TDS on Salary: How It Works and How to Save More
Understand how TDS on salary is calculated under Section 192. Learn to reduce TDS through investment declarations, regime choice, and smart tax planning.
TDS (Tax Deducted at Source) on salary is the income tax your employer deducts from your monthly salary before paying you. Under Section 192 of the Income Tax Act, every employer is legally required to deduct TDS based on your estimated annual income and applicable tax slab. Understanding how TDS works helps you plan better and avoid both excess deduction and year-end tax surprises.
What is TDS on Salary?
TDS on salary is the government's mechanism to collect income tax in advance, spread across 12 months. Instead of paying your entire tax liability at year-end, your employer estimates your annual tax and deducts 1/12th of it every month. This deducted amount is deposited with the government and reflected in your Form 26AS and AIS (Annual Information Statement). When you file your ITR, this TDS is adjusted against your actual tax liability.
How Employer Calculates TDS
Step-by-step TDS calculation process:
- Step 1: Estimate your total annual salary (basic + HRA + allowances + bonuses)
- Step 2: Deduct exemptions (HRA, LTA) based on your declarations
- Step 3: Apply standard deduction (₹75,000 new regime / ₹50,000 old regime)
- Step 4: Deduct Chapter VI-A deductions (80C, 80D, etc.) if old regime
- Step 5: Calculate tax on net taxable income using applicable slab rates
- Step 6: Add 4% health and education cess
- Step 7: Divide annual tax by remaining months = monthly TDS
TDS Calculation Example: ₹10 Lakh Salary
Let's calculate monthly TDS for Amit with ₹10 lakh annual salary under both regimes:
New Tax Regime (Default):
- Gross Salary: ₹10,00,000
- Less: Standard Deduction: ₹75,000
- Taxable Income: ₹9,25,000
- Tax: ₹0 (up to ₹3L) + ₹20,000 (₹3-7L @5%) + ₹22,500 (₹7-9.25L @10%) = ₹42,500
- Add Cess (4%): ₹1,700
- Total Annual Tax: ₹44,200
- Monthly TDS: ₹3,683
Old Tax Regime (with deductions):
- Gross Salary: ₹10,00,000
- Less: Standard Deduction: ₹50,000
- Less: HRA Exemption: ₹1,50,000 (assumed)
- Less: 80C: ₹1,50,000 | 80D: ₹25,000
- Taxable Income: ₹6,25,000
- Tax: ₹12,500 (₹2.5-5L @5%) + ₹25,000 (₹5-6.25L @20%) = ₹37,500
- Less: Rebate 87A: ₹0 (income > ₹5L)
- Add Cess (4%): ₹1,500
- Total Annual Tax: ₹39,000
- Monthly TDS: ₹3,250
In this example, the old regime saves ₹5,200 annually. But this depends entirely on your actual deductions. Without HRA and 80C, the new regime would be significantly better.
How to Reduce TDS on Salary
Legitimate ways to reduce your monthly TDS:
- Submit investment declarations (Form 12BB) at the start of the financial year
- Declare 80C investments: EPF, PPF, ELSS, LIC premium, tuition fees
- Submit rent receipts for HRA exemption claim
- Declare health insurance premium under Section 80D
- Report home loan interest under Section 24(b)
- Declare NPS contribution for extra ₹50,000 deduction (80CCD 1B)
- Choose the tax regime that results in lower tax for your situation
- Report previous employer salary if you switched jobs mid-year
Investment Declaration: Form 12BB
Form 12BB is the declaration form you submit to your employer listing all your planned investments and expenses for the financial year. Based on this form, your employer adjusts TDS calculations. Most companies ask for declarations in April (provisional) and January-February (final with proofs).
What to declare in Form 12BB:
- HRA: Rent amount, landlord name, PAN (if rent > ₹1 lakh/year), address
- Section 80C: PPF, ELSS, LIC, EPF, NSC, tuition fees, home loan principal
- Section 80D: Health insurance premium for self, family, and parents
- Section 24(b): Home loan interest certificate from bank
- Section 80E: Education loan interest paid
- Section 80CCD(1B): NPS contribution (additional ₹50,000)
- LTA: Leave Travel Allowance claim details
TDS When Switching Jobs Mid-Year
When you change jobs during a financial year, your new employer doesn't know about income earned at your previous company. This can lead to incorrect TDS calculation. You must provide Form 12B (previous employer salary details) to your new employer so they can calculate TDS on your combined annual income correctly.
Steps when switching jobs:
- Collect Form 16 (Part A & B) from previous employer
- Submit Form 12B to new employer with previous salary and TDS details
- Re-submit investment declarations to new employer
- If not submitted, you may face higher TDS or tax demand when filing ITR
- New employer will calculate TDS on combined salary from both employers
If you don't inform your new employer about previous salary, both employers may give you the benefit of basic exemption limit (₹2.5L or ₹3L), resulting in short TDS deduction and a tax demand when you file ITR.
Excess TDS Deducted? How to Get Refund
If your employer deducted more TDS than your actual tax liability (common when you make investments late in the year or have other income sources with losses), you can claim a refund by filing your Income Tax Return. The refund is processed within 30-45 days of ITR verification and credited directly to your bank account with interest under Section 244A.
Common reasons for excess TDS:
- Investment proofs submitted late (after employer's deadline)
- Employer didn't consider HRA exemption properly
- You have capital losses that offset other income
- Switched to new regime after employer calculated on old regime
- Bonus/variable pay pushed you to higher slab temporarily
TDS Certificate: Form 16
Form 16 is the TDS certificate your employer issues by June 15 every year. It contains two parts: Part A (TDS deducted and deposited details with challan numbers) and Part B (detailed salary breakup, deductions claimed, and tax computation). Form 16 is essential for filing your ITR and serves as proof of tax paid.
TDS Rates for FY 2024-25
Unlike other TDS sections with flat rates, TDS on salary (Section 192) is deducted at your average tax rate based on estimated annual income. There's no flat TDS rate — it's calculated individually for each employee based on their salary, regime choice, and declared deductions.
TDS on other income types (for reference):
- Section 194A: Interest income (banks) — 10% if > ₹40,000/year
- Section 194B: Lottery/game winnings — 30%
- Section 194H: Commission/brokerage — 5%
- Section 194I: Rent — 10% (if > ₹2.4 lakh/year)
- Section 194J: Professional fees — 10%
- Section 194N: Cash withdrawal — 2% (if > ₹1 crore)
How to Check TDS Deducted: Form 26AS and AIS
Verify your TDS through these methods:
- Form 26AS: Available on TRACES portal — shows all TDS deducted against your PAN
- AIS (Annual Information Statement): On income tax portal — comprehensive financial data
- TIS (Taxpayer Information Summary): Processed version of AIS with feedback option
- Monthly payslip: Check TDS deduction amount each month
- Form 16: Annual certificate from employer (issued by June 15)
Calculate your exact tax liability and optimal TDS planning
Use Income Tax CalculatorFrequently Asked Questions
Your employer estimates your total annual tax liability based on projected salary, declared investments, and chosen tax regime. This annual tax is divided by 12 (or remaining months) to arrive at monthly TDS. The calculation is revised when you submit investment proofs or receive bonuses.
Yes, by submitting investment declarations (Form 12BB) with details of your 80C investments, HRA, home loan, health insurance, and other deductions. Your employer will recalculate TDS based on these declarations. You can also apply to the Assessing Officer for a lower TDS certificate under Section 197.
If your employer fails to deduct TDS, they face penalties under Section 201 (interest at 1-1.5% per month). As an employee, you're still liable to pay tax — you must pay advance tax or self-assessment tax when filing ITR. The employer's default doesn't absolve your tax obligation.
Under the New Tax Regime, if your taxable income (after standard deduction of ₹75,000) is up to ₹7 lakh, you get full rebate under Section 87A — so effectively zero TDS. Under the Old Regime, the rebate applies up to ₹5 lakh taxable income.