the tax on it, and deducts that tax evenly across the year. Unlike TDS on rent or professional fees, there is no single rate. Two employees with the same monthly salary can have very different TDS because of their regime, deductions or earlier income.

The calculation, in order

1. Estimate the employee's gross salary for the full financial year (April to March).
2. Confirm the regime: new by default, old only if the employee opted for it.
3. Subtract exemptions and deductions allowed in that regime, including the standard deduction.
4. Apply the slab rates to the taxable income.
5. Apply the rebate and, if needed, marginal relief.
6. Add surcharge if income is high enough, then 4% health and education cess.
7. Subtract TDS already deducted this year and divide the balance by the months left.

If you just want a quick estimate for one employee, the salary TDS calculator runs these steps under both regimes.

Estimating annual salary income

The estimate covers everything taxable as salary that the employer expects to pay in the year: basic pay, dearness allowance, HRA, special and other allowances, taxable perquisites, and any bonus, incentive or arrears already known. Employer contributions to PF within the statutory limits are not added as salary income.

For a salary structure that stays flat all year, the estimate is simply monthly gross × 12. In practice it moves. Overtime, variable incentives and one-off payments are usually added in the month they become known, which is why the monthly TDS figure should be refreshed rather than copied from last month.

If your pay structure has taxable and non-taxable components, keep that marking consistent. In salary management each component is flagged as taxable or not, which makes the estimate easier to build from the payroll records.

The regime the employee chooses

The new tax regime is the default. An employee who wants the old regime has to tell the employer, normally at the start of the year or on joining. If no choice is given, the employer deducts tax under the new regime.

Guidance issued under the 1961 Act said this intimation to the employer is generally made once for the year. It only decides how much TDS is deducted. A salaried employee without business income can still pick either regime when filing the return. The trade-offs are covered in our old vs new tax regime guide.

Exemptions and deductions allowed in each regime

The regime decides what the employer may subtract before applying slabs. Under the old regime, the employer relies on the employee's declarations early in the year and proofs later (Form 12BB was the 1961-Act declaration form).

Section numbers such as 80C and 80D are 1961-Act references. The deductions continue in the 2025 Act under new numbering, but check the current limits before relying on them.

Slabs, rebate, marginal relief and cess

The slabs below are those announced in Union Budget 2025 for the new regime. Confirm the rates that apply for the current year before using them in payroll.

Rebate. In the new regime, if taxable income is ₹12 lakh or less, a rebate of up to ₹60,000 wipes out the slab tax. With the ₹75,000 standard deduction, that means no tax on salary up to ₹12,75,000. In the old regime the rebate is up to ₹12,500 for taxable income up to ₹5 lakh. The rebate was Section 87A under the 1961 Act.

Marginal relief. Just above ₹12 lakh, the new regime caps tax at the amount by which taxable income exceeds ₹12 lakh. At taxable income of ₹12,10,000 the slab tax is ₹61,500, but the tax payable is limited to ₹10,000, plus ₹400 cess. The relief stops mattering at roughly ₹12.7 lakh of taxable income, where slab tax falls below the excess.

Surcharge and cess. Surcharge starts at 10% for income above ₹50 lakh and rises in bands (the new regime caps it at 25%). Health and education cess of 4% is added to tax plus any surcharge.

Worked example: ₹15 lakh salary, new regime

Recalculating after changes during the year

The monthly figure is only as good as the estimate. When something changes, redo the annual calculation and spread the remaining tax over the months left.

Increments

Bonus and one-off payments

A bonus raises the annual estimate in the month it is paid or approved. If the ₹15 lakh employee receives a ₹2,00,000 bonus, gross becomes ₹17,00,000 and taxable income ₹16,25,000. Slab tax is ₹20,000 + ₹40,000 + ₹60,000 + ₹5,000 = ₹1,25,000, and with ₹5,000 cess the annual tax is ₹1,30,000. The bonus adds ₹32,500 of tax. Employers either deduct that extra amount from the bonus month or spread it over the remaining months; both reach the same annual total.

Joining mid-year with previous-employer income

A new employer only sees its own salary unless the employee declares what they earned earlier in the year and the tax already deducted (Form 12B was the 1961-Act form for this). Without that, both employers give the standard deduction and may both apply the rebate.

If the employee does not declare it, the ₹78,780 does not disappear. It becomes payable when they file their return, possibly with interest.

Depositing TDS and reporting it

Tax deducted from salary in a month must be deposited by the 7th of the following month. Tax deducted in March can be deposited by 30 April.

Employers also file a quarterly statement of salary TDS, which was Form 24Q under the 1961 Act, and give each employee an annual certificate of salary and tax deducted, known as Form 16 under the 1961 Act. The 2025 Act renumbers both, so check the current form names and due dates on the Income Tax Department's website. Our Form 16 guide explains what the certificate contains.

Where Swastik Payroll fits

Swastik Payroll does not calculate income tax, handle regime choices, collect investment declarations or file TDS statements. What it does is record TDS as a deduction component in each monthly salary record, so the amount shows on the employee's payslip and in a TDS column of the payroll report, which exports to Excel or CSV.

In practice, the employer or CA works out each employee's monthly TDS, enters it in payroll, and uses the exported payroll report as the base for deposits and quarterly statements. Because approved salary months can be locked, the TDS figures in past months do not change after the fact.

Frequently asked questions

This guide is general information for employers and employees in India, not legal or tax advice. Statutory rates, limits and forms change; confirm the current position with EPFO, ESIC, the Income Tax Department or your CA before acting on it.