CBDT issues circular regarding TDS

CBDT Issues Circular Regarding TDS on Salaries for FY 2026-27: A Payroll Compliance Handbook

Every April, the Central Board of Direct Taxes (CBDT) releases its annual circular under Section 192 of the Income-tax Act, 1961, setting the precise rules for how employers must compute and deduct tax at source on employee salaries for the year. For FY 2026-27 (AY 2027-28), the circular confirms the new tax regime under Section 115BAC as the default, specifies the applicable income-tax slabs and ₹75,000 standard deduction for salaried employees, the Section 87A rebate ceiling, perquisite valuation rules, and the Form 12BB declaration framework. If you run payroll — or sign off on it — this is your binding rulebook for the year.

What the CBDT Salary TDS Circular Actually Does

The circular under Section 192 is not advisory — it is the authoritative document that governs every rupee of TDS deducted from an employee's salary. It binds Assessing Officers and creates a practical safe harbour for employers who follow it faithfully.

In concrete terms, the circular answers:

• When to deduct TDS (from the very first salary payment of the year, not from the quarter when tax liability crystallises)
• How to estimate full-year income at the start of the year and revise it as declarations or salaries change
• What exemptions and deductions to factor in — and under which regime
• How to value non-cash perquisites such as company cars, rent-free accommodation, and ESOPs
• What forms to collect from employees (Form 12BB) and file with the government (Form 24Q)
• When to issue Form 16 to employees (15 June following the FY)

For FY 2026-27, two elements make the circular especially important. First, the new tax regime is now the default — you must deduct TDS as if the employee is under Section 115BAC unless they opt out in writing before the first payroll of April 2026. Second, the ₹7.5 lakh aggregate employer contribution cap (PF + NPS + superannuation) continues to create perquisite tax exposure for senior employees if payroll teams have not re-validated their contribution structures.

New Tax Regime as Default Under Section 115BAC

Finance Act 2023 made the new regime the statutory default for all individuals, including salaried employees, from AY 2024-25. For FY 2026-27, the income-tax slabs under the new regime (as per the Finance Act applicable for AY 2027-28, subject to gazette notification) are:

Always verify the operative slabs against the Finance Act 2026 gazette notification before programming your payroll engine — Budget speeches sometimes carry last-minute amendments that differ from the presented version.

Standard Deduction and Section 87A Rebate

Salaried employees and pensioners get a standard deduction of ₹75,000 under the new regime (applicable from AY 2024-25 onwards). Deduct this from gross salary before applying the slabs.

The Section 87A rebate is available if total income does not exceed ₹7,00,000 — effectively making net taxable income up to ₹7,75,000 (₹7,00,000 plus ₹75,000 standard deduction) zero-tax under the new regime, as the rebate eliminates the liability entirely up to that ceiling.

One critical restriction: Section 87A rebate is not available on special-rate income — for example, long-term capital gains taxable under Section 112A. If an employee discloses capital gains in their Form 12BB, ensure your computation correctly excludes those gains from the rebate calculation. Overlooking this is one of the most frequent payroll TDS errors.

Surcharge and Health & Education Cess

Apply surcharge on income above ₹50 lakh (10%), above ₹1 crore (15%), and above ₹2 crore (25% — the maximum surcharge rate under the new regime is capped at 25%, compared to up to 37% under the old regime for income above ₹5 crore). Add 4% Health and Education Cess on total tax plus surcharge for all employees.

When an Employee Opts Out: The Old Regime Route

An employee who wants to remain on the old tax regime for TDS purposes must take three concrete steps:

1. File Form 10-IEA on the Income Tax e-filing portal (incometax.gov.in) before or at the very start of FY 2026-27.
2. Provide a copy or written intimation of the Form 10-IEA filing to the employer before the first payroll of April 2026.
3. Understand that once intimated, the employer is entitled to rely on it — you are not required to independently verify portal status.

Under the old regime, the following remain available to the employee:

• Standard deduction: ₹50,000
• HRA exemption under Section 10(13A) — lower of: actual HRA received, rent paid minus 10% of salary, or 50%/40% of salary for metro/non-metro cities
• LTA: Section 10(5), claimable twice in a four-year block
• Chapter VI-A deductions: Section 80C (up to ₹1.5 lakh), 80CCD(1B) (₹50,000 additional NPS), 80D (health insurance premiums), 80E (education loan interest), 80TTA/80TTB, and others
• Professional tax under Section 16(iii)

Old regime slab rates:

Section 87A rebate under the old regime is available only if total income does not exceed ₹5,00,000, and the rebate is limited to ₹12,500 (the tax on ₹5 lakh under old regime slabs). Employees who cross ₹5 lakh in total income under the old regime lose this rebate entirely.

Payroll rule: An employee cannot switch regime mid-year for TDS purposes after the FY has begun without fresh written intimation. If a switch happens without notice and there is a TDS shortfall, the employer's exposure under Section 201 is limited only if you can show you acted in good faith on the last valid declaration received.

How to Handle Form 12BB — The Practical End-to-End Workflow

Form 12BB is the employee's self-declaration of proposed investments and claims, mandated under Rule 26C of the Income-tax Rules, 1962. It is the foundational input for your TDS engine and the document you must retain as audit evidence.

Step 1: Circulate Form 12BB in April

At the start of FY 2026-27, issue Form 12BB to all employees. They must declare:

• HRA: Landlord name, PAN (mandatory if annual rent exceeds ₹1,00,000), address, and monthly rent
• LTA: Travel entitlement for the current four-year block
• Section 80C, 80CCD, 80D, 80E instruments: estimated amounts for ELSS, PPF, life insurance premiums, NPS, housing loan principal, children's tuition fees, and others
• Home loan interest under Section 24(b) — employees must obtain a provisional certificate from their lender for FY 2026-27 at this stage
• Any other deduction or exemption, including HRA if opting old regime

The amounts here are projections. Annualise them and spread the resulting monthly TDS evenly across all 12 months.

Step 2: Revise Mid-Year If Circumstances Change

If an employee receives an increment, changes their rental arrangement, takes a new home loan, or changes their NPS contribution in August — update the Form 12BB and revise TDS prospectively from that month. Do not wait until Q4 to absorb all shortfalls; spreading the correction over two or three months is far less disruptive than a large March deduction.

Step 3: Proof Submission by 15 January

Set a firm internal deadline — most employers use 31 December to 15 January — for submission of actual proof. Acceptable documents include:

• ELSS account statements showing actual units purchased
• Life insurance premium receipts for the current year
• Home loan repayment certificates (principal and interest split)
• Rent receipts with landlord's PAN where rent exceeds ₹8,333 per month (₹1 lakh annual threshold)
• Health insurance premium receipts for employee and dependents
• Children's school tuition fee receipts

If actual proof falls short of the declaration, recover the shortfall from January through March. If proof exceeds the declaration (an employee bought more ELSS than they projected), refund the excess through the March salary or offset it against Q4 payable TDS.

Step 4: Lock and File Q4 Annexure II

By 31 March, freeze the final figures for each employee. The Q4 Form 24Q filing includes Annexure II — the employee-level summary that populates Form 16 and feeds into AIS on the employee's portal. This annexure carries details of gross salary, all exemptions and deductions claimed, net taxable income, and total TDS. An error here propagates into every downstream document the employee relies on.

Non-negotiable rule: You cannot give TDS credit for Chapter VI-A deductions without supporting documents. Accepting verbal assurances exposes the employer to Section 201(1) demands for short-deduction.

Perquisite Valuation: Numbers Employers Frequently Get Wrong

Rent-Free Accommodation (RFA)

Taxable value depends on ownership and the city's population bracket:

• Employer-owned property: 7.5% of salary for cities with population up to 15 lakh; 10% for 15–40 lakh; 15% for above 40 lakh
• Leased or rented property: Lower of actual lease rent paid by employer OR the percentage-of-salary figure above
• Furnished accommodation: Add 10% per annum on the original cost of furniture (employer-owned) or actual hire charges (rented)

The most common error here is applying the wrong population bracket for Tier-2 cities. Post-census reclassifications mean many cities have crossed the 15 lakh threshold. Cross-check the Census data for the urban agglomeration, not just the municipal corporation limits.

Motor Car Perquisite

Where the employer provides a car and bears all running and maintenance costs:

• Engine capacity up to 1,600cc: ₹1,800 per month
• Engine capacity above 1,600cc: ₹2,400 per month
• With employer-provided driver: Add ₹900 per month in each case

Where the car is used exclusively for official duty and the employer maintains a certified logbook, no perquisite is chargeable. The logbook must be countersigned by a senior officer. Many employers skip the logbook formality and then incorrectly exempt the perquisite — an audit risk under Section 17(2).

ESOPs: Exercise Date Taxation and Start-up Deferral

Under Section 17(2)(vi), ESOPs are taxed as salary perquisite at the date of exercise — not at grant, and not at sale. Taxable value = FMV on exercise date minus exercise price paid by the employee.

For employees of DPIIT-certified eligible start-ups, tax on this perquisite can be deferred to the earliest of: 48 months from exercise date, the date the employee ceases employment, or the date of actual sale of shares. The employer must report the perquisite in Form 24Q in the year of exercise even if TDS is deferred, and must issue a separate certificate to the employee under the prescribed format.

The ₹7.5 Lakh Aggregate Employer Contribution Cap

Under Section 17(2)(vii), the combined employer contribution to Recognised Provident Fund, National Pension System (NPS), and approved superannuation funds is taxable as perquisite to the extent it exceeds ₹7,50,000 in a year.

Consider a CXO on ₹1.2 crore CTC: employer PF contribution = ₹1,44,000 (12% of ₹12 lakh basic). If NPS employer contribution (under 80CCD(2)) is ₹3,60,000 (10% of ₹36 lakh basic), and the superannuation scheme adds another ₹3,60,000, the total is ₹8,64,000 — which breaches the cap by ₹1,14,000. That excess is a taxable perquisite, and many payroll systems are not configured to compute it automatically.

Form 24Q: Filing Timelines and What Each Quarter Requires

Form 24Q is the quarterly TDS return for salary deductions, filed on the TRACES/TIN portal. Annual deadlines for FY 2026-27:

Q1 through Q3 require only Annexure I (challan and deductee details). Q4 additionally requires Annexure II — the comprehensive employee-level salary, deduction, and TDS summary. Treat Annexure II as the single most consequential payroll document of the year.

Section 234E Late Filing Penalty

The penalty is ₹200 per day of delay, subject to a cap equal to the TDS amount for that return.

Worked penalty example: Suppose your Q1 FY 2026-27 TDS return, due 15 July 2026, is filed on 15 September 2026 — a 62-day delay. Total TDS for Q1 = ₹12,00,000. Late fee = ₹200 × 62 = ₹12,400. Since ₹12,400 is far below ₹12,00,000, the full ₹12,400 is payable before TRACES accepts the return. This fee is not deductible under the Income-tax Act — it is a dead cost.

Worked Example: Computing Monthly TDS for an ₹18 Lakh CTC

Profile: Ananya, 36, salary ₹18,00,000 CTC. Employer provides a car above 1,600cc with no driver. She has not filed Form 10-IEA and remains on the new regime. Employer contributes ₹72,000 to NPS (Section 80CCD(2)).

Step 1 — Gross Salary:

Under the new regime, HRA received is fully taxable — no exemption applies.

Step 2 — Standard Deduction: ₹17,08,800 − ₹75,000 = ₹16,33,800

Step 3 — Deductions under new regime: Only Section 80CCD(2) employer NPS contribution of ₹72,000 is available.

₹16,33,800 − ₹72,000 = ₹15,61,800 (Total Income)

Step 4 — Tax on ₹15,61,800:

Step 5 — Health and Education Cess: ₹1,58,540 × 4% = ₹6,342

Total annual tax = ₹1,64,882

Monthly TDS = ₹1,64,882 ÷ 12 ≈ ₹13,740

For comparison, under the old regime with HRA exemption of ₹1,80,000, 80C at ₹1,50,000, 80D at ₹25,000, and 80CCD(1B) of ₹50,000, Ananya's total income would fall to approximately ₹12,08,800 — but at old regime slab rates (20% and 30%), her gross tax would exceed ₹2,20,000 before cess, making the old regime significantly costlier in her case. The new regime wins for employees whose deductions are moderate. The tipping point shifts in favour of the old regime once home loan interest, maximum 80C, and significant HRA exemptions all combine above roughly ₹4–5 lakh.

Common Mistakes and Pitfalls to Avoid

1. Not collecting Form 10-IEA before computing old-regime TDS If an employee verbally requests old-regime treatment but has not filed Form 10-IEA on the portal, you cannot lawfully extend old-regime benefits. Collect the form confirmation before April payroll is processed — not in January when employees chase HRA exemptions.

2. Ignoring mid-year salary revisions in the TDS annualisation An August increment that adds ₹3,00,000 to the annual package must be re-annualised from August, not carried over silently to Q4. Deferring the recalculation means an abnormally large March deduction — and an HR escalation.

3. Accepting 80C declarations above the ₹1.5 lakh ceiling Many employees declare ELSS + PPF + insurance + home loan principal that cumulatively exceed ₹1,50,000. Programme your payroll system to hard-cap Section 80C at ₹1.5 lakh. Excess deduction creates a refund situation for the employee and a reconciliation discrepancy in Form 24Q.

4. Skipping the landlord PAN for high-rent HRA claims Under Rule 26C, landlord PAN is mandatory where annual rent exceeds ₹1,00,000. Without it, the HRA exemption cannot be factored into TDS. If the landlord refuses to provide PAN, the exemption is inadmissible — document this in writing.

5. Using the wrong AY on the TDS challan TDS deducted during FY 2026-27 must be deposited under AY 2027-28 using challan ITNS 281, Section 192. Paying under AY 2026-27 by mistake creates a mismatch in the employee's AIS that requires an OLTAS challan correction — a time-consuming process that delays employee ITR filing.

6. Filing Q4 Annexure II without a pre-submission reconciliation Many employers file Q4 24Q in May without cross-checking Annexure II figures against the full-year payroll register. The result: gross salary figures in Form 16 that do not match AIS, employees receiving defective return notices from the department, and Section 271H penalty notices for incorrect returns.

7. Overlooking the ₹7.5 lakh employer contribution cap at CXO level Perquisite from excess employer contributions is frequently missed because it sits in HR's benefits model, not in the payroll TDS engine. Run a dedicated senior-employee perquisite check every June to catch this before Q1 TDS is deposited.

Reconciling Form 24Q with Form 26AS and AIS

The Annual Information Statement (AIS) and Tax Information Summary (TIS) on the Income Tax portal (incometax.gov.in) are now the primary reference points for employees — more detailed and more granular than the legacy Form 26AS. Mismatches between what your Form 24Q reports and what appears in the employee's AIS create cascading problems during ITR season.

Practical monthly reconciliation checklist:

1. After each monthly payroll, reconcile: TDS deducted per payroll register = TDS deposited via ITNS 281 challan (due by 7th of the following month, 30 April for March deductions).
2. After each quarterly 24Q filing, pull the 26AS preview for a sample of employees on TRACES and confirm PAN, TDS amount, and Section 192 code are reflected correctly.
3. After Q4 Annexure II filing, run a full-year employee-level reconciliation: gross salary per payroll = gross salary in Annexure II = figure appearing in Form 16 Part A.
4. Within 15 days of identifying any mismatch, file a correction return (Form 24Q-C) on TRACES. Correct PAN errors, TDS amount errors, and section code errors before the employee's ITR filing window opens in June.
5. For challan-level errors (wrong AY or Section), raise an OLTAS challan correction request on the TIN-NSDL portal before filing the correction 24Q — otherwise, the revised return will not map correctly.
6. Notify the affected employee by email once the correction is filed so they know to re-check AIS before submitting their ITR.

Section 201(1A) interest worked example: Suppose ₹60,000 TDS was not deducted from an employee's October 2026 salary, and the shortfall surfaces in March 2027 during reconciliation. Interest under Section 201(1A) accrues at 1.5% per month from the month of non-deduction — October 2026 through February 2027 = 5 months. Interest = ₹60,000 × 1.5% × 5 = ₹4,500, payable along with the principal TDS before the March deposit is made.

Issuing Form 16 with figures that exactly mirror AIS is the operational gold standard. When both documents agree, the employee can file their ITR in minutes and the employer is insulated from Section 201 notices.

Key Takeaways

• The CBDT circular under Section 192 is your binding authority for FY 2026-27 — download and read the notified circular itself, not a summary; rates and procedures change year-on-year.
• New tax regime (Section 115BAC) is the statutory default; employees must file Form 10-IEA on the e-filing portal and deliver written intimation to you before April payroll to access old-regime benefits.
• The ₹75,000 standard deduction plus the Section 87A rebate up to ₹7 lakh make the new regime tax-free up to ₹7.75 lakh for salaried employees; the old regime becomes advantageous only when total deductions (HRA + 80C + home loan interest + 80D + NPS) exceed roughly ₹4–5 lakh depending on income level.
• Form 12BB must be collected at year-start, revised mid-year when circumstances change, and backed by physical proof by January — no documentary proof, no TDS deduction credit.
• Perquisite valuation errors — wrong RFA population bracket, unchecked ₹7.5 lakh employer contribution cap, and uncertified logbooks for car perquisites — are among the most frequent triggers for Section 201 short-deduction demands.
• Form 24Q quarterly returns are due 15 July / 15 October / 15 January / 31 May; late filing costs ₹200 per day under Section 234E; late TDS deposit costs 1.5% per month interest under Section 201(1A) — both are non-deductible cash penalties.
• A clean, documented reconciliation chain — payroll register → ITNS 281 challan → Form 24Q Annexure II → Form 26AS / AIS → Form 16 — is the only reliable way to keep both the employer's compliance record and the employee's ITR filing experience trouble-free.