TDS on Salary: How Your Employer Calculates It

TL;DR

TDS on salary is deducted under Section 192 based on your estimated total income for the year.

TDS on salary is deducted by the employer under Section 192 of the Income-tax Act. The deduction is not at a flat rate — it is based on the estimated total income of the employee for the financial year. The employee submits investment declarations and proof, the employer computes the tax liability, and the TDS is spread across the 12 months (or the actual months of employment). The result is reflected in Form 16 (TDS certificate), Form 12BA (perquisite statement), and Form 16A / 24Q (quarterly TDS return).

The Annual Flow

Step 1 — Investment Declaration at the Start of the Year

Most employers open the investment declaration portal in April (start of the FY). The employee declares:

• Section 80C investments — PPF, ELSS, EPF, life insurance premium, home loan principal repayment, tuition fees, NSC, ULIP, tax-saving FD.
• Section 80CCD(1B) NPS contribution — up to ₹50,000 additional over the 80C limit.
• Section 80D health insurance premium — self and family (up to ₹25,000) plus parents (up to ₹50,000, or ₹1 lakh if parents are senior).
• Section 80E education loan interest — for self, spouse, children, or legal ward.
• Section 80G donations — qualifying donations to notified funds / institutions.
• HRA exemption — rent paid for the residential accommodation.
• LTA (Leave Travel Allowance) exemption — for two journeys in a block of four years.
• Home loan interest under Section 24(b) — up to ₹2 lakh per year for self-occupied property.
• Section 80TTA / 80TTB interest — savings account interest (up to ₹10,000 for non-senior, up to ₹50,000 for senior).

The declarations are accepted as proof documents — the employee uploads rent receipts (for HRA), insurance premium receipts (for 80D), interest certificates (for home loan), and contribution receipts (for EPF / PPF / ELSS).

Step 2 — TDS Computation

The employer computes the TDS based on:

• Estimated salary for the year (gross annual salary).
• Estimated bonus / incentive / perquisites.
• Deductions under Chapter VI-A (80C, 80D, 80E, 80G, etc.).
• Deductions under Chapter VI (80CCD(1B), 80TTA / 80TTB).
• Standard deduction (₹75,000 for new regime, ₹50,000 for old regime).
• HRA exemption (under Section 10(13A)).
• LTA exemption (under Section 10(5)).
• Other exemptions (under Section 10).

The taxable income is calculated. The tax on the taxable income is computed using the slab rates for the chosen tax regime (old or new). The rebate under Section 87A is applied if total income is up to ₹7 lakh (new regime) or up to ₹5 lakh (old regime). The health and education cess of 4% is added.

The result is the annual tax liability. The TDS per month is the annual tax / 12, with adjustments for any advance tax or relief claimed.

Step 3 — Monthly TDS Deduction

Each month, the employer deducts the computed TDS from the salary. The TDS is reflected in the salary slip and in Form 24Q (the quarterly TDS return). The TDS deduction is reported to the employee at the end of each quarter through Form 16A (for non-salary TDS) or as part of Form 16 (for salary TDS).

Step 4 — Mid-Year Changes

If the employee changes their investment declarations mid-year (e.g., contributes more to EPF, takes an additional home loan), the employer re-computes the TDS for the remaining months. The TDS for the year is balanced out across the remaining months.

Step 5 — Form 16 Issuance

Form 16 is the TDS certificate issued by the employer at the end of the financial year (or on the employee’s leaving the job). Form 16 contains:

• Part A: Employer details, employee details, TDS deducted each quarter.
• Part B: Salary computation — gross salary, exemptions, deductions, taxable income, tax liability.

Form 16A is for non-salary TDS (interest, rent, professional fees). For a salaried employee, Form 16 is the primary document.

Form 12BA is the statement of perquisites, profits in lieu of salary, and capital gains paid by the employer.

Worked Example

An employee has the following profile:

• Annual salary: ₹18,00,000 (basic + DA + special allowance + HRA component in salary).
• HRA received: ₹4,32,000 per year.
• Rent paid: ₹36,000 per month = ₹4,32,000 per year.
• Location: Metro (Mumbai, Delhi, Kolkata, Chennai).
• 80C investments: ₹1,50,000 (EPF + PPF + ELSS).
• 80D health insurance: ₹35,000 (self + spouse + 2 children).
• Home loan interest (self-occupied): ₹2,00,000.

Old Regime Computation

Item	Amount (₹)
Gross salary	18,00,000
Less: Standard deduction	(50,000)
Less: HRA exemption — least of (a) HRA received ₹4,32,000; (b) 50% of basic for metro ₹3,00,000 (assuming basic ₹6,00,000); (c) rent paid above 10% of basic — rent ₹4,32,000 - 10% basic ₹60,000 = ₹3,72,000 — least is (b) ₹3,00,000	(3,00,000)
Less: 80C	(1,50,000)
Less: 80D	(35,000)
Less: 24(b) home loan interest	(2,00,000)
Taxable income	10,65,000

Tax on ₹10,65,000 under old slabs:

Slab	Tax
0 – ₹2.5L	Nil
₹2.5L – ₹5L (5%)	12,500
₹5L – ₹10L (20%)	1,00,000
₹10L – ₹10.65L (30%)	19,500
Total	1,32,000

Add 4% cess: ₹5,280. Annual tax: ₹1,37,280. Monthly TDS: ₹11,440.

New Regime Computation

Under the new regime (FY 2024-25, default):

Item	Amount (₹)
Gross salary	18,00,000
Less: Standard deduction (₹75,000)	(75,000)
Less: 80CCD(2) employer NPS	(NIL for this profile)
Taxable income	17,25,000

Tax under new regime slabs:

Slab	Tax
0 – ₹3L	Nil
₹3L – ₹7L (5%)	20,000
₹7L – ₹10L (10%)	30,000
₹10L – ₹12L (15%)	30,000
₹12L – ₹15L (20%)	60,000
₹15L – ₹17.25L (30%)	67,500
Total	2,07,500

Add 4% cess: ₹8,300. Annual tax: ₹2,15,800. Monthly TDS: ₹17,983.

The old regime wins in this profile — the deduction stack (HRA + 80C + 80D + 24(b)) outweighs the new regime’s lower slabs. The employer computes the TDS based on the regime the employee has chosen.

The Employee’s Choice — Old vs New Regime

For the FY 2024-25 onwards, the new regime is the default. The employee must opt for the old regime by submitting a declaration to the employer. If the employee does not declare, the employer computes TDS on the new regime.

The choice can be made:

• At the start of the FY — declaration to the employer.
• Mid-year — change the declaration; the employer re-computes TDS for the remaining months.
• At the time of filing the ITR — the employee can switch regimes for the final computation. The ITR will reflect the actual tax, and any excess TDS will be refunded.

The last option is the most important — even if the employer deducted TDS on the new regime, the employee can file the ITR under the old regime and claim a refund of the excess TDS.

Common Mistakes

Mistake 1 — Not declaring all deductions

The employee forgets to declare the home loan interest, the LTA, or the NPS contribution. The employer computes TDS on a higher taxable income. The actual tax on the ITR is lower, and the employee gets a refund. While the refund is processed, the employee loses the cash-flow benefit during the year.

Mistake 2 — Declaring deductions that are not eligible

The employee declares expenses that are not eligible under the income-tax Act (e.g., credit card bills, household expenses). The employer reduces TDS based on the false declaration. The ITR disallows the deduction, and the employee owes tax + interest.

Mistake 3 — Choosing the wrong regime

The employee defaults to the new regime because the employer uses the new regime by default. The employee’s deduction stack is high (HRA + 80C + 80D + home loan), and the old regime would have been better. The employee ends up paying higher tax. The fix: file the ITR under the old regime and claim a refund.

Mistake 4 — Not submitting rent receipts for HRA

The employer is not allowed to apply the HRA exemption without the rent receipts. The employee must submit the rent receipts and the landlord’s PAN (if rent exceeds ₹1 lakh per year) at the start of the year or as the rent agreement changes.

Mistake 5 — Not updating the regime mid-year

The employee declared the old regime at the start of the year, then changed jobs and joined a new employer who defaulted to the new regime. The new employer’s TDS is on the new regime, but the employee’s actual income from both employers is on the old regime. The reconciliation is in the ITR.

Form 16 vs Form 26AS

Form 16 is the TDS certificate issued by the employer. Form 26AS is the consolidated TDS statement issued by the income-tax department. They should match. If they don’t:

• The employer has not deposited the TDS deducted (TDS is deducted but not paid to the government). This is rare, but if it happens, the employee must follow up with the employer.
• The employer has deposited the TDS but under a different PAN or assessment year. The mismatch is technical.
• The employer has filed Form 24Q but the data is not reflected in Form 26AS. The mismatch resolves itself in 15–30 days.

If the mismatch persists, the employee can file a complaint with the TDS Reconciliation Cell at the e-filing portal.

When to Get Help

TDS on salary is one of the most-misunderstood items in personal finance. The employer’s TDS computation may differ from the employee’s actual tax liability because:

• The employer uses the default regime (new), but the employee’s profile is better under the old regime.
• The employee declared deductions at the start of the year but did not follow through with the actual investments.
• The employee changed jobs mid-year, and the consolidated TDS is wrong.

We routinely review Form 16 / 26AS / AIS for our clients and file the ITR with the optimal regime. Our ITR filing service covers the entire flow — declaration review, regime selection, ITR preparation, e-verification, refund tracking. Share your Form 16 and your investment summary on WhatsApp for a no-charge assessment.

For the underlying regime choice, see our old vs new tax regime guide. For the ITR form selection, see our which ITR form guide.

Sources

• Income Tax Department — TDS on Salary
• CBDT — Section 192, 192A; Rules for Form 16, Form 12BA