TDS on Salary in India FY 2025-26

Every employer in India who pays salary above the basic exemption limit must deduct TDS on salary every month under Section 192 of the Income Tax Act, 1961. Yet many employers particularly growing businesses and MSMEs get the calculation wrong. They either deduct too little, which creates a liability for them with the Income Tax Department, or too much, which causes unnecessary hardship for employees and increases the risk of refund disputes at year end.

The Union Budget 2025 revised the new tax regime slabs significantly for FY 2025-26 (AY 2026-27), raising the basic exemption limit and extending the Section 87A rebate to income up to ₹12 lakh. As a result, TDS calculations for the current financial year are quite different from those in previous years. In this guide, we cover exactly how TDS on salary works, what the correct slab rates are, how to calculate the monthly deduction step by step, what forms are required, and what happens when an employer gets it wrong.

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• ▸  Monthly TDS calculated correctly under new and old regime both
• ▸  Form 24Q filed quarterly — on time, every quarter
• ▸  Form 16 issued to all employees by 15 June deadline
• ▸  Investment declarations collected and processed through payroll

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What Is TDS on Salary Under Section 192 and Who Must Deduct It?

The Legal Basis for TDS Deduction

Section 192 of the Income Tax Act, 1961 requires every employer to deduct income tax at source from the salary of any employee whose estimated annual income exceeds the basic exemption limit for the financial year. This is not a separate tax. Rather, TDS on salary is simply the advance collection of the employee’s income tax liability deducted by the employer at the time of salary payment and deposited directly with the government.

Importantly, the employer’s status does not matter for this obligation. Whether the employer is an individual, a proprietorship, a partnership firm, an LLP, a private limited company, or a public sector undertaking if they pay salary and that salary exceeds the basic exemption limit, they must deduct TDS. Furthermore, there is no minimum business size threshold. Consequently, even a small business with five employees must comply with Section 192 if any employee’s salary exceeds the taxable limit.

Which Employers Are Covered

Every entity that has an employer-employee relationship with a salaried individual falls under Section 192. This includes private companies, government departments, trusts, NGOs, educational institutions, and proprietorship firms. Additionally, individuals who employ domestic workers or staff at a personal level are covered if the salary paid exceeds the basic exemption limit though this is rare in practice. The key test, therefore, is the existence of a formal employer-employee relationship, not the type or size of the employer.

₹12.75L Effective Tax-Free Limit New Regime FY 2025-26

7th Monthly TDS Deposit Deadline (Following Month)

1.5% Interest p.m. for Late TDS Deposit

Income Tax Slabs for TDS on Salary FY 2025-26 (AY 2026-27)

New Tax Regime Slabs — Default From FY 2023-24

The new tax regime under Section 115BAC has been the default income tax regime since FY 2023-24. Under the new regime, if an employee does not explicitly communicate their regime choice to the employer, the employer must calculate TDS under the new regime. The Union Budget 2025 revised the new regime slabs significantly for FY 2025-26. Specifically, the basic exemption limit was raised from ₹3 lakh to ₹4 lakh, and the Section 87A rebate was enhanced to ₹60,000, making income up to ₹12 lakh effectively tax-free. For salaried employees, the standard deduction of ₹75,000 pushes this effective tax-free limit to ₹12.75 lakh.

Old Tax Regime Slabs Still Available by Choice

The old tax regime remains available for FY 2025-26. However, an employee who wishes to be taxed under the old regime must explicitly communicate this choice to the employer at the beginning of the financial year. If the employer receives no such communication, the new regime applies by default. The old regime offers deductions under Section 80C, 80D, HRA, LTA, and home loan interest — but it taxes income at higher slab rates. Therefore, old regime slabs are particularly beneficial for employees with significant investments and eligible deductions.

Under the old regime, the standard deduction is ₹50,000 for salaried employees (versus ₹75,000 under the new regime). Additionally, a Section 87A rebate of up to ₹12,500 applies if taxable income does not exceed ₹5,00,000, making income effectively tax-free at that level under the old regime as well.

How to Calculate TDS on Salary — Step-by-Step Process

The 9-Step TDS Calculation Formula Under Section 192

The correct process for calculating TDS on salary requires the employer to estimate the employee’s total income for the full financial year at the beginning of the year. The deduction is then spread equally across the remaining months. Specifically, here is the step-by-step formula verified from Section 192 and CBDT guidelines:

1. Step 1: Compute Gross Salary = Basic + DA + HRA + Special Allowance + Bonus + all other salary components
2. Step 2: Subtract Exempt Allowances = HRA exemption (old regime only) + LTA + other exempt items
3. Step 3: Net Salary = Gross Salary − Exempt Allowances
4. Step 4: Taxable Income = Net Salary − Standard Deduction (₹75,000 new regime / ₹50,000 old regime) − Chapter VI-A Deductions (old regime only)
5. Step 5: Compute Tax on Taxable Income using applicable slab rates
6. Step 6: Apply Section 87A Rebate if eligible (₹60,000 under new regime; ₹12,500 under old regime)
7. Step 7: Add Surcharge if applicable (income above ₹50 lakh)
8. Step 8: Add Health & Education Cess at 4% on (Tax + Surcharge)
9. Step 9: Monthly TDS = Total Annual Tax Liability ÷ Number of months remaining in the financial year

Worked Example New Regime (₹15 Lakh Annual Salary)

Worked Example — Old Regime (₹12 Lakh Salary With Deductions)

Key Employer Obligations for TDS on Salary — Due Dates and Compliance

Monthly TDS Deposit Deadline

After deducting TDS from an employee’s salary, the employer must deposit the amount with the government by the 7th of the following month. For example, TDS deducted in the month of June must be deposited by 7th July. There is one exception: TDS deducted in March must be deposited by 30th April. Furthermore, if the employer fails to deposit on time, interest at 1.5% per month (or part thereof) applies from the date of deduction to the date of deposit — not from the due date. This is a strict provision, and many employers are caught by this when they confuse “due date” with “date of deduction.”

Quarterly TDS Return — Form 24Q

In addition to monthly deposits, every employer must file a quarterly TDS return in Form 24Q. This return contains details of salary paid to each employee and the TDS deducted during the quarter. The due dates for Form 24Q are as follows:

Importantly, Form 24Q has two annexures. Annexure I — which covers quarterly salary and TDS details — is required for all four quarters. Annexure II which covers estimated and actual salary details for the full financial year is mandatory only in Q4. However, it is also submitted in Q1, Q2, and Q3 as an estimated figure. For most outsourced payroll providers, this is managed as part of the standard quarterly compliance cycle.

Form 16 Issuance Deadline and Contents

After filing the Q4 TDS return, the employer must issue Form 16 to every employee from whose salary TDS was deducted. Form 16 is the TDS certificate for salaried income. It is the primary document that employees use to file their Income Tax Return. Specifically, the deadline for issuing Form 16 for FY 2025-26 (AY 2026-27) is 15th June 2026. Failure to issue Form 16 on time is an offence under the Income Tax Act. Furthermore, errors in Form 16 — such as incorrect PAN, wrong salary figures, or mismatched TDS amounts create problems for employees when they file their ITR and try to reconcile with Form 26AS.

Form 16 has two parts. Part A contains quarterly TDS deducted and deposited details, along with the employer’s PAN and TAN. Part B is an annexure that the employer prepares — it includes the salary breakup, applicable exemptions, Chapter VI-A deductions, and the final tax liability computation. Both parts must be issued together. Managing this correctly is a core part of structured payroll management — and it is where many businesses with informal payroll processes run into problems every June.

Investment Declarations and Form 12BB What Employers Must Collect

Why Investment Declarations Matter for TDS

For employees who choose the old tax regime, the TDS calculation depends on the deductions the employee declares at the beginning of the financial year. Without these declarations, the employer must calculate TDS on the full gross salary without any deductions — which results in significantly higher monthly TDS deductions throughout the year. Consequently, most employees who opt for the old regime submit their investment declarations in April, at the start of the financial year.

Form 12BB The Investment Declaration Form

Form 12BB is the standard form prescribed under Rule 26C of the Income Tax Rules for employees to declare their investments and eligible deductions to the employer. It covers HRA details (rent paid, landlord’s name and PAN where rent exceeds ₹1,00,000 per year), LTA claims, home loan interest, and all Chapter VI-A investments such as 80C, 80D, and 80CCD(1B). Employers should collect Form 12BB from every employee who has opted for the old regime at the beginning of the financial year. Additionally, employees must submit actual proof of investments in January or February — because the employer needs to verify declarations before computing the final TDS for Q4 and issuing Form 16.

What Employers Must Do When Employees Switch Regime Mid-Year

Salaried employees can switch tax regimes only at the time of filing their ITR. During the financial year itself, the employee must stick to the regime declared to the employer at the start of the year. If an employee changes their declaration mid-year for example, from new regime to old regime the employer should note that this is not permitted during the year. The employer must therefore clearly communicate this at onboarding and at the start of each financial year, and document the employee’s regime choice formally. For businesses managing this through an outsourced HR outsourcing partner, regime declarations are collected and recorded as part of the structured April onboarding process for the new financial year.

Penalties and Consequences of TDS Non-Compliance for Employers

Interest for Late Deduction or Late Deposit

Two separate interest charges apply when an employer fails to comply with TDS on salary obligations. First, if TDS is not deducted at all when it should have been, interest at 1% per month (or part thereof) applies from the date the deduction should have been made to the date it is actually deducted. Second, if TDS is deducted but not deposited with the government on time, interest at 1.5% per month (or part thereof) applies from the date of deduction to the date of deposit. Both charges are recoverable from the employer not the employee and are not deductible as a business expense.

Penalty for Non-Filing of Form 24Q

Under Section 234E of the Income Tax Act, a fee of ₹200 per day applies for every day that Form 24Q is filed after the due date. This fee accrues until the return is filed, subject to a maximum equal to the TDS amount for that quarter. Additionally, under Section 271H, the Assessing Officer may levy a penalty between ₹10,000 and ₹1,00,000 for incorrect filing or non-filing of TDS returns this is over and above the late fee under Section 234E. Consequently, businesses that treat TDS return filing as an afterthought face costs that accumulate rapidly and are difficult to reverse.

Disallowance of Salary Expense in the Employer’s Books

This is the compliance consequence that most employers do not anticipate. Under Section 40(a)(ia) of the Income Tax Act, if an employer fails to deduct TDS on salary payments, 30% of that salary amount is disallowed as a deductible expense in the employer’s own income tax computation. Therefore, the employer ends up paying tax on income that was actually spent as salary simply because TDS was not deducted. This disallowance applies retrospectively when the employer files their own ITR, making non-deduction of TDS an extremely expensive oversight for the business itself.

New vs Old Tax Regime for TDS Which Should Your Payroll Default To?

The Employer’s Default Obligation

Since FY 2023-24, the new tax regime is the default. If an employee does not explicitly communicate a regime preference, the employer must apply the new regime for TDS calculation. This is not optional. Therefore, employers must have a formal process at the start of each financial year typically in April to collect regime declarations from every employee. In practice, many businesses that manage payroll informally fail to do this, and end up applying the wrong regime, which leads to either excess or short deduction throughout the year.

When the New Regime Is More Beneficial

Under the new regime, the Section 87A rebate has been raised to ₹60,000, making income up to ₹12 lakh effectively tax-free for resident individuals. Additionally, the standard deduction is ₹75,000 — higher than the ₹50,000 available under the old regime. Consequently, for employees earning up to ₹12.75 lakh who have limited investments or deductions, the new regime typically results in lower or zero tax liability. Moreover, the new regime offers seven progressive slab rates compared to the old regime’s three — which means the tax increase at each income level is more gradual, benefiting mid-income earners particularly.

When the Old Regime May Still Be Better

The old regime continues to offer advantages for employees with significant deductions. Specifically, if an employee can claim substantial amounts under Section 80C (up to ₹1,50,000), Section 80D health insurance (up to ₹25,000 or ₹50,000 for senior citizens), HRA exemption, home loan interest, and NPS contribution under Section 80CCD(1B) (₹50,000 additional), the reduction in taxable income may more than offset the higher slab rates of the old regime. Therefore, employees earning above ₹12 lakh with large eligible deductions should calculate their liability under both regimes and communicate their choice to the employer in April. For businesses that want to help employees make this comparison accurately, Futurex’s payroll management engagement includes regime advisory as part of the annual April process.

Conclusion: TDS on Salary Is a Monthly Obligation — Not an Annual One

TDS on salary is not a year-end reconciliation exercise. It is a structured monthly obligation that requires accurate calculation, timely deposit, quarterly return filing, and annual Form 16 issuance all executed correctly, every single month of the financial year. With the significant changes to new regime slabs in FY 2025-26 and the enhanced Section 87A rebate, many employees’ TDS positions have changed substantially compared to previous years. Employers who do not update their payroll calculations for these changes are either over-deducting or under-deducting — both of which create problems that surface at year end.

Furthermore, the penalties for TDS non-compliance are not trivial. Interest at 1% to 1.5% per month, late fees of ₹200 per day for Form 24Q, and the potential disallowance of 30% of salary under Section 40(a)(ia) make getting TDS right from the beginning of the year far less expensive than correcting errors at the end of it. Therefore, businesses that manage payroll through a specialist outsourced provider — rather than an informal in-house process — consistently avoid these costs and carry cleaner books year after year.

Futurex Management Solutions handles TDS on salary as part of a fully integrated payroll compliance engagement — covering declaration collection, monthly computation, deposit tracking, Form 24Q filing, and Form 16 issuance for businesses across Delhi NCR, Noida, and pan-India. If your current payroll process does not give you confidence that every TDS calculation is correct, a free review is the practical next step. You may also find it useful to read about how outsourced accounting for small business integrates with payroll compliance to deliver a cleaner, more reliable financial operation end-to-end.

Frequently Asked Questions About TDS on Salary in India