TDS on Salary

TDS on Salary

TDS on salary under section 192 of the Income-tax Act 1961 is how most salaried Indians pay their income tax — not through self-assessment, but through their employer, every month, before they ever see the money. For FY 2026-27, with the new tax regime as the statutory default, a standard deduction of Rs. 75,000, and a section 87A rebate that wipes out tax entirely for resident individuals with taxable income up to Rs. 12,00,000, getting your April declaration right is no longer just good practice — it is the single variable that determines whether your monthly take-home is optimised or needlessly low.

How Section 192 Actually Works

Most TDS sections are mechanical: pay a vendor Rs. 5,00,000 under a contract, deduct 2% under section 194C, deposit Rs. 10,000. Section 192 works differently. It imposes on the employer a duty to estimate the employee's total annual taxable income at the start of the year and deduct tax in equal monthly instalments.

Every month, your employer's payroll system runs this loop:

1. Project the full-year gross salary from the current month forward.
2. Add any other income the employee has voluntarily disclosed (FD interest, rental income, capital gains).
3. Apply the applicable exemptions and deductions under the chosen tax regime.
4. Compute the annual tax on the net taxable income.
5. Subtract TDS already deducted in earlier months.
6. Divide the remaining liability by the remaining months.
7. Deduct that amount from the current month's salary.

This rolling recalculation is why your TDS can be steady for nine months and then spike in February and March — the payroll system is catching up with December declarations, January investment proofs, or a mid-year salary revision.

The employer deposits the deducted TDS with the government by the 7th of the following month (30 April for March deductions under rule 30). Late deposit attracts interest at 1.5% per month under section 201(1A). Non-deposit is an offence — the employer remains liable even after you file your ITR and claim the credit.

The employer also files a quarterly TDS return in Form 24Q, which is the source document that populates your Form 26AS and the Annual Information Statement (AIS) on the income-tax portal. A Form 24Q error by your employer = a missing TDS credit in your AIS = a tax demand in your ITR. This chain is the reason Form 16 reconciliation matters.

The April Declaration: Seven Items That Actually Matter

Each April, your payroll team circulates an investment declaration form (mandated under Rule 26C and typically presented as Form 12BB). This is not administrative busywork. Whatever you declare here drives your monthly TDS until January proofs correct it.

Treat it as a sworn estimate, not a wish list. Here is what to declare accurately:

1. Tax regime choice If you do not respond, the employer defaults to the new regime under section 115BAC. A passive default costs nothing if the new regime is genuinely better for you — but if you have significant deductions, an uncorrected default inflates your TDS for the full year.

2. HRA details (old regime only) Declare: your monthly HRA component, actual monthly rent, landlord's name, address, and — mandatory where annual rent exceeds Rs. 1,00,000 — the landlord's PAN under Rule 26C(2)(b). A missing PAN forfeits the entire HRA exemption regardless of genuine rent payments.

3. 80C investments Your EPF contribution is deducted automatically; manually declare ELSS, PPF deposits, LIC premiums, home loan principal repayment, and children's tuition fees. The aggregate ceiling under section 80C remains Rs. 1,50,000.

4. 80D health insurance premiums Up to Rs. 25,000 for yourself and family; an additional Rs. 25,000 for parents (Rs. 50,000 if parents are senior citizens). Declare expected premiums in April; submit the actual receipts in January.

5. 80CCD(1B): additional NPS deduction A standalone deduction of up to Rs. 50,000 for contributions to NPS Tier-1, over and above the 80C limit. Available only under the old regime and widely underutilised.

6. Section 24(b) home loan interest Up to Rs. 2,00,000 for interest on a self-occupied residential property under the old regime. Not available under the new regime at all — this single item often tips the regime comparison in favour of old-regime for borrowers with substantial home loans.

7. Other income disclosures If you earn bank FD interest, have rental income, or expect short-term capital gains, you can disclose these to your employer. The employer then computes TDS on your total estimated income. If you don't disclose and the other income is large enough to push you past the advance-tax threshold, you will owe interest under sections 234B and 234C when you file — on tax that your employer had no way of knowing about.

New Regime vs Old Regime: Slabs, Standard Deduction, and the 87A Floor

New tax regime slabs (FY 2026-27):

Surcharge applies on income above Rs. 50,00,000; verify current rates for the applicable year. A 4% Health and Education Cess applies under both regimes.

Standard deduction: Rs. 75,000 under the new regime; Rs. 50,000 under the old regime (as per Finance Act applicable to FY 2026-27 — confirm for any subsequent amendments).

Section 87A rebate under the new regime: Up to Rs. 60,000 (or actual tax liability, whichever is lower) for resident individuals with taxable income not exceeding Rs. 12,00,000. After the standard deduction, this means a salaried employee with gross salary up to Rs. 12,75,000 pays zero income tax under the new regime.

Section 87A rebate under the old regime: Up to Rs. 12,500 where taxable income does not exceed Rs. 5,00,000.

Important: The rebate is a binary cut-off. Taxable income of exactly Rs. 12,00,000 → full rebate, zero tax. Taxable income of Rs. 12,01,000 → no rebate, pay tax on Rs. 12,01,000 in full. Marginal relief applies where the incremental tax exceeds the incremental income above the threshold — your employer's payroll software should handle this, but verify if your gross salary is near Rs. 12,75,000.

Old tax regime slabs:

The old regime's narrower slabs become attractive only when your total eligible deductions — HRA, 80C, 80D, home loan interest, NPS — together exceed roughly Rs. 3,50,000–Rs. 4,50,000. Below that threshold, the new regime almost always wins on sheer slab structure.

Worked Example: Same Salary, Two Regimes, Rs. 42,536 Apart

Employee: Priya, software engineer, Pune, FY 2026-27 Gross CTC: Rs. 18,00,000 | Basic: Rs. 9,00,000 | HRA: Rs. 3,60,000 (non-metro) | Other allowances: Rs. 5,40,000

Scenario A — New Tax Regime

Tax computation:

• 0 – Rs. 4L: Nil
• Rs. 4–8L at 5%: Rs. 20,000
• Rs. 8–12L at 10%: Rs. 40,000
• Rs. 12–16L at 15%: Rs. 60,000
• Rs. 16–17.25L at 20%: Rs. 25,000
• Sub-total: Rs. 1,45,000 | Cess @ 4%: Rs. 5,800
• Annual tax: Rs. 1,50,800 | Monthly TDS: Rs. 12,567

Scenario B — Old Regime with Full, Documentable Deductions

Priya pays Rs. 36,000/month (Rs. 4,32,000 per year) in rent. Pune is non-metro.

HRA exempt = least of:

1. Actual HRA received: Rs. 3,60,000
2. 40% of basic salary (non-metro): 40% × Rs. 9,00,000 = Rs. 3,60,000
3. Rent paid – 10% of basic: Rs. 4,32,000 – Rs. 90,000 = Rs. 3,42,000 ← least

Total deductions under old regime:

Taxable income: Rs. 18,00,000 – Rs. 8,42,000 = Rs. 9,58,000

Tax computation:

• 0 – Rs. 2.5L: Nil
• Rs. 2.5–5L at 5%: Rs. 12,500
• Rs. 5–9.58L at 20%: Rs. 4,58,000 × 20% = Rs. 91,600
• Sub-total: Rs. 1,04,100 | Cess @ 4%: Rs. 4,164
• Annual tax: Rs. 1,08,264 | Monthly TDS: Rs. 9,022

The comparison:

Priya saves Rs. 42,536 annually — but only because she has genuine, provable deductions. Remove the home loan and reduce rent, and the new regime would likely win. Recalculate every April; last year's answer is not guaranteed to hold.

Form 12BB: Investment Proofs and What Happens When You Miss the Deadline

Form 12BB is the physical evidence behind your April estimates. You interact with it twice:

• April (provisional): Estimated figures for the full year. Drives TDS for April through January.
• December–January (final): Actual proofs. Most employers set a hard deadline between 10–20 January. Missing it does not erase your entitlement to the deduction — you claim it in your ITR — but it means the employer cannot factor it in for February and March. Your TDS spikes; you get a refund later. A Rs. 1,50,000 shortfall in declared 80C investments, on a 30% tax slab, creates a Rs. 46,800 catch-up deduction across two months.

What is and isn't valid proof:

Your employer is legally responsible under section 201 if they accept bogus proofs and under-deduct TDS. They will therefore scrutinise — and reject — anything that does not match the declared amounts with supporting documentation.

Job Changes and Multiple Employers: The Most Dangerous Scenario

This is where the largest TDS errors happen, and the fix requires 10 minutes of paperwork that almost nobody does.

The problem: When you change employers mid-year, each employer independently applies the basic exemption limit, the standard deduction, and — critically — the 87A rebate, as if their salary is your only income. If Employer A's portion alone falls below the taxable threshold and Employer B's portion also appears below it in isolation, both deduct little or no TDS. But your combined income may be substantially taxable.

The fix — Form 12B: Under Rule 26A, you are required to furnish details of your previous employer's salary and TDS to your new employer. Most employees don't know this form exists. Submit it at the time of joining along with your previous employer's salary slips and Form 16 (if available for the relevant months). The new employer then recomputes TDS on the aggregate income.

A brief illustration: Arjun earns Rs. 8,50,000 from Employer A (April–September) and joins Employer B at a higher package earning Rs. 4,50,000 in hand (October–March). Employer A deducted zero TDS because Rs. 8,50,000 annualised is below the new-regime zero-tax threshold after the standard deduction. Employer B, unaware of Employer A's salary, also deducts minimal TDS on Rs. 4,50,000 received. Combined income: Rs. 13,00,000 — taxable income after standard deduction: Rs. 12,25,000 — outside the 87A rebate band — tax due including cess: approximately Rs. 66,300. At ITR filing, Arjun finds a shortfall, pays interest under sections 234B and 234C, and wonders where it went wrong. Answer: Form 12B was never submitted.

TDS on Specific Salary Components

Section 192 covers "salary" as defined broadly under section 17(1). Components beyond basic salary often catch employees off-guard.

Bonus and performance incentives: TDS is deducted in the month of actual payment. A Rs. 3,00,000 annual bonus paid in one go in October will cause a significant one-month TDS spike. This is correct and expected; it is not a payroll error.

ESOPs and RSUs: When stock options are exercised or RSUs vest, the perquisite — fair market value on the exercise/vesting date minus any amount paid by you — is taxable as salary income under section 17(2)(vi). TDS is deducted in that month. The cash-flow risk is real: you may owe Rs. 5,00,000 in TDS but have received only shares, not cash. Factor this into your exercise timing decisions.

Gratuity: Exempt up to Rs. 20,00,000 under section 10(10) for employees covered by the Payment of Gratuity Act 1972. The balance is taxable as salary in the year of receipt. TDS is deducted by the employer before disbursement.

Leave encashment: For non-government employees, exempt up to Rs. 25,00,000 at the time of retirement or resignation under section 10(10AA). Leave encashment during service — mid-career, not at separation — is fully taxable in the year of payment.

EPF withdrawal before five years: If you withdraw from the Employees' Provident Fund before completing five continuous years of service and the amount exceeds Rs. 50,000, TDS applies at 10% (under section 192A) if PAN is furnished. Without PAN, TDS is deducted at 20%. Withdrawals after five years of continuous service are generally exempt.

Severance and ex-gratia: Taxable as salary in the year of receipt unless specifically exempt — for instance, Voluntary Retirement Scheme proceeds are exempt up to Rs. 5,00,000 under section 10(10C), subject to conditions.

Form 16 and AIS Reconciliation Before You File

By 15 June each year, your employer is required to issue Form 16 for the preceding FY under Rule 31. It has two distinct parts:

• Part A: Downloaded directly from TRACES (TDS Reconciliation Analysis and Correction Enabling System) using your PAN and the employer's TAN. This is the government-authenticated record of TDS deducted and deposited quarter by quarter. It cannot be manually edited by the employer.
• Part B: Prepared by the employer. Details the computation — gross salary, exemptions claimed (HRA, LTA), the standard deduction, all Chapter VI-A deductions, and the net taxable salary figure.

Before filing your ITR, reconcile these four documents in sequence:

1. Form 16 Part A ↔ Form 26AS: TDS figures should match to the rupee. A difference means the employer filed Form 24Q with an error, deposited TDS against the wrong TAN, or — worst case — deducted but did not deposit.
2. Form 16 Part A ↔ AIS (Annual Information Statement): The income-tax portal's AIS independently aggregates salary reported by employers under SFT and TDS returns. If the salary in AIS does not match Form 16, the ITR pre-fill will differ from Form 16 — a mismatch you must resolve before filing.
3. Form 16 Part B ↔ your salary slips: Confirm that the HRA, LTA, and other exemptions in Part B match what appeared on your payslips through the year.

If you find a mismatch: The employer must file a correction in Form 24Q (a revised quarterly TDS return). This is entirely the employer's responsibility. Raise it in writing to HR and Payroll immediately upon receiving Form 16 — do not wait until July. If the employer has deducted TDS but not deposited it, you cannot claim credit in your ITR; file a grievance on the income-tax e-filing portal under the My Pending Actions section and escalate to your jurisdictional Assessing Officer if it remains unresolved after 30 days.

Common Mistakes and How to Fix Them

1. Over-declaring investments in April, under-delivering in January You declare Rs. 1,50,000 in 80C investments but end up investing only Rs. 80,000. The payroll system has been giving you TDS relief of Rs. 70,000 all year. The January reconciliation triggers a catch-up, and your February and March TDS reflects the correction in full. On a 30% slab, a Rs. 70,000 shortfall = Rs. 21,840 of extra TDS across two months. Declare conservatively; you can always update upward if you invest more, but the downward correction is brutal.

2. Ignoring the landlord PAN requirement Annual rent above Rs. 1,00,000 requires the landlord's PAN — not just a declaration that no PAN exists. Without it, the HRA exemption is denied regardless of genuine rent payments. If your landlord genuinely has no PAN (rare but possible), obtain a notarised declaration and check your employer's specific policy; many payroll teams will not process HRA without PAN regardless.

3. Not disclosing FD or other income Salaried employees often park Rs. 5–10 lakh in fixed deposits and assume TDS under section 194A handles their tax on interest. It does not — that TDS credit reduces your liability but does not inform your employer that your total income is higher. If the added interest pushes you above the advance-tax liability threshold (tax payable exceeding Rs. 10,000 after TDS credit), you are exposed to interest under sections 234B and 234C. Disclose expected interest income in April.

4. Not recalculating the regime comparison each year You bought a house this year. Your home loan interest deduction alone is Rs. 2,00,000 under section 24(b), available only in the old regime. That single change could flip the calculation entirely. Conversely, if you paid off your home loan last year, the old regime may no longer win. Recalculate in April without assuming continuity.

5. Collecting two Form 16s and ignoring the aggregate Two Form 16s do not give you two standard deductions or two applications of the 87A rebate. Each employer computes independently; your ITR consolidates. If each employer separately applied Rs. 75,000 (new regime) standard deduction to their portion, your ITR will apply it only once — potentially creating tax due at filing time that neither employer anticipated.

6. Filing ITR without reconciling AIS AIS now aggregates salary, interest, dividends, securities transactions, and more. If the AIS salary figure differs from your Form 16 and you file the ITR using Form 16 figures only, the assessing officer's system sees a discrepancy and may issue a defective return notice or a demand. Check AIS first; if the AIS figure is wrong, submit feedback directly on the income-tax portal.

Key Takeaways

• Section 192 is estimate-and-adjust: your employer recalculates every month; an accurate April declaration is the cheapest way to ensure even TDS across the year.
• New regime is the statutory default for FY 2026-27: you must affirmatively opt for the old regime in writing — silence = new regime.
• Zero-tax threshold under new regime: salaried individuals with gross salary up to Rs. 12,75,000 pay no income tax after the Rs. 75,000 standard deduction and section 87A rebate of up to Rs. 60,000.
• Form 12BB drives six months of TDS; January proofs correct the rest: miss the proof deadline and your February–March TDS spikes; you wait for a post-filing refund instead of keeping the cash through the year.
• Job changers must submit Form 12B: disclosing your previous employer's salary and TDS to the new employer is a legal requirement under Rule 26A, and the only way to prevent under-deduction and year-end interest under sections 234B/234C.
• Form 16 Part A, Form 26AS, and AIS must all agree before you file your ITR; mismatches are the employer's problem to fix, but you must spot and report them before 31 July.
• ESOP perquisites, large bonuses, and EPF withdrawals before five years are taxed at source in the month of receipt — plan your cash flow accordingly and verify these appear correctly in Form 16 Part B.