TDS on Salary — Section 192 with New Tax Regime Slabs FY 2025-26

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TDS on Salary — Section 192 with New Tax Regime Slabs FY 2025-26

Under Section 192 of the Income-tax Act 1961, every employer paying salary must deduct TDS on each employee's estimated annual income. For FY 2025-26 (AY 2026-27), the new tax regime under Section 115BAC is the default, the Section 87A rebate has been raised to ₹60,000 on total incomes up to ₹12 lakh, and the standard deduction of ₹75,000 applies to all salaried new-regime taxpayers. A salaried employee with gross pay up to ₹12,75,000 pays zero income tax — but only if the employer computes TDS correctly, month by month.

How Section 192 Works — The Average-Rate Mechanism

Unlike Section 194C or 194J, which apply a flat percentage to each individual payment, Section 192 uses an estimated annual income approach. The employer:

1. Estimates total salary for the full financial year (April–March), including known bonuses and recurring allowances
2. Deducts eligible items under the chosen regime (standard deduction under new regime; or HRA, 80C, 80D, etc. under old regime)
3. Computes tax on the net taxable figure using the applicable slab rates
4. Adds surcharge (if applicable) and Health and Education Cess at 4%
5. Divides the annual tax liability by the number of remaining pay months
6. Deducts that monthly instalment at the time of actual salary payment, not on accrual

This spreading logic means TDS is a living number. Every time the input changes — a mid-year bonus, a perquisite, a revised investment declaration — the employer must recalculate the full-year liability and re-spread it over the remaining months.

TDS deposit due date: 7th of the following month for all months except March. For March deductions, the due date is 30 April. Late deposit attracts interest under Section 201(1A) at 1.5% per month (or part thereof).

New Tax Regime Slabs — FY 2025-26 (Finance Act 2025)

Budget 2025 made the most significant overhaul of the new regime since Section 115BAC was introduced. The basic exemption limit was raised from ₹3,00,000 to ₹4,00,000 and the slab structure was expanded to seven tiers:

Health and Education Cess at 4% applies on the basic tax plus surcharge.

These are materially different from the FY 2024-25 slabs (which had a ₹3 lakh basic exemption and only six tiers). Employers running legacy payroll configurations that were not updated after the Finance Act 2025 will be computing TDS on the wrong slab table — a very common payroll software error in April and May 2025.

Section 87A Rebate — The ₹12 Lakh Zero-Tax Threshold

Section 87A now provides a rebate of up to ₹60,000 for resident individuals whose total income does not exceed ₹12,00,000 under the new regime. The mechanics:

• On a total income of exactly ₹12,00,000: Tax on slabs = (5% × ₹4,00,000) + (10% × ₹4,00,000) = ₹20,000 + ₹40,000 = ₹60,000. Full rebate applies. Net tax = Nil.
• On a total income of ₹12,00,001: The rebate is entirely withdrawn. Tax of ₹60,000-plus plus cess becomes payable on the full income. This one-rupee-above-threshold cliff is real and creates serious short-deduction risk.

Standard Deduction and the ₹12,75,000 Gross Threshold

Salaried employees under the new regime receive a flat standard deduction of ₹75,000 — no bills, no proof submission, no limit on category. This deduction is applied before computing taxable income. The result:

• Gross salary ₹12,75,000 → Less standard deduction ₹75,000 → Total income ₹12,00,000 → 87A rebate covers full tax → Net tax: Nil
• Gross salary ₹12,75,001 → Total income ₹12,00,001 → 87A rebate not available → Tax liability jumps to approximately ₹62,400 (including cess) on a one-rupee difference

Employers must compute each employee's position individually. Never apply a blanket "everyone below ₹12.75 lakh pays zero TDS" rule. One accidental rupee above the threshold wipes out the rebate.

Worked Example: Monthly TDS Across Three Salary Bands

Case A — Annual Salary ₹9,00,000 (New Regime)

Case B — Annual Salary ₹15,00,000 (New Regime)

Case C — Salary ₹28,00,000 Plus ₹2,00,000 Bonus in November

• Gross annual income: ₹30,00,000
• Less standard deduction: ₹75,000
• Taxable income: ₹29,25,000

The recomputation trap: From April to October (7 months), payroll spread TDS based on ₹28 lakh salary = estimated annual tax ≈ ₹4,17,000 → monthly TDS ≈ ₹34,750. When the ₹2 lakh bonus is paid in November, the employer must immediately recalculate using the revised ₹30 lakh figure, determine total tax of ₹4,75,800, subtract TDS already deducted, and spread the balance over the remaining 5 months (November–March). Failing to do this recomputation in the November payroll is one of the most common Section 192 compliance errors.

Employee Regime Declaration — What Employers Must Get in Writing

Section 192(2C) requires each employee to furnish their regime choice in writing before TDS computation begins. Rules employers must follow:

• No declaration received? Default to the new regime (Section 115BAC). You cannot assume old-regime preference.
• Employee opts for old regime? Accept all eligible deductions: standard deduction ₹50,000 (lower under old regime), HRA under Section 10(13A), 80C up to ₹1,50,000, 80D premiums, home loan interest under Section 24(b), LTA, and other Chapter VI-A deductions.
• Mid-year regime switch? Employees cannot switch the regime for TDS purposes mid-year. The regime declared in April governs the entire payroll year. The employee may switch at the time of filing their ITR — but that is their responsibility, not yours.
• February proof submission? Collect investment proofs (insurance receipts, ELSS statements, home loan certificates) in January/February. Recompute the full-year tax with verified deductions and adjust TDS in the February–March payrolls.

Store regime declarations for a minimum of 7 years. They are your primary defence document if a Section 201 default notice arrives.

Mid-Year Events That Blow Up Your TDS Calculation

Joining Mid-Year — The Form 12B Obligation

When an employee joins in, say, October, you compute TDS only on the salary they earn with you — but Section 192(2) requires you to aggregate all salary from the current financial year, including amounts paid by the previous employer. You must obtain Form 12B from the new joiner, which declares prior salary, perquisites, and TDS already deducted.

Worked example: Employee earned ₹9,00,000 from Employer A (April–September, zero TDS due to 87A) and joins you at ₹10,00,000 p.a. from October. Total annual income = ₹9,00,000 + ₹5,00,000 = ₹14,00,000. Tax on ₹13,25,000 (after standard deduction): approximately ₹88,125 + cess ≈ ₹91,650. None was deducted by Employer A. You must deduct the entire ₹91,650 over 6 months ≈ ₹15,275/month. Without Form 12B, you would have computed TDS on only ₹5,00,000 — effectively nil — and massively under-deducted.

Bonus Payments Concentrated in March

A large March bonus concentrates all remaining tax catch-up into one or two payrolls. This is legal but creates cash-flow pain for employees. Best practice: once the bonus quantum is approved (typically at the board or management level in February), start spreading the additional TDS across February and March rather than dumping it entirely in March.

ESOPs, RSUs, and Perquisites

ESOP exercise is a perquisite under Section 17(2) — taxable in the year of exercise, valued at Fair Market Value on the date of exercise minus the option price. The employer is required to compute this perquisite value and include it in the salary TDS computation in the month of exercise. RSU vesting follows the same logic.

Other commonly missed perquisites: rent-free or concessional accommodation, employer-provided car for personal use, club memberships, reimbursements above prescribed limits (mobile, internet beyond the actual bill), and interest-free or concessional loans. These are quantified using rules under Rule 3 of the Income-tax Rules and added to taxable salary.

Quarterly Filings — Form 24Q and Q4 Annexure-II

Form 24Q is the employer's quarterly TDS return for salary. It must be filed on the TIN-NSDL / TRACES portal using the Return Preparation Utility (RPU) or approved payroll software. A valid TAN (Tax Deduction and Collection Account Number) is mandatory.

Q4 is different from Q1–Q3. It carries an additional Annexure II that captures, for each employee:

• Full salary breakup (basic, HRA, special allowances, perquisites, bonus)
• Regime opted and deductions claimed
• Final tax computation — tax payable, tax deducted, and balance
• Reconciliation of tax deducted vs. tax deposited via challans

Any variance between Annexure II and what appears in Form 16 will surface in the employee's AIS (Annual Information Statement) on the income-tax portal — a guaranteed source of employee complaints and potential demand notices. Reconcile before filing.

Challan ITNS 281 — Deposit Mechanics

TDS deducted must be deposited using Challan ITNS 281 via net banking or the income-tax portal (incometax.gov.in). Select:

• Tax Applicable: (0020) Corporation Tax or (0021) Other than Companies, as applicable
• Type of Payment: TDS on Salary (Section 192)
• Assessment Year: the assessment year relevant to the financial year being deducted (e.g., AY 2026-27 for FY 2025-26 deductions)

Depositing under the wrong section code (e.g., 194J instead of 192) means the credit will not appear correctly against the employee's salary income in AIS/TIS — even if the right amount was paid.

Form 16 — Parts A and B, Timelines, and TRACES Download

Form 16 is the annual TDS certificate issued to each salaried employee. It comes in two parts that must reconcile exactly.

Part A: Generated and downloaded by the employer from TRACES (tdscpc.gov.in). It shows the employer's TAN, the employee's PAN, the assessment year, and a quarter-wise summary of TDS deducted and deposited against challan details. Part A cannot be prepared manually — it is system-generated from the filed Form 24Q data. If your Form 24Q filings had errors (wrong PAN, challan mismatch), Part A will be wrong, and you must file a correction statement before generating Form 16.

Part B: Prepared by the employer from payroll records. It contains the full salary breakdown, regime opted, all deductions claimed, and the final tax computation. Part B must reconcile identically with the Q4 Annexure II figures.

Due date for issuance: 15 June following the financial year. For FY 2025-26: 15 June 2026.

Late issuance attracts ₹100 per day per certificate under Section 272A(2)(g), with no statutory cap on the total penalty. For a company with 200 employees, a 30-day delay = ₹100 × 200 × 30 = ₹6,00,000.

Common Pitfalls to Avoid

1. Using stale slab rates from FY 2024-25 The Budget 2025 slab table is materially different from FY 2024-25. Payroll software must be updated to the new seven-tier structure with ₹4 lakh basic exemption. Verify your system's slab configuration in April each year.

2. Applying the zero-TDS rule as a blanket The ₹12,75,000 gross threshold is not a rule — it is the result of an individual computation. An employee with a variable component that crosses ₹12,75,000 mid-year needs a TDS revision immediately.

3. Skipping Form 12B for new joiners Prior employer salary is part of the year's total income. Without Form 12B, your TDS is based on an incomplete income figure. Collect it on day one of employment and factor it into the first payroll.

4. Ignoring perquisites in the monthly TDS base Including perquisites only in the year-end Form 16 but ignoring them during monthly TDS creates a large spike in the last payroll. Compute and include perquisite values monthly.

5. PAN errors in Form 24Q TRACES matches TDS credits using PAN. One wrong digit in the employee's PAN means their Form 26AS shows no credit — they face a demand notice despite your correct deduction. Cross-verify employee PANs against the NSDL PAN verification service before Q1 filing.

6. Not running a Annexure II vs. Form 16 reconciliation This mismatch is the single largest trigger for employee AIS discrepancies and for Section 154 rectification requests. Run the reconciliation as a mandatory step before generating Form 16.

Penalties for Getting It Wrong

Penalty in practice: A company delayed Form 24Q Q4 filing by 45 days. Fee under Section 234E = ₹200 × 45 = ₹9,000 per TAN. Additionally, for each employee whose Form 16 was issued 20 days late: ₹100 × 20 = ₹2,000 per employee. For 50 employees: ₹1,00,000 in Form 16 delay penalties alone. These amounts are recoverable but time-consuming to dispute. The avoidance cost is nearly zero — lock a calendar reminder for 31 May (Form 24Q Q4) and 15 June (Form 16).

Key Takeaways

• New regime is the default for FY 2025-26. If no written declaration is received, compute TDS under Section 115BAC seven-tier slabs with ₹4 lakh basic exemption. Do not assume old-regime preference.
• Budget 2025 changed the slabs and the 87A rebate significantly. The rebate rose from ₹25,000 to ₹60,000, the threshold from ₹7 lakh to ₹12 lakh, and the basic exemption from ₹3 lakh to ₹4 lakh. Payroll software must reflect Finance Act 2025 rates — not FY 2024-25 rates.
• The effective nil-tax gross salary threshold for salaried employees is ₹12,75,000 — but it is a cliff, not a ramp. One rupee above ₹12,75,000 gross triggers the full slab tax because 87A is withdrawn entirely.
• TDS is a monthly recomputation, not a one-time April calculation. Bonuses, mid-year joiners with prior salary (Form 12B), ESOP exercises, and February investment proof revisions all require fresh spreads.
• Q4 Form 24Q Annexure II is the linchpin document. It must match Form 16 Part B exactly. Reconcile before filing; do not reconcile after issuing certificates.
• Form 16 must be issued by 15 June. For a 100-person company, a 30-day delay costs ₹3,00,000 in Section 272A penalties. Set the deadline as a non-negotiable payroll calendar item.
• Deposit TDS by the 7th of each month (30 April for March). Interest at 1.5% per month under Section 201(1A) accrues from the date of deduction — not from the due date. Even a few days of delay accumulates cost across a full payroll register.