What Is TDS on Salary?
Tax Deducted at Source (TDS) is India’s pay-as-you-earn tax system. Instead of employees paying their full income tax at year-end, their employer withholds an estimated amount from each monthly salary payment and deposits it directly with the government.
Under Section 192 of the Income Tax Act, 1961, every employer paying salary to an employee is required to deduct TDS if the employee’s estimated annual income exceeds the basic exemption limit. This is not optional — failure to deduct or deposit TDS attracts penalties and interest.
TDS Under the New Tax Regime (Default from FY 2023-24 Onwards)
The new tax regime is now the default for all employees. Employees must actively opt out and into the old regime if they prefer it. The new regime offers lower tax rates but eliminates most deductions and exemptions.
New Regime Tax Slabs (FY 2025-26)
| Annual Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Standard deduction: ₹75,000 (available under the new regime)
Rebate under Section 87A: Employees with taxable income up to ₹12,00,000 (after standard deduction) pay zero tax.
Surcharge and cess: 4% health and education cess applies on the total tax amount. Surcharge applies for income above ₹50 lakh.
TDS Under the Old Tax Regime
Employees can opt for the old regime, which has higher tax rates but allows deductions under Section 80C (up to ₹1.5 lakh), HRA exemption, LTA, home loan interest, and others.
Old Regime Tax Slabs (FY 2025-26)
| Annual Taxable 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
The old regime is generally better for employees who have significant deductions: home loans, school tuition fees, life insurance premiums, ELSS investments, NPS contributions, and HRA claims for those paying high rent.
How Employers Calculate Monthly TDS
The employer estimates the employee’s annual taxable income at the beginning of the financial year (April) and distributes the tax equally across 12 monthly salary payments.
Calculation Steps
- Estimate annual gross salary including basic, HRA, special allowance, bonuses, and other taxable components
- Subtract standard deduction (₹75,000 new regime or ₹50,000 old regime)
- Subtract declared investments/deductions (old regime only) — based on the employee’s investment declaration submitted at the start of the year
- Arrive at taxable income and apply the applicable tax slabs
- Add cess (4%) and surcharge if applicable
- Divide annual tax by 12 (or remaining months in the year) to get monthly TDS
Mid-Year Adjustments
If an employee’s circumstances change — they receive a bonus, claim additional deductions, or change tax regime — the employer must recalculate and adjust TDS for the remaining months. This is why many companies see higher TDS deductions in March (the last month of the financial year) when employees fail to submit investment proofs for declared deductions.
Employer Filing Obligations
Monthly TDS Deposit
TDS deducted from employee salaries must be deposited with the government by the 7th of the following month. For March deductions, the deadline is April 30th.
The payment is made via challan on the TIN-NSDL portal (now merged into the Income Tax e-filing portal) under Challan 281.
Quarterly TDS Returns
Employers must file quarterly TDS returns in Form 24Q, which contains:
- Employee-wise salary details
- TDS deducted and deposited
- PAN of each employee
- Challan details
| Quarter | Period | Due Date |
|---|---|---|
| Q1 | April – June | July 31 |
| Q2 | July – September | October 31 |
| Q3 | October – December | January 31 |
| Q4 | January – March | May 31 |
Important: The Q4 return includes Annexure II, which contains the full annual salary computation for each employee. This data feeds into Form 16 generation.
Annual: Form 16 Issuance
Form 16 is the TDS certificate every employer must issue to employees by June 15 following the financial year. It has two parts:
- Part A: Certificate of TDS deposited with the government, downloaded from the TRACES portal
- Part B: Detailed salary breakup, deductions claimed, and tax computation
Form 16 is the primary document employees use to file their personal income tax returns.
Penalties for TDS Non-Compliance
| Violation | Penalty |
|---|---|
| Failure to deduct TDS | Equal to the amount of TDS not deducted |
| Late deposit of TDS | Interest at 1.5% per month from deduction date to deposit date |
| Late filing of TDS return | ₹200/day until the return is filed (capped at the TDS amount) |
| Failure to issue Form 16 | ₹100/day per certificate (capped at the TDS amount) |
| Incorrect PAN or details | ₹1,000 per return/statement with errors |
Criminal prosecution is possible under Section 276B of the Income Tax Act for willful failure to deposit TDS — imprisonment ranging from 3 months to 7 years.
TDS for Foreign Companies Without an Indian Entity
If you don’t have an Indian entity, you cannot directly deduct and deposit TDS in India. This is one of the primary reasons foreign companies use an EOR.
The EOR, as the legal employer in India, holds a TAN (Tax Deduction and Collection Account Number) and is responsible for:
- Calculating TDS based on each employee’s salary, tax regime choice, and declared investments
- Depositing TDS with the government by the 7th of each month
- Filing quarterly Form 24Q returns
- Generating and issuing Form 16 to each employee by June 15
Without an EOR or your own entity, you have no mechanism to comply with TDS requirements. Paying employees “gross” without TDS deduction puts the employee in a difficult position — they’d need to pay advance tax quarterly on their own, and the absence of TDS on salary would raise red flags during tax assessment.
Common TDS Issues and How to Handle Them
Employee Joining Mid-Year
When an employee joins mid-year, they may have earned salary from a previous employer. The new employer should collect Form 12B from the employee, which details previous salary and TDS for the year. This ensures accurate TDS calculation for the remaining months.
Employee Not Submitting Investment Proofs
Many employees declare investments in April (80C, HRA, etc.) but fail to submit proofs by the February deadline. When proofs aren’t submitted, the employer must recalculate TDS without those deductions and deduct the shortfall from the March salary. This often results in a significantly lower March take-home pay.
Regime Selection
Employees must declare their tax regime choice at the beginning of the financial year. Under the new rules introduced in the Income-tax Bill, 2025, employees can switch between old and new regimes each year at the time of filing their return. However, for TDS calculation purposes, the employer applies the regime declared at the start of the year.
Key Takeaways
- TDS on salary is a mandatory employer obligation in India, not optional
- The new tax regime is the default — lower rates, fewer deductions
- Monthly deposit deadline is the 7th of the following month
- Quarterly returns in Form 24Q are critical — late filing costs ₹200/day
- Form 16 must be issued by June 15 annually
- Foreign companies without an Indian entity must use an EOR (or their own entity) to handle TDS compliance
- The penalties for non-compliance are significant and include potential criminal prosecution