Circular on TDS for salaries: FY 2023-2024

Circular on TDS for salaries: FY 2023-2024

The CBDT circular on TDS from salaries under Section 192 for FY 2023-24 cemented one structural change that still shapes every payroll run in FY 2026-27: the new tax regime under Section 115BAC is the default. Employees who want the old regime must opt out in writing. Employers who ignore this — or who fail to recompute TDS quarterly — face short-deduction risk, Section 271C penalties and AIS mismatches that employees spend weeks resolving at return-filing time. This guide unpacks every layer of that framework, with current numbers and steps a payroll team or finance head can act on today.

Why the FY 2023-24 Circular Was a Turning Point

Before Finance Act 2023, the new tax regime under Section 115BAC was opt-in — employees had to proactively choose it, and the old regime with its deductions under Chapter VI-A remained the TDS default. The FY 2023-24 CBDT circular flipped that structure completely.

The circular operationalised three Finance Act 2023 amendments simultaneously:

1. New regime as default. Employers must deduct TDS under Section 115BAC for every employee who has not submitted a written declaration specifying the old regime. There is no room for assumption or system inertia.
2. Standard deduction extended to the new regime. Rs. 50,000 (since raised — see Section 4 below) became available under both regimes, closing a gap that had made the new regime less attractive for salaried employees with modest deduction claims.
3. Section 87A rebate extended. Employees opting for the new regime with taxable income up to Rs. 7 lakh faced zero tax liability after the rebate — a strong pull factor toward the default.

This was not routine administrative housekeeping. Employers who did not patch their payroll software before April 2023 continued deducting TDS on old-regime assumptions for months. The error surfaced in Form 26AS mismatches and in employees demanding refunds of excess deductions. The documentation obligation on the employer also sharpened: payroll archives now had to carry regime declarations alongside Form 12BB.

One nuance the circular addressed is the interplay between salaried employees and those with business income. An employee who has income from business or profession and had already opted out of the new regime under Section 115BAC(5) in a prior year cannot freely switch back and forth. That choice is largely irrevocable once made. Payroll teams should flag such employees separately and document the declaration basis to withstand a TDS survey.

The Regime Choice Framework — What Employers Must Collect

The practical workflow a payroll team should run in April, before the first salary disbursement of each financial year, is:

1. Issue a regime declaration form to every employee — continuing and newly joined alike — asking them to explicitly elect "new regime (Section 115BAC)" or "old regime."
2. Default to new regime for any employee who does not respond by the designated internal cut-off. Record this in writing — an email acknowledgement is sufficient, but keep it.
3. Collect Form 12BB from every employee opting for the old regime. Form 12BB captures HRA details, leave travel concession (LTC) claims, home loan interest declarations under Section 24(b), and Chapter VI-A deductions (80C, 80CCD(1), 80D, etc.).
4. Do not accept Form 12BB for new-regime employees. Section 115BAC disallows most exemptions and deductions available in the old regime. If you allow a new-regime employee to claim HRA or LTA through payroll, you are under-deducting TDS — and that liability sits with the employer, not the employee.

Form 12BB is not filed with any tax authority. It is the employer's internal record. But in a TDS survey or scrutiny, the Assessing Officer will ask for it. Employers who cannot produce signed Form 12BB for old-regime employees have no defence for the deductions they allowed.

Timing of revisions. An employee may revise their declaration during the year if their circumstances change (for example, taking out a home loan). The revised declaration affects TDS from the month of revision onwards — the employer recalculates the average rate for the remaining months on the updated projected income. Keep a date-stamped version history of every declaration.

Section 192 TDS Computation Mechanics

Section 192 does not prescribe a flat rate. It requires the employer to:

• Estimate the employee's total salary income for the full financial year
• Compute tax on that estimate at the applicable slab rates for the chosen regime
• Deduct at the average rate from each monthly payment

The formula is:

Average TDS rate = (Estimated annual tax ÷ Estimated annual salary) × 100

This rate applies to every month's salary disbursement. The computation must account for the employee's regime choice, declared perquisites valued under Rule 3, any house property income or loss brought to the employer's notice (subject to the Rs. 2,00,000 cap on self-occupied property loss under Section 71(3A)), eligible Chapter VI-A deductions (old regime only) and any other income from other sources that the employee discloses to the employer.

Three events trigger a mandatory recomputation during the year:

• Mid-year increment or variable pay: A Rs. 2,00,000 bonus paid in October changes the annual income estimate. Recalculate the total projected tax, deduct the TDS already deducted for April–September, and spread the balance across October–March.
• Investment proof submission (typically January–February): Employees submit actual LIC receipts, PPF passbooks, ELSS statements or rent receipts. If actual investments fall short of April declarations, the shortfall tax is recovered over the last two payrolls. Set a firm February 1 proof deadline and start recomputation immediately — do not wait for February payroll.
• Mid-year joining: New joiners bring salary history from previous employers (Form 12B). Without Form 12B, TDS is computed independently on the new company's salary alone, creating systematic short-deduction. See Section 6 below.

Tax Slabs, Standard Deduction and Rebates — The FY 2026-27 Position

The FY 2023-24 circular established the foundational slab structure for the new regime. Finance Act 2024 and Finance Act 2025 have since revised it materially. For FY 2026-27 (AY 2027-28), verify the CBDT salary TDS circular issued for FY 2026-27 before finalising your April 2026 payroll logic. The confirmed rates from Finance Act 2025, applicable from FY 2025-26 onwards and subject to any Finance Act 2026 amendment, are:

New regime — Section 115BAC (as revised by Finance Act 2025):

Standard deduction: Rs. 75,000 under the new regime (raised from Rs. 50,000 by Finance Act 2024, effective FY 2024-25 onwards). Under the old regime, the standard deduction remains Rs. 50,000. Applying the wrong figure — most commonly Rs. 50,000 for a new-regime employee — causes systematic over-deduction and employee complaints.

Section 87A rebate under the new regime (FY 2025-26): Raised to Rs. 60,000, making employees with taxable income up to Rs. 12,00,000 effectively tax-free. A salaried employee with gross salary up to Rs. 12,75,000 under the new regime (Rs. 12,75,000 minus Rs. 75,000 standard deduction = Rs. 12,00,000 taxable) has zero net tax after the rebate — subject to the important caveat that special-rate income such as capital gains does not qualify for the rebate.

Old regime slabs (unchanged since FY 2017-18): Up to Rs. 2,50,000 — Nil; Rs. 2,50,001 to Rs. 5,00,000 — 5%; Rs. 5,00,001 to Rs. 10,00,000 — 20%; above Rs. 10,00,000 — 30%. Section 87A rebate under old regime: up to Rs. 5,00,000 taxable income, maximum rebate Rs. 12,500.

4% health and education cess applies on the computed tax in both regimes. Do not omit it — cess is not optional.

Perquisites and Allowances — Valuation and Regime Treatment

The FY 2023-24 circular reiterated that perquisites are part of salary for Section 192 purposes and must be valued under Rule 3 of the Income-tax Rules, 1962. Common perquisites and how they are treated:

Rent-free or concessional accommodation (Rule 3(1)): Valued on the basis of whether the employer is in a government or non-government category, the population of the city and the employee's annual salary. This perquisite is taxable under both regimes — there is no exemption available under Section 115BAC.

Motor car (Rule 3(2)): Taxed at prescribed notional rates depending on whether the car is used partly or fully for personal purposes and who bears running costs. Taxable under both regimes.

ESOPs in eligible start-ups — Section 192(1C): DPIIT-certified eligible start-ups may defer TDS on ESOP perquisites. TDS is not required at allotment. It must be deducted within 14 days of whichever occurs first: (a) 48 months from the end of the assessment year in which shares were allotted; (b) the date on which the employee sells the shares; or (c) the date the employee ceases to be employed at the start-up. This is a meaningful cash-flow benefit — employees who exercise ESOPs in cash-scarce early-stage companies are not forced to sell immediately to fund the TDS liability.

HRA, LTA and specific allowances: Section 10(13A) (House Rent Allowance), Section 10(5) (Leave Travel Allowance) and most Section 10(14) allowances are available only under the old regime. Section 115BAC explicitly disallows these exemptions. If a new-regime employee hands you rent receipts and asks you to exempt HRA, you must decline — processing it is a TDS default on the employer.

Multi-Employer and Mid-Year Joining Scenarios

When an employee changes jobs mid-year, the tax picture is split across two Form 16s and two payroll systems. Without coordination, both employers compute TDS independently on their own salary slice, the combined deduction undershoots the actual tax on the aggregate income, and the employee faces a tax demand at filing time — with interest under Section 234B for shortfall.

The remedy is Form 12B, prescribed under Rule 26A. The joining employee furnishes this to the new employer to declare:

• Gross salary and perquisites received from the previous employer (April to date of leaving)
• TDS deducted by the previous employer
• Deductions claimed under Chapter VI-A (if old-regime employee)
• PAN of the previous employer

The new employer adds this income and prior TDS to their own calculation, computes the remaining tax due on the combined projected income, and spreads the balance over the remaining payroll months.

What happens without Form 12B: The new employer's payroll engine starts fresh from zero. If the employee crossed a higher slab in the first half with the previous employer, neither employer's TDS computation captures that. The employee ends up with a balance tax payable and interest — through no fault of their own but through the payroll team's failure to request Form 12B on day one.

Make Form 12B a formal on-boarding requirement alongside Form 12BB, PAN/Aadhaar linking confirmation and the regime declaration. Build it into your HRMS on-boarding checklist and flag any new joiner whose file is incomplete before processing their first salary.

Common Mistakes in Salary TDS — and How to Correct Them

1. Payroll system still defaulting to old regime after April 2023 Payroll software that was not updated defaulted to old-regime logic for every non-declaring employee. If this happened in your organisation, recalculate TDS from the affected months and adjust in subsequent salaries within the same financial year. Do not wait for the return — corrections made within the year avoid Section 271C exposure.

2. Accepting Form 12BB from new-regime employees This causes under-deduction and creates an employer TDS default. Block 12BB acceptance in your payroll intake process for employees who have declared the new regime.

3. Not recomputing after investment proof submission If employees submit proofs in January and the employer ignores them until the March payroll, the catch-up hits the last two salary disbursements and creates a spike that employees dispute. Set a proof submission deadline (typically 15 January) and trigger payroll recomputation the same week.

4. Incorrect PAN in the payroll master Section 206AA mandates TDS at 20% if PAN is absent or invalid. On a salary of Rs. 10,00,000 where the applicable rate is 5%, incorrect PAN means deducting Rs. 2,00,000 instead of Rs. 50,000 — a Rs. 1,50,000 over-deduction per employee that triggers refund claims. Run a PAN validation audit against TRACES at the start of every April.

5. House property loss claim beyond the statutory cap Old-regime employees can set off self-occupied house property loss against salary, but only up to Rs. 2,00,000 under Section 71(3A). If a payroll system allows the full declared interest of, say, Rs. 3,50,000, TDS is under-deducted by the tax on Rs. 1,50,000 of excess relief — which can be Rs. 45,000 per year at the 30% slab.

6. Part A / Part B mismatch in Form 16 Part A is generated from TRACES and reflects deposits made on the basis of Form 24Q filings. Part B is employer-prepared and shows the salary computation. Mismatches arise when variable pay, arrears or perquisites appear in Part B but the corresponding TDS was deposited under a different challan or quarter. Reconcile both parts before issue — a discrepancy in Form 16 triggers a mismatch alert in the employee's AIS and generates a defective return notice.

Worked Example: TDS Computation for Two Employees (FY 2026-27)

Two employees at the same company, same gross salary, different regime choices. This is exactly the comparison a finance head should run every April to validate payroll configuration.

Employee A — New Regime (Section 115BAC)

Tax on Rs. 13,25,000 (new regime):

• Rs. 0 – Rs. 4,00,000 × 0% = Nil
• Rs. 4,00,001 – Rs. 8,00,000: Rs. 4,00,000 × 5% = Rs. 20,000
• Rs. 8,00,001 – Rs. 12,00,000: Rs. 4,00,000 × 10% = Rs. 40,000
• Rs. 12,00,001 – Rs. 13,25,000: Rs. 1,25,000 × 15% = Rs. 18,750
• Tax before cess: Rs. 78,750
• Add 4% cess: Rs. 3,150
• Total annual tax: Rs. 81,900
• Monthly TDS: Rs. 81,900 ÷ 12 = Rs. 6,825

(Taxable income exceeds Rs. 12 lakh; Section 87A rebate does not apply here.)

Employee B — Old Regime

Tax on Rs. 10,25,000 (old regime):

• Rs. 0 – Rs. 2,50,000 × 0% = Nil
• Rs. 2,50,001 – Rs. 5,00,000: Rs. 2,50,000 × 5% = Rs. 12,500
• Rs. 5,00,001 – Rs. 10,00,000: Rs. 5,00,000 × 20% = Rs. 1,00,000
• Rs. 10,00,001 – Rs. 10,25,000: Rs. 25,000 × 30% = Rs. 7,500
• Tax before cess: Rs. 1,20,000
• Add 4% cess: Rs. 4,800
• Total annual tax: Rs. 1,24,800
• Monthly TDS: Rs. 1,24,800 ÷ 12 = Rs. 10,400

What this tells you: Employee B pays Rs. 42,900 more in tax annually than Employee A despite identical gross salaries. That gap is real only as long as Employee B can actually utilise every deduction declared: the HRA requires a genuine rent-payment arrangement, the 80D premium must be paid, the 80C investment must be made before 31 March. In any year where deductions fall short of declarations, the gap narrows and the new regime wins more clearly. Run this comparison fresh every April for each employee — do not carry forward prior-year assumptions.

Form 16, Form 24Q and AIS Reconciliation

Form 24Q — quarterly TDS return filing deadlines for FY 2026-27:

Form 16 must be issued by 15 June 2027 for FY 2026-27 under Rule 31 of the Income-tax Rules.

Late filing fee under Section 234E: Rs. 200 per day, per deductor, from the due date until actual filing. This is not a discretionary penalty — it accrues automatically and cannot be waived. A Q4 return filed 60 days late costs Rs. 200 × 60 = Rs. 12,000 in mandatory fees before the return is accepted. Larger organisations with multiple branches registered as separate deductors multiply this by each registration.

TDS payment due dates: Tax deducted from salary must be deposited to the government by the 7th of the following month. For March deductions, the deadline extends to 30 April. Late deposit attracts interest under Section 201(1A) at 1.5% per month on the unpaid TDS from the date of deduction to the date of deposit.

AIS reconciliation: The Annual Information Statement (AIS) on the income-tax portal pulls TDS data from Form 24Q filings and pre-populates the employee's ITR draft. A salary figure in Form 16 Part B that does not match the AIS-populated number creates a discrepancy the employee must manually correct before filing — and it generates a deficiency flag. If the error is in your Form 24Q, you must file a correction return on the TRACES portal. Do this before 15 June to allow employees to file clean ITRs.

Key Takeaways

• New regime is the default. For every employee who does not submit a written opt-out declaration, deduct TDS under Section 115BAC. Document the declaration — or the absence of one — with a date.
• Standard deduction is regime-specific. It is Rs. 75,000 under the new regime and Rs. 50,000 under the old regime. The wrong figure causes over- or under-deduction at scale.
• Recompute every quarter. Average-rate TDS under Section 192 must reflect actual increments, bonuses and verified investment proofs. An April-only computation is a deduction default waiting to surface.
• Form 12B is non-negotiable for mid-year joiners. Without it, the new employer cannot capture the prior employer's salary and TDS — creating systematic short-deduction that the employee pays for with interest and demands at filing.
• Perquisite valuation under Rule 3 is mandatory in both regimes. Accommodation and car perquisites are taxable regardless of regime choice. HRA and LTA exemptions are available only in the old regime.
• Form 16 by 15 June 2027. Reconcile Part A (TRACES) and Part B totals before issue. A mismatch in Form 16 creates an AIS alert for the employee and a correction burden for your TDS team.
• Read the FY 2026-27 CBDT circular before April payroll. The FY 2023-24 circular set the structural template; each year's circular contains updated rate tables, clarifications on perquisite valuation and any new provisions. Do not run payroll on prior-year assumptions without checking the current circular.