How to Calculate TDS on Salary in India (FY 2025–26): Step-by-Step Guide

Learn how TDS is calculated on your salary with real examples, regime comparison, and expert-backed tips to boost take-home for FY 2025–26.

In India, every salaried employee earning above a certain threshold is subject to Tax Deducted at Source (TDS), which their employer deducts from monthly pay. This deduction ensures timely collection of income tax and reduces the burden of a lump sum tax payment at the end of the year. With evolving tax regimes and recent Budget 2025 announcements, understanding how TDS is calculated on salary is more important than ever.

Whether you’re a first-time employee or a seasoned professional trying to assess your in-hand salary post-tax, this guide will walk you through every aspect of TDS calculation—complete with updated slabs, comparison of tax regimes, and practical examples.

What is TDS on Salary?

TDS on salary is governed by Section 192 of the Income Tax Act, 1961. It requires employers to deduct tax from an employee’s monthly salary based on their estimated annual income. The deducted amount is then deposited with the government on the employee’s behalf. At the end of the financial year, the employee receives Form 16, which summarizes these deductions and can be used for filing income tax returns.

This process helps both the employee and the government by streamlining tax collection and compliance. Importantly, the amount of TDS depends on several factors—like your gross salary, deductions under sections such as 80C or 80D, tax regime selected, and applicable rebates.

Understanding Income Tax Slabs for FY 2025–26

Before calculating TDS, it’s essential to understand the tax slabs under both the Old Tax Regime and the New Tax Regime introduced in Budget 2025. The regime you choose directly affects your monthly TDS and take-home salary.

Old Tax Regime (With Deductions)

Note: Individuals earning up to ₹5 lakhs are eligible for full tax rebate under Section 87A, resulting in zero tax liability.

This regime allows claiming deductions such as:

• ₹1.5 lakhs under Section 80C (LIC, PF, PPF, ELSS, etc.)
• ₹25,000–₹50,000 under Section 80D for medical insurance
• HRA, LTA, and standard deduction of ₹50,000

You can refer to the official Income Tax Department portal for complete eligibility and deduction details.

New Tax Regime (No Deductions, Lower Rates)

While the new tax regime offers lower tax rates, it does not allow most deductions except the standard deduction of ₹50,000, and deductions for NPS and employer contributions. It’s ideal for those who don’t claim major deductions or have simpler salary structures.

An insightful comparison between both regimes is offered on Tax2win, helping you assess which one suits your financial profile better.

Choosing Between Old and New Tax Regime

Selecting the right tax regime is crucial before calculating TDS. Employers now request employees to declare their regime preference at the beginning of the financial year. Failing to do so may lead to default tax deduction under the new regime.

The old regime is beneficial for those availing home loan interest deductions, HRA, and Section 80C/80D benefits. The new regime benefits those with minimal investments or simpler salary structures.

Knowing this choice upfront makes your TDS deduction far more accurate.

Step-by-Step Guide to Calculate TDS on Salary

TDS on salary is not a flat-rate deduction—it’s a cumulative tax computed annually and deducted monthly in proportion. To get an accurate picture of your monthly tax liability, follow these six essential steps:

Step 1: Estimate Your Gross Annual Salary

Start by calculating your gross annual salary, which includes all income components such as:

• Basic Pay
• Dearness Allowance (DA)
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Special Allowances
• Performance Bonuses
• Employer-provided benefits like car lease, food coupons, etc.

Example:

Step 2: Deduct Allowances & Exemptions

Now subtract applicable exemptions to arrive at your net taxable salary. Common exemptions include:

• HRA (if you live in rented accommodation)
• Leave Travel Concession (LTC)
• Standard Deduction of ₹50,000
• Section 10 allowances like children’s education, hostel allowance, etc.

For HRA, exemption depends on salary, rent paid, and city of residence. You can use calculators like the one from Groww to accurately compute HRA exemptions.

Step 3: Include Other Income

In addition to your salary, include any other income that contributes to your total taxable amount:

• Interest from fixed deposits or savings accounts
• Rental income from house property
• Capital gains (short or long-term)
• Freelance or consulting income

These must be reported to your employer for accurate TDS calculation, else you might face a tax shortfall at the end of the year.

Step 4: Subtract Eligible Deductions

This is where most employees optimize their taxes using Chapter VI-A deductions. These include:

• Section 80C: Up to ₹1.5 lakhs (LIC, PPF, ELSS, EPF, tuition fees, etc.)
• Section 80D: Medical insurance for self, family, parents
• Section 80E: Education loan interest
• Section 80CCD(1B): ₹50,000 under NPS (over and above 80C)

Illustration:

These deductions are allowed only under the old tax regime. Under the new regime, most of these are not applicable except for the standard deduction and certain employer-side contributions to NPS.

For current deduction limits and eligible instruments, you can refer to NSDL’s official tax guide.

Step 5: Apply the Relevant Tax Slab

Once net taxable income is arrived at, apply the relevant income tax slab rates based on the regime you’ve opted for. Don’t forget to include 4% health and education cess on the total tax payable.

Let’s say your net taxable income is ₹6,15,000 under the old regime:

• First ₹2.5 lakh = Nil
• ₹2.5L–₹5L = 5% of ₹2.5L = ₹12,500
• ₹5L–₹6.15L = 20% of ₹1.15L = ₹23,000
• Total Tax = ₹35,500 + 4% Cess (₹1,420) = ₹36,920

Step 6: Calculate Monthly TDS

Divide the total tax payable by the number of months remaining in the financial year. If your annual TDS liability is ₹36,920 and your calculation starts in April, then monthly TDS would be:

₹36,920 ÷ 12 = ₹3,077/month

Employers are expected to adjust this TDS monthly based on changes in declared investments, bonus payouts, or mid-year resignations.

TDS Calculation Example: Old vs New Tax Regime

To better understand the impact of tax regime selection on monthly TDS, let’s walk through a practical example. Consider a salaried individual with the following annual income structure:

Let’s now calculate TDS under both regimes.

Old Tax Regime (With Deductions)

Assumptions:

• HRA Exemption: ₹1,00,000 (based on rent paid and metro city status)
• Standard Deduction: ₹50,000
• Section 80C Investments: ₹1,50,000
• Section 80D (Health Insurance): ₹25,000
• NPS (Section 80CCD(1B)): ₹50,000

Total Deductions & Exemptions: ₹3,75,000

Taxable Income = ₹10,20,000 – ₹3,75,000 = ₹6,45,000

Tax Calculation:

• First ₹2.5L: Nil
• ₹2.5L–₹5L: 5% = ₹12,500
• ₹5L–₹6.45L: 20% of ₹1.45L = ₹29,000
• Total = ₹41,500 + 4% Cess = ₹43,160
• Monthly TDS = ₹3,596.67

New Tax Regime (No Deductions Except Standard Deduction)

Applicable Deductions: Standard Deduction of ₹50,000

Taxable Income = ₹10,20,000 – ₹50,000 = ₹9,70,000

Tax Calculation:

• ₹0–₹3L: Nil
• ₹3L–₹6L: 5% = ₹15,000
• ₹6L–₹9L: 10% = ₹30,000
• ₹9L–₹9.7L: 15% of ₹70,000 = ₹10,500
• Total = ₹55,500 + 4% Cess = ₹57,720
• Monthly TDS = ₹4,810

Regime Comparison Summary

As the comparison shows, the old regime results in lower TDS if the employee maximizes deductions. However, the new regime is suitable for those without major tax-saving investments or who prefer simplified filing.

Employees should also be aware of the Form 10IE requirement if switching tax regimes during filing. You can find more about this on the Income Tax India e-filing portal.

Salary Structure Design for Lower TDS

Smart structuring of salary components can significantly reduce TDS deductions. Employers often allow flexibility in choosing components like HRA, food coupons, or LTA. For instance:

• Opting for HRA and paying rent legally qualifies you for exemptions
• LTA claims for domestic travel once in two years are tax-free
• Meal vouchers (up to ₹50 per meal) are exempt from tax

These choices can affect your net taxable income even before applying deductions. If structured well, they can lower your tax outgo and increase your in-hand salary.

For a personalized breakup, you can use employer-provided tools or refer to external calculators like the one offered by Scripbox.

TDS Payment, Deadlines, and Compliance for Employers & Employees

While understanding how TDS is calculated is crucial for employees, it’s equally important to be aware of compliance rules, due dates, and documentation involved in the process. Both employers and employees have specific responsibilities to ensure smooth deduction and reporting.

Monthly TDS Deposit Timeline for Employers

Once the employer deducts TDS from salary, it must be deposited with the government within a stipulated timeframe. The Income Tax Rules prescribe strict deadlines for this.

For example, TDS deducted in May must be deposited by 7th June. Non-compliance may result in interest penalties and even disallowance of expenses under the Income Tax Act.

Employers must use Challan ITNS 281 for payment, which can be done through authorized banks or via the TIN NSDL online portal.

Quarterly TDS Return Filing (Form 24Q)

In addition to depositing tax, employers are also required to file quarterly TDS returns using Form 24Q. This form captures employee-level details of salary paid and tax deducted, including PAN, income details, and deductions claimed.

Incorrect or delayed filing can attract penalties under Section 234E and 271H. Detailed information about filing procedures is available on the TRACES website, where employers can also download Form 16 later.

Form 16 and Its Importance for Employees

Form 16 is the most crucial document provided by an employer to a salaried employee at the end of the financial year. It serves as proof that TDS on salary has been deducted and deposited with the government.

It is divided into two parts:

• Part A: Contains employer details, employee PAN, summary of TDS deducted and deposited
• Part B: Provides detailed salary breakup, exemptions claimed, deductions under Chapter VI-A, and final taxable income

Employees should:

• Match the TDS figures in Form 16 with their Form 26AS available on the e-Filing portal
• Ensure their PAN is correctly quoted to avoid higher TDS at 20% under Section 206AA
• Retain Form 16 for filing ITR and future reference

If there’s a mismatch between the Form 16 and Form 26AS, it can delay tax refunds or trigger scrutiny.

What If TDS is Not Deducted or Deposited?

Although employers are liable to deduct and deposit TDS, the responsibility to pay correct tax ultimately lies with the employee. If TDS is not deducted or deposited, the employee may:

• Face a shortfall during ITR filing
• Have to pay interest under Section 234B/234C for delayed advance tax
• Be subject to scrutiny or demand notices if not declared properly

To avoid such issues, salaried individuals must:

• Review payslips regularly
• Use Form 26AS and AIS to verify TDS entries
• Inform employers about any other income or deductions for accurate TDS calculation

Questions on TDS Calculation and Salary Taxation

TDS on salary continues to be one of the most common yet misunderstood areas for salaried individuals. Here are some frequently asked questions that address key doubts and practical concerns:

What if I Change Jobs Mid-Year?

When you switch employers during the financial year, your new employer may not consider the income and TDS from the previous company unless you disclose it. As a result, your overall tax calculation may be incorrect, leading to under- or over-deduction.

To avoid double benefits or underpayment:

• Share Form 12B with your new employer (contains details of earlier salary and TDS)
• Disclose total income for the year, not just from the current employer
• Retain salary slips and final settlement details for ITR filing

You can download Form 12B format from several financial websites or directly refer to this template provided by Karvy.

Can I Claim Refund If Excess TDS Was Deducted?

Yes. If more TDS was deducted than your actual tax liability, the refund can be claimed while filing your income tax return. The Income Tax Department typically processes refunds within a few weeks of verification.

To speed up the process:

• Ensure your bank account is pre-validated on the Income Tax e-filing portal
• File return well before the due date
• Double-check all income, deduction, and TDS figures against Form 26AS and AIS

What Happens if My PAN is Not Provided to Employer?

If you fail to submit your Permanent Account Number (PAN) to the employer, TDS will be deducted at the higher of the applicable rate or 20% under Section 206AA, regardless of your actual income slab.

Hence, always ensure your PAN is updated in employer records, especially for new joinees or contractual staff.

Is TDS Applicable on Arrears, Bonus, or Leave Encashment?

Yes. TDS is applicable on:

• Annual performance bonuses
• Leave encashment (fully taxable for private sector employees)
• Arrears of salary paid in a financial year

In such cases, you can request relief under Section 89(1) to spread the income over previous years if it causes a tax burden spike. Relief calculation requires submission of Form 10E, which can be filed through your income tax account dashboard.

More guidance on this is available through the official Income Tax Form 10E utility.

Do I Need to File ITR If TDS is Already Deducted?

Yes. Even if full TDS has been deducted from your salary, filing an Income Tax Return (ITR) is mandatory if your total income exceeds the basic exemption limit. Filing helps in:

• Claiming refunds for excess TDS
• Declaring other income (interest, rent, capital gains)
• Avoiding compliance notices or late fees

It’s also essential for visa applications, loan processing, and future financial credibility.

How Can I Check TDS Already Deducted on My Salary?

The easiest way is to view your Form 26AS or Annual Information Statement (AIS) online. These documents reflect:

• TDS deducted by all employers
• Advance tax or self-assessment payments
• High-value transactions and income entries

To access it:

1. Log in to the e-filing portal
2. Navigate to “Services” → “View Form 26AS”
3. Or, go to AIS tab for the detailed version

Both are important before filing your tax return.

Smart Tips to Reduce TDS and Increase In-Hand Salary

While TDS is a statutory obligation, there are legal and smart ways to reduce your tax burden, which in turn leads to higher monthly take-home. Strategic salary planning and timely declarations can ensure optimum tax savings without violating compliance.

1. Maximize Tax-Saving Investments

Use the full benefit of Section 80C by investing in:

• Public Provident Fund (PPF)
• Employees’ Provident Fund (EPF)
• Equity Linked Saving Schemes (ELSS)
• Life Insurance Premiums
• Tax-saving FDs

These collectively allow a deduction of up to ₹1.5 lakhs per year. Make sure to submit proof to your employer before the declaration cutoff date to ensure lower monthly TDS. You can track these deadlines and declaration options using platforms like ClearTax.

2. Use NPS for Additional Deductions

National Pension Scheme (NPS) is an excellent tool for additional savings. You can claim:

• Up to ₹50,000 under Section 80CCD(1B) over and above the 80C limit
• Further deductions on employer contributions under Section 80CCD(2)

This not only reduces TDS on salary but also builds long-term retirement wealth. To learn more about how it works and its benefits, refer to the NPS Trust portal.

3. Structure Salary with More Tax-Free Components

If your employer allows flexibility, request inclusion of the following to reduce taxable income:

• Meal coupons (up to ₹2,200/month tax-free)
• Conveyance allowance (for employees without company transport)
• Telephone/Internet reimbursement
• Books and research allowance (for professionals in R&D or academia)
• Education and hostel allowance for children

Proper documentation and usage of these components can lead to a significant reduction in your monthly TDS.

4. Declare All Deductions and Rent Payments Timely

Most employers provide a proof submission window in January or February. Failing to submit valid rent receipts, investment proofs, or insurance premiums may result in excess TDS.

If you’re paying rent and not receiving HRA, you can still claim it under Section 80GG, provided you meet the eligibility. Keep all receipts, bank statements, and rental agreements handy.

5. Choose Tax Regime Wisely Every Year

The right tax regime can make a major difference. For instance:

Since the government now allows taxpayers to switch regime every year (for salaried individuals), it’s wise to calculate both options annually before declaring.

You can use regime comparison tools available on portals like Groww to make the right decision based on latest rules.

Final Thoughts: Why Understanding TDS on Salary Matters

Knowing how TDS is calculated on your salary isn’t just about compliance—it’s about financial empowerment. Whether you’re planning investments, optimizing take-home, or filing returns, being informed gives you control over your money.

Don’t rely solely on your employer to handle everything. Cross-verify, plan early, and utilize every eligible exemption to reduce your liability. Every rupee saved is a rupee earned—and smarter tax planning today can lead to stronger financial outcomes tomorrow.

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