TDS on Salary — How Employers Calculate and Deduct Tax Under Section 192

Every employer in India who pays salary to employees is required to deduct TDS (Tax Deducted at Source) under Section 192 of the Income Tax Act and deposit it with the government. TDS on salary is unique — unlike other TDS provisions, there is no fixed rate; the tax is calculated at the employee's applicable income tax slab rate after deductions. Here is the complete guide.

Who Must Deduct TDS on Salary?

Any employer — company, LLP, firm, individual or HUF — who pays salary to employees must deduct TDS if the employee's estimated annual income exceeds the basic exemption limit (₹2.5 lakh for below 60 years, ₹3 lakh for senior citizens 60-80 years, ₹5 lakh for super senior citizens above 80 years — under old regime). Under the New Tax Regime, the basic exemption is ₹3 lakh.

How TDS on Salary is Calculated

Unlike other TDS (which is a fixed percentage on payment), TDS on salary follows a 4-step process:

Step 1 — Estimate Annual Income: At the start of each financial year, estimate the employee's total salary income for the full year including all allowances, perquisites and bonuses.

Step 2 — Allow Declared Deductions: The employee submits Form 12BB declaring their investments and deductions — Section 80C, 80D, HRA exemption, home loan interest (Section 24), LTA exemption, etc. These reduce the estimated taxable income.

Step 3 — Compute Annual Tax: Apply the applicable income tax slab rates on the net taxable income to arrive at annual tax liability. Add 4% cess. Check for rebate under Section 87A (income up to ₹5 lakh under old regime / ₹7 lakh under new regime gets full rebate — nil tax).

Step 4 — Divide by 12: The annual tax liability is divided by the number of remaining months in the year to arrive at monthly TDS deduction.

Old Regime vs New Regime — Employee Choice

From FY 2024-25 onwards, the New Tax Regime is the default. Employees must specifically opt for the Old Tax Regime to claim deductions under 80C, HRA, LTA, etc. The employee must inform the employer at the start of the year (or before the employer processes the April salary). Once declared, the regime choice can be changed at the time of filing ITR.

Year-End Reconciliation

At year-end, the employer recalculates actual tax based on actual salary paid, deductions submitted (with proof) and adjusts any shortfall or excess TDS in the last 1-3 months' salary. The employer then issues Form 16 (by 15 June) showing the actual tax deducted and deposited.

TDS Return for Salary — Form 24Q

Employers file quarterly TDS returns for salary in Form 24Q with TRACES. The final (Q4) Form 24Q contains the complete annual salary details for each employee. This is the basis on which Form 16 is generated from TRACES for Part A.

Conclusion

TDS on salary requires employers to calculate tax correctly for each employee, accommodate regime choices, reconcile at year-end and issue Form 16 on time. SPOTON provides payroll compliance services including TDS on salary computation, Form 24Q filing and Form 16 generation for businesses in Calicut and Kerala.