TDS on Salary India 2026: Complete Calculation Guide for Employers

TDS on Salary in India 2026: How to Calculate, Deduct, and File

Tax Deducted at Source (TDS) on salary is the employer's obligation to deduct income tax from each employee's monthly salary and remit it to the government before the 7th of the following month. Getting TDS wrong — deducting too little, too much, or using the wrong regime — creates problems that surface at Form 16 time and can result in notices from the Income Tax Department to both the employee and the employer.

This guide explains how TDS on salary is calculated correctly in 2026, covering both old and new tax regimes, the investment declaration process, and the monthly reconciliation discipline that prevents year-end surprises.

Why TDS on Salary Is More Complex Than Most Employers Realise

TDS on salary is not simply "deduct X% from gross salary." The correct calculation requires:

1. Projecting the employee's total annual income for the financial year
2. Identifying which tax regime the employee has chosen (old or new)
3. Applying the correct deductions (old regime only) — 80C, 80D, HRA exemption, standard deduction
4. Calculating the annual tax liability under the chosen regime and applicable surcharge
5. Dividing the remaining tax liability equally across the remaining months of the financial year
6. Recalculating when the employee's circumstances change — salary revision, investment declaration update, additional income declared

For a company with 50 employees across different salary levels, each on potentially different tax regimes with different investment declarations, this calculation must be performed correctly for each employee independently every month.

Old Tax Regime vs New Tax Regime in 2026

From FY 2023-24, the new tax regime is the default. Employees who want to use the old regime — with its deductions and higher slab rates — must actively opt in and provide a declaration to the employer before the financial year starts (or at the time of joining if they join mid-year).

New Tax Regime Slabs (Default, FY 2026-27)

Annual Income	Tax Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹7,00,000	5%
₹7,00,001 – ₹10,00,000	10%
₹10,00,001 – ₹12,00,000	15%
₹12,00,001 – ₹15,00,000	20%
Above ₹15,00,000	30%

Standard deduction under new regime: ₹75,000 (increased from ₹50,000 in Budget 2024).

Tax rebate under Section 87A: Taxpayers with net taxable income up to ₹7,00,000 (after standard deduction) under the new regime get a full tax rebate — effective zero tax payable.

Old Tax Regime Slabs (Opt-in Required)

Annual Income	Tax Rate
Up to ₹2,50,000	Nil
₹2,50,001 – ₹5,00,000	5%
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

Standard deduction: ₹50,000.

Key deductions available under old regime:

• Section 80C: Up to ₹1,50,000 (PPF, ELSS, life insurance premium, home loan principal, children's tuition)
• Section 80D: Up to ₹25,000 for health insurance (₹50,000 for senior citizens)
• HRA exemption: Minimum of (actual HRA received), (rent paid minus 10% of Basic), or (50% of Basic for metro / 40% for non-metro)
• Section 24(b): Up to ₹2,00,000 interest on home loan for self-occupied property
• Professional tax paid: Deductible in full

Tax rebate under Section 87A: Taxpayers with net taxable income up to ₹5,00,000 under the old regime get full rebate.

Surcharge and Cess

Income tax is increased by:

• Health and Education Cess: 4% of income tax (applicable to all taxpayers)
• Surcharge: 10% of income tax for income between ₹50 lakh and ₹1 crore; 15% for ₹1–2 crore; 25% for ₹2–5 crore; 37% for above ₹5 crore (under old regime; 25% is the maximum under new regime)

For most salaried employees at Indian SMBs, surcharge does not apply — it is relevant for employees with very high salaries.

How to Calculate TDS on Salary: Step-by-Step

Step 1: Collect Investment Declarations (Form 12BB)

At the start of each financial year (April), collect Form 12BB from every employee who has opted for the old tax regime. The form captures:

• Investments under Section 80C (PPF deposits, insurance premiums, ELSS, etc.)
• HRA details — monthly rent paid and landlord's PAN (if rent exceeds ₹1 lakh per year)
• Home loan interest under Section 24
• Health insurance premiums under Section 80D
• Any other deductions claimed

For employees on the new regime, no investment declaration is needed — only the standard deduction of ₹75,000 is applied.

Step 2: Project Annual Taxable Income

For each employee:

Annual gross salary = Monthly CTC × 12 (or the sum of expected monthly gross figures if salary changes mid-year due to increments)

Less: Deductions (old regime employees)

• Standard deduction: ₹50,000
• HRA exemption: Calculate per the formula
• Professional tax paid: Actual amount
• 80C declared: Up to ₹1,50,000
• 80D declared: Up to ₹25,000
• Section 24 home loan interest: Up to ₹2,00,000

Less: Deductions (new regime employees)

• Standard deduction: ₹75,000

Annual taxable income = Annual gross salary minus applicable deductions

Step 3: Calculate Annual Tax Liability

Apply the applicable slab rates to the taxable income. Add surcharge if applicable. Add 4% cess on (income tax + surcharge). Subtract Section 87A rebate if the taxable income is within the rebate threshold.

Step 4: Distribute Across Remaining Months

Monthly TDS = Annual tax liability remaining ÷ Number of months remaining in the financial year

In April (first month), remaining months = 12. In July (mid-year joinee), remaining months = 9 (July to March). If salary or declarations change in October, recalculate remaining liability and spread over 6 months (October to March).

Step 5: Worked Example

Employee: Annual CTC ₹12,00,000, opted for new regime, joining April 2026.

Annual taxable income = ₹12,00,000 - ₹75,000 (standard deduction) = ₹11,25,000

Tax calculation (new regime):

• Up to ₹3,00,000: Nil
• ₹3,00,001–₹7,00,000 (₹4,00,000 at 5%): ₹20,000
• ₹7,00,001–₹10,00,000 (₹3,00,000 at 10%): ₹30,000
• ₹10,00,001–₹11,25,000 (₹1,25,000 at 15%): ₹18,750
• Total tax: ₹68,750
• Add 4% cess: ₹2,750
• Total tax payable: ₹71,500

Monthly TDS = ₹71,500 ÷ 12 = ₹5,958/month (rounded to ₹5,958)

Perquisite TDS: The Edge Case Most Payroll Software Handles Poorly

Perquisites are non-cash benefits that are taxable as salary. Common examples:

• Company car: Taxable at a fixed rate per month based on engine capacity
• ESOP exercise: Taxable perquisite = fair market value on exercise date minus exercise price
• Rent-free accommodation: Taxable at 10% or 15% of salary depending on city classification
• Interest-free or concessional loan: Interest benefit at SBI rate is taxable

When a perquisite arises in a specific month — particularly ESOP exercise, which can create a large one-time taxable perquisite — the employer must add the perquisite to that month's taxable income, recalculate the annual tax liability, and adjust TDS for that month accordingly.

This mid-year recalculation is where many payroll systems fail. The correct approach is: add the perquisite to projected annual income for TDS purposes, recalculate total annual tax, subtract TDS already deducted in previous months, and spread the remaining liability across the remaining months.

TDS Payment and Filing

Payment Due Date

TDS deducted for a month must be deposited to the government by the 7th of the following month (for April–February). For March, the due date is April 30.

Quarterly TDS Returns (Form 24Q)

Employers must file quarterly TDS returns (Form 24Q) with the following details: employer TAN, employee PAN, gross salary paid, deductions claimed, taxable income, and TDS deducted for each employee. Due dates:

Quarter	Period	Due Date
Q1	April–June	July 31
Q2	July–September	October 31
Q3	October–December	January 31
Q4	January–March	May 31

Late filing of Form 24Q attracts a penalty of ₹200 per day under Section 234E, plus a penalty of ₹10,000–₹1,00,000 under Section 271H.

Form 16

Form 16 must be issued to all employees whose TDS was deducted during the financial year by June 15 following the financial year end. Form 16 has two parts:

• Part A: TDS deducted and deposited (downloaded from TRACES)
• Part B: Salary details, deductions, and tax computation (generated from your HRMS or payroll software)

Form 16 is the employee's primary document for filing their personal income tax return. Errors in Form 16 — wrong salary figures, wrong TDS amount — create problems for both the employee and the employer.

What Your Payroll Software Must Handle for TDS

A payroll software that claims to handle TDS must demonstrate:

1. Separate regime support per employee: Old regime employees and new regime employees in the same company, handled independently.
2. Investment declaration collection: Employee self-service portal where employees submit 12BB declarations that automatically update TDS calculation.
3. Year-to-date recalculation: When salary changes or declarations update mid-year, the remaining TDS is recalculated and spread correctly.
4. Perquisite input: Manual perquisite entry per employee for ESOP exercise and other one-time taxable events.
5. Form 24Q generation: The quarterly TDS return file generated in the format required by TRACES.
6. Form 16 generation: Part B of Form 16 generated automatically from the payroll system.

Frequently Asked Questions

What happens if I deduct less TDS than required?

The employee is responsible for paying the shortfall as self-assessment tax when filing their return. The employer, however, is liable for interest at 1.5% per month on the amount not deducted (Section 201), and can also face a penalty equal to the amount of TDS that was not deducted under Section 271C. Run a TDS reconciliation in January–February each year to catch and correct any shortfalls before March.

Can an employee change their tax regime mid-year?

For salaried employees, the tax regime can be changed only at the time of filing the annual return — not mid-year at the employer level. If an employee chooses the old regime at the start of the year, the employer deducts TDS on the old regime basis for the full year, regardless of what the employee ultimately files in their return. If an employee joins mid-year and has a previous employer, they must declare their previous employer's income and TDS so the new employer can project the full year's tax correctly.

What is the TDS rate for contract workers versus employees?

For regular employees, TDS is calculated under Section 192 using the applicable slab rates for their annual income — not a flat rate. For contractors and consultants paid under Section 194J (professional fees), TDS is deducted at 10% on each payment. These are completely different deduction mechanisms and must not be mixed — a contractor paid through the payroll as if they were an employee, with slab-rate TDS, is an error.

Does PF deduction reduce TDS?

Yes, but only for employees on the old tax regime. Employee PF contribution (up to ₹1,50,000 per year) qualifies as a deduction under Section 80C, which reduces taxable income and therefore TDS. For employees on the new regime, PF deduction does not reduce TDS — the new regime does not allow Section 80C deductions.

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