Tax Deducted at Source (TDS)

Tax Deducted at Source (TDS) is the mechanism by which an employer deducts income tax from an employee’s salary before paying them, then deposits that tax directly with the Indian government. Under Section 192 of the Income Tax Act, 1961, every employer paying salary above the basic exemption limit must deduct TDS. The amount deducted depends on the employee’s total estimated annual income, chosen tax regime (old or new), and declared investments or deductions. TDS ensures a steady flow of revenue to the government and prevents employees from facing a large tax bill at year-end. The TDS on salary in India guide walks through the monthly mechanics.

How TDS Works

At the beginning of each financial year (April), or when an employee joins, the employer estimates the employee’s total taxable income for the year. The employee declares their preferred tax regime and any deductions or exemptions they plan to claim. The employer then divides the estimated annual tax liability equally across the remaining pay periods.

The process follows these steps:

1. Compute Gross Salary, Add all taxable components: basic, HRA (taxable portion), special allowance, bonus, and other allowances.
2. Subtract Exemptions, Under the old regime: HRA exemption (Section 10(13A)), Leave Travel Allowance (Section 10(5)), standard deduction of ₹50,000.
3. Subtract Deductions, Under the old regime: Section 80C (up to ₹1,50,000 for PF, ELSS, insurance), Section 80D (health insurance), home loan interest (Section 24), and others. Under the new regime: only the standard deduction of ₹75,000 applies (FY 2024-25 onwards).
4. Apply Tax Slabs, Calculate tax based on the applicable regime’s slab rates.
5. Add Cess, 4% Health and Education Cess on the tax amount.
6. Divide by Remaining Months, Spread the annual liability evenly across payroll months.

TDS Slab Rates: Old vs New Regime

New Tax Regime (Default from FY 2024-25):

Income Slab (₹)	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%

Rebate under Section 87A: No tax payable if total income is up to ₹7,00,000.

Old Tax Regime (Optional):

Income Slab (₹)	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%

Example Calculation (New Regime):

An employee with a taxable income of ₹12,00,000 under the new regime:

• ₹0, ₹3,00,000: ₹0
• ₹3,00,001, ₹7,00,000: ₹4,00,000 × 5% = ₹20,000
• ₹7,00,001, ₹10,00,000: ₹3,00,000 × 10% = ₹30,000
• ₹10,00,001, ₹12,00,000: ₹2,00,000 × 15% = ₹30,000
• Total Tax: ₹80,000
• Cess (4%): ₹3,200
• Annual TDS: ₹83,200
• Monthly TDS: ₹6,933

Key Compliance Deadlines:

• Monthly TDS deposit: By the 7th of the following month
• Quarterly TDS return (Form 24Q): Within 31 days of quarter end
• Form 16 issuance: By June 15 following the financial year
• Late deposit penalty: Interest at 1.5% per month under Section 201(1A)

Why TDS Matters for Foreign Companies

Foreign companies employing people in India, whether through a subsidiary or an EOR, are legally responsible for accurate TDS deduction and deposit. Common pitfalls include:

• Incorrect regime selection: Defaulting all employees to one regime without collecting individual declarations
• Missing mid-year adjustments: When employees submit investment proofs late, TDS must be recalculated and adjusted in remaining months
• Bonus and variable pay: One-time payments change the annual tax estimate and require TDS recalculation

Failure to deduct TDS or depositing it late makes the employer liable for the tax amount plus interest and penalties. The employer cannot recover this from the employee after the financial year ends.

How Omnivoo Handles TDS

Omnivoo collects each employee’s tax regime preference and investment declarations at onboarding and during the annual declaration window. The payroll engine calculates TDS monthly, adjusts automatically when declarations change, and deposits tax with the government before the 7th of each month. Omnivoo also generates and files quarterly Form 24Q returns and issues Form 16 to every employee by the June deadline.