Your payroll closes on the 25th. Salaries go out on the 31st. But before you hit process, one number has to be right every single month — the TDS deduction. Get it wrong in April, and you’re correcting it by scrambling in March. Miss a deposit deadline, and you’re explaining interest charges to your finance head.
Here’s the employer’s working guide to TDS on salary under Section 192 for FY 2026-27.
- TDS on salary is deducted under Section 192 of the Income Tax Act, 1961.
- Employer estimates annual income, computes annual tax, then divides by remaining months of the financial year.
- New Tax Regime is the default for FY 2026-27 — employees must formally opt for old regime in writing.
- Deposit deadline: 7th of the following month (March TDS by April 30).
- Effective tax-free limit under new regime: ₹12.75 lakh gross (₹12L taxable + ₹75K standard deduction + Section 87A rebate).
What is TDS on Salary Under Section 192?
TDS on salary is the tax deducted at source from an employee’s monthly salary before it reaches their bank account. Under Section 192 of the Income Tax Act, 1961, you — the employer — are the deductor and are personally responsible for computing and depositing the right amount each month.
Unlike TDS on contractor payments (which uses flat percentage rates like 1% or 2%), Section 192 TDS has no fixed rate. You compute the employee’s estimated annual tax liability based on their salary, deductions, and declared regime — then spread that liability across remaining months. Every salary hike, bonus, joining, resignation, or regime switch changes the number mid-year. And the Income Tax department holds you accountable for shortfalls, not the employee.
New vs Old Tax Regime: Which Applies for TDS in FY 2026-27?
The New Tax Regime under Section 115BAC is the default regime for FY 2026-27. If your employee does not submit a written declaration choosing the old regime, compute TDS under the new regime. Employees who want the old regime must submit Form 10-IEA or a self-declaration in your HR system before the first payroll cut of the year.
An employee can switch between regimes once during the year — but the switch must be declared to you before your internal deadline (typically October or November, when investment proof submissions happen). After that, the regime is locked for the remaining months.
Make regime collection a mandatory April task. Don’t assume; ask.
New Tax Regime Slabs — FY 2026-27 (AY 2027-28)
| Annual Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Standard deduction (new regime): ₹75,000 per year.
Section 87A rebate: ₹60,000 — available when taxable income is ₹12 lakh or below. Effective result: zero tax liability for gross salary up to ₹12.75 lakh.
Health & Education Cess: 4% on computed tax (both regimes).
No other deductions allowed under new regime — no HRA, 80C, 80D, LTA, or home loan interest.
Old Tax Regime Slabs — FY 2026-27
| Annual Taxable Income | Tax Rate (below 60 years) |
|---|---|
| Up to ₹2,50,000 | Nil |
| ₹2,50,001 to ₹5,00,000 | 5% |
| ₹5,00,001 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Standard deduction (old regime): ₹50,000.
Section 87A rebate: ₹12,500 (taxable income up to ₹5 lakh).
Key deductions: 80C up to ₹1.5 lakh (PF, PPF, ELSS, LIC, home loan principal), 80D up to ₹25,000 (₹50,000 for senior citizens), HRA (formula-based), LTA (actual travel cost, two times in a four-year block), 80CCD(1B) NPS extra ₹50,000, Section 24(b) home loan interest up to ₹2 lakh.
Step-by-Step: How to Calculate Monthly TDS on Salary
Step 1 — Collect declarations in April
Before the first payroll run, collect from each employee: (a) regime choice declaration, (b) Form 12BB with estimated investments under old regime, (c) rent agreement and rent receipts for HRA claims, (d) previous employer’s Form 16 or Form 12B if they joined mid-year. Missing this step means you’re guessing all year.
Step 2 — Estimate annual taxable salary
Add up all taxable components for the full year: basic, DA, special allowance, city compensatory allowance, performance bonus (estimated), and any other taxable perquisites. Exclude PF employee contribution (already deducted), and exempt allowances like meal coupons up to ₹50 per meal.
For a mid-year joiner, use income from joining date to March 31 — plus add their income from the previous employer (Section 192(2A)). They must submit Form 12B or their previous Form 16. Ignore this and you’ll under-deduct; the employee pays steep self-assessment tax come July.
Step 3 — Apply deductions (old regime only)
If the employee chose old regime, reduce estimated annual income by the standard deduction (₹50,000) and all declared deductions — HRA exemption calculated under Section 10(13A), 80C investments, 80D premiums, home loan interest, etc.
HRA exemption is the lowest of: (a) actual HRA received, (b) rent paid minus 10% of basic + DA, (c) 50% of basic + DA for metros (Delhi, Mumbai, Chennai, Kolkata) or 40% for non-metro cities.
Step 4 — Compute annual tax
Apply the slab rates on net taxable income. Add 4% Health & Education Cess. Subtract Section 87A rebate if applicable. The result is the employee’s annual TDS liability for the year.
Step 5 — Divide by remaining months
Monthly TDS = Annual tax liability ÷ Number of months remaining in the financial year.
- April computation: divide by 12
- October joiner: divide by 6
- January joiner: divide by 3
Recalculate every time there’s a salary change, bonus, or regime switch.
Step 6 — Deduct and deposit
Deduct the monthly TDS from the employee’s net salary. Deposit using Challan ITNS 281 via the Income Tax Portal (www.incometax.gov.in) under e-Pay Tax using your company’s TAN (Tax Deduction Account Number) by the 7th of the following month. March TDS deadline is April 30.
Worked Example: TDS Calculation for FY 2026-27 (New Regime)
Priya is a Marketing Manager at a Bengaluru tech startup. Annual CTC: ₹15 lakh.
Salary structure: Basic ₹7.5L | HRA ₹3L | Special Allowance ₹4.5L
Regime: New (default, no declaration submitted)
Gross annual salary: ₹15,00,000
Less: Standard deduction: ₹75,000
Net taxable income: ₹14,25,000
Tax computation:
- Up to ₹4L: Nil
- ₹4L to ₹8L: 5% of ₹4L = ₹20,000
- ₹8L to ₹12L: 10% of ₹4L = ₹40,000
- ₹12L to ₹14.25L: 15% of ₹2.25L = ₹33,750
- Subtotal: ₹93,750
- Add 4% cess: ₹3,750
- Annual TDS: ₹97,500
No Section 87A rebate (taxable income exceeds ₹12L).
Monthly TDS (computed in April) = ₹97,500 ÷ 12 = ₹8,125/month
Priya’s July payslip will show ₹8,125 under “Income Tax” deductions — and her Form 16 next June will match this exactly.
Mid-Year Adjustments HR Must Handle
Salary hike in June
When the appraisal increment kicks in on June 1, recompute annual income (using 2 months at old salary + 10 months at new salary), recalculate annual tax, subtract TDS already deposited April–May, and divide the balance by remaining 10 months. Don’t just raise the salary without touching TDS — it’s the most common source of year-end corrections.
Bonus in Q2 or Q3
Add the bonus to estimated annual income the month it’s decided (not when it’s paid). Recompute, subtract deposited TDS, divide balance by remaining months. Never try to deduct the entire bonus TDS in one month — that creates a spike that employees rightly complain about.
Employee resignation in November
When an employee gives notice, compute TDS for the remaining days of their last month as normal. Ensure all arrears, leave encashment, and gratuity are reflected correctly before issuing the final payslip. Issue Form 16 at year-end (or on request, via TRACES Part A).
What HR Managers Get Wrong About TDS on Salary
Not collecting regime declarations. The most common mistake. Defaulting everyone to new regime costs high-earners with significant 80C/HRA deductions hundreds of thousands in unnecessarily early tax payments. Ask in April. Document the answer.
Ignoring the previous employer’s income. A September joiner who earned ₹6 lakh in their first job this year still has that ₹6L to account for. Section 192(2A) requires you to add it. Without it, your TDS is too low and the employee gets a tax demand later.
Skipping TDS on reimbursements wrongly categorised. Some companies pay “allowances” that are actually fully taxable but label them as reimbursements to escape TDS. CBDT scrutiny catches this in TDS returns. If it’s not a legitimate expense with proof, it’s salary.
Depositing late because payroll runs on the last day. If your July payroll runs on July 31, TDS must be deposited by August 7 — not August 31. The deposit deadline is from the date of deduction, not month-end. Set a separate TDS deposit task on the 5th of every month.
Not adjusting for excess deduction in the last quarter. Year-end adjustments are normal — but large March corrections (either deducting or refunding) look bad on audit. Spread adjustments across November, December, and January when you have actual investment proofs.
TDS Compliance Checklist for Indian HR Teams
| Task | When | Action |
|---|---|---|
| Collect regime declarations | April 1–15 | Form 10-IEA or HR system self-declaration |
| Collect investment declarations (Form 12BB) | April 15 | Provisional estimates acceptable |
| Compute annual TDS per employee | April 20 | Enter into payroll system before April run |
| Deposit challan (ITNS 281) | 7th of next month | Income Tax Portal, using TAN |
| File Form 24Q Q1 | 15 July | TRACES / e-TDS portal |
| File Form 24Q Q2 | 15 October | TRACES / e-TDS portal |
| Collect proof of investment | Nov 1–15 | Physical or upload to HR portal |
| Revise TDS for second half | November payroll | Based on actual investment proofs |
| File Form 24Q Q3 | 15 January | TRACES / e-TDS portal |
| File Form 24Q Q4 | 31 May | TRACES / e-TDS portal |
| Issue Form 16 to employees | By 15 June 2027 | TRACES Part A + employer Part B |
Frequently Asked Questions About TDS on Salary
Q: What is the minimum salary for TDS deduction in FY 2026-27?
Under the new regime, TDS applies when gross salary exceeds ₹12.75 lakh (₹12L taxable income after ₹75K standard deduction, with Section 87A rebate wiping out tax below that threshold). Under the old regime, TDS applies when taxable income after all deductions exceeds ₹2.5 lakh (₹5L with 87A rebate).
Q: What if an employee has no PAN?
Deduct TDS at 20% of gross salary — no slabs, no exemptions, no rebate. This is under Section 206AA. The employee takes home significantly less. Chase PAN submissions before the first payroll of the year. Aadhaar-PAN linking via the IT portal resolves this for most employees.
Q: Can an employee claim a refund if excess TDS was deducted?
Yes. The employee files an ITR after the year ends. Excess TDS appears in Form 26AS and is refunded by the Income Tax department directly to their bank. Your job as employer is issuing a correct Form 16 — the ITR and refund process is entirely the employee’s to manage.
Q: Is TDS deducted on the employer’s PF contribution?
No. The employer’s PF contribution (up to 12% of basic + DA, or ₹7.5 lakh annually) is not included in the employee’s taxable salary. Employee’s own PF contribution is deducted from gross before TDS — and under the old regime, qualifies for 80C deduction up to the ₹1.5 lakh limit.
Q: What is Form 12BB and when must employees submit it?
Form 12BB is the employee’s investment and expense declaration form submitted to the employer. It covers HRA rent details, LTA plans, home loan interest, and 80C to 80U investments. Employees submit it twice — provisional in April and final with proofs in October/November. CBDT mandates it under Rule 26C; without it, the employer cannot give deduction credit.
Q: Does TDS apply to contract workers on the payroll?
If a contractor receives regular monthly salary and is treated as an employee for payroll purposes, Section 192 applies. If they invoice you as a vendor, Section 194C (1–2%) or 194J (10%) applies. The distinction matters — verify each engagement’s legal nature before deciding which provision to use.
A Quick Note Before You Run Payroll This Month
TDS on salary has zero margin for “we’ll fix it later.” The Interest under Section 201(1A) runs at 1% per month for non-deduction and 1.5% per month for non-deposit — on top of the demand notice. For a team of 50 employees averaging ₹50,000 TDS per month, a 2-month delay costs ₹75,000 in interest alone.
If your team is still calculating TDS in spreadsheets with manual slab look-ups, look at EZHRM’s TDS & Form 16 module — it handles Section 192 computation, regime switching, mid-year adjustments for hikes and bonuses, Form 24Q generation, and Form 16 issuance, so your payroll team can close the month without the tax calculation becoming a separate project.