TDS on salary: how your employer works out the tax every month

1. Estimate annual salary: basic, allowances, bonus, perquisites and any arrears expected in the year.
2. Apply the regime: the new regime is the default. If you want the old regime, tell your employer at the start of the year; otherwise TDS follows the new regime.
3. Subtract exemptions and deductions allowed in that regime: the ₹75,000 standard deduction in the new regime (₹50,000 in the old), and in the old regime HRA, LTA, 80C and the rest, based on your declarations.
4. Compute tax at slab rates, apply the rebate, add surcharge if any and 4% cess.
5. Divide the remaining tax by the months left in the year, and deduct that from each month’s pay.

Example. Annual salary ₹18 lakh, new regime, no other income. Taxable income ₹17.25 lakh after the standard deduction. Tax on the first ₹16 lakh is ₹20,000 + ₹40,000 + ₹60,000, plus 20% on the ₹1.25 lakh above it (₹25,000): ₹1,45,000. Add 4% cess of ₹5,800 and the year’s tax is ₹1,50,800, so monthly TDS is about ₹12,567.

More on the declaration form in our Form 12BB (Form 124) guide.

• Perquisites like a company car, rent-free accommodation, interest-free loans and ESOP allotments are valued under the rules and added to salary. ESOPs are covered in our ESOP taxation guide.
• Employer-paid tax on non-monetary perquisites is allowed and is not taxed again in your hands.
• Arrears of salary received in a later year can push you into a higher slab. Relief is available by filing the prescribed form (formerly Form 10E) before claiming it in the return.
• Employer NPS contribution up to 14% of basic plus DA is deductible even in the new regime.

No TDS is needed if the employee’s estimated income is below the taxable limit after rebate. Our Form 16 guide explains how to read the certificate.

• Too much deducted: common when proofs are missed or you switch regime at filing. Claim the refund in your return.
• Too little deducted: common with two employers in a year or with interest income. Pay self-assessment tax before filing to avoid interest.
• TDS missing from Form 26AS: ask the employer to correct the 24Q; your credit depends on it.

Each employer computes TDS as if its salary were your only income, so both apply the lower slabs and the ₹75,000 standard deduction. The result is usually a tax shortfall in the return.

1. Give the new employer the old employer’s salary and TDS figures; they will spread the extra tax over the remaining months.
2. If you forget, compare your total tax with total TDS before filing, and pay self-assessment tax on the gap.
3. Claim the standard deduction only once in the return, even though both Form 130s show it.