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Tax Deducted at Source (TDS) on salary is one of the most important compliance mechanisms under the Income-Tax Act, 2025. From 1 April 2026, section 392 of the Income-Tax Act, 2025 along with the relevant provisions of the Income-Tax Rules, 2026 will govern the manner in which employers deduct tax from salary income.

Every salaried employee should understand how salary TDS works, what information may be furnished to the employer, how deductions and exemptions are considered, and the rights and responsibilities arising under the new law. This article explains the salary TDS provisions in simple language and provides practical guidance to help employees avoid incorrect TDS deductions, year-end tax shocks and additional tax liability while filing their income-tax returns.

1. What is TDS on salary?

TDS on salary means deduction of income-tax by the employer at the time of payment of salary to the employee. Under section 392(1) of the Income-Tax Act, 2025:

• Every employer responsible for paying salary is required to deduct income-tax (TDS).
• TDS is required to be deducted at the time of payment of salary.
• TDS is deducted at the average rate of income-tax applicable to the estimated annual taxable salary income of the employee, based on the tax regime selected by the employee.

In simple words:

• The employer estimates the employee’s total taxable salary for the financial year.
• The estimated tax liability is computed.
• The total tax liability is spread over the remaining months of the year.
• Proportionate TDS is deducted every month from salary payments. 

2. Who is Responsible for Deducting TDS?

The following persons are responsible for deducting TDS on salary:

• Companies
• Partnership firms
• LLPs
• Government departments
• Trusts and institutions
• Start-ups
• Any employer paying salary income

The employer acts as a tax deductor on behalf of the Central Government

3. When is TDS deducted?

TDS is deducted:

• At the time of actual payment of salary
• Not merely when salary becomes due

Therefore:

• If salary is delayed, TDS is deducted when payment is actually made.
• Advance salary and arrears are also subject to TDS. 

4. How Does the Employer Calculate Salary TDS?

The employer generally follows the following process:

Step 1 – Estimate Gross Salary

The employer estimates:

• Basic salary
• Dearness allowance
• Bonus
• Commission
• Allowances
• Perquisites
• Incentives
• Employer taxable contributions
• Any other taxable salary component

Step 2 – Consider Exemptions and Deductions

The employer considers:

• House Rent Allowance exemption
• Leave Travel Concession exemption
• Standard deduction (as applicable)
• Interest on housing loan
• Eligible deductions
• Other admissible exemptions
• Relief under section 157 in respect of salary paid in arrears or in advance.

Step 3 – Include Other Income/Loss Reported by Employee

The employer may also consider:

• Salary from previous employer
• Income from house property
• Other income
• TDS/TCS already deducted or collected elsewhere

Step 4 – Compute Estimated Tax

The employer calculates:

• Taxable income
• Applicable slab rates under the tax regime opted by the employee.
• Surcharge, if applicable
• Health and education cess

Step 5 – Deduct Monthly TDS

The annual estimated tax is spread across the remaining months of the financial year.

5. Average Rate Method of TDS

Section 392 of the Income-Tax Act, 2025 requires salary TDS to be deducted at the “average rate of income-tax”.

Formula for Average Rate of TDS

Average Rate of Income-Tax = Estimated Annual Tax Liability ÷ Estimated Annual Taxable Salary

Monthly TDS is then computed using this average rate.

Example

• Estimated annual taxable salary: Rs. 20,00,000
• Estimated total tax liability: Rs. 2,08,000

Average Tax Rate

Rs. 2,08,000 ÷ Rs. 20,00,000 = 10.4%

If the monthly taxable salary is Rs. 1,66,667, then:

Monthly TDS is Rs. 1,66,667 × 10.4% = Rs. 17,333 (approx.)

6. What Information Can Employees Submit to Employer?

Rule 204 permits employees to furnish certain particulars in Form No. 122. This enables proper TDS computation. Employees may disclose:

(a) Salary from Previous or Other Employer

If an employee changes jobs during the year, details of the previous salary and TDS may be submitted:

This prevents short deduction of tax.

(b) Loss from House Property

Employees can report:

• Housing loan interest loss, if eligible based on the tax regime selected.

This reduces taxable salary.

(c) Other Income

Employees may disclose:

• Interest income
• Rental income
• Dividend income
• Capital gains
• Freelancing income

However, losses under heads other than house property cannot be adjusted by the employer.

(d) TDS/TCS Already Deducted

The employee can report:

• TDS deducted by previous employer
• TDS on any other income reported
• Tax collected at source (TCS)

This helps avoid excess deduction.

7. Important Restriction on Adjustment of Losses

Under section 392(4)(b):

The employer cannot reduce salary TDS for all kinds of losses.

Only the following are permitted:

1. Loss under the head “Income from house property”
2. TDS/TCS already deducted or collected

Therefore:

• Business losses cannot be adjusted.
• Capital losses cannot be adjusted.
• Speculative losses cannot be adjusted.

8. Evidence Employees Must Submit

Rule 205 requires employees to furnish evidence or particulars in Form No. 124 in respect of exemptions, deductions and other eligible claims considered for salary TDS purposes, such as:

(a) House Rent Allowance (HRA)

Employees must provide:

• Name of landlord
• Address of landlord
• PAN of landlord where annual rent exceeds Rs. 1,00,000
• Relationship with landlord, if any

(b) Leave Travel Concession (LTC/LTA)

Employees must provide:

• Travel bills
• Tickets
• Supporting expenditure proof

(c) Interest on Housing Loan

Employees must provide:

• Name of lender
• Address of lender
• PAN of lender
• Interest certificate

(d) Chapter VIII Deductions

Employees must furnish proof of investments/expenditure relating to deductions. Examples may include:

• Life insurance premium
• Provident fund contribution
• Tuition fees
• ELSS investments
• Medical insurance premium
• Pension scheme contributions
• Interest on Higher Educational loan

9. Can Employer Adjust Excess or Short TDS?

Yes.

Section 392(5)(c) specifically allows the employer to:

• Increase TDS
• Reduce TDS

for correcting:

• Excess deduction
• Short deduction
• Failure to deduct in earlier months

within the same financial year.

Example

If excess TDS was deducted in April and May, the employer may reduce TDS in later months. Similarly, if tax was under-deducted initially, the employer can increase deductions in the remaining months.

10. Non-Monetary Perquisites – Employer Can Pay Tax

Section 392(2) contains a special provision for non-monetary perquisites. Examples:

• Company car
• Free accommodation
• Club membership
• Gift vouchers
• ESOP-related benefits

The employer may choose:

• To pay tax on behalf of the employee
• Without recovering such tax from employee salary

The tax paid by the employer is treated as TDS.

11. TDS on ESOPs in Eligible Start-ups

Section 392(3) contains special rules for eligible start-ups. Where eligible start-ups allot:

• Specified securities
• Sweat equity shares

Tax deduction/payment may be deferred as per section 289(3). This provision provides relief to employees receiving ESOPs where immediate tax payment could create liquidity issues.
 

12. Salary Certificate and Perquisite Statement

Under Rule 204(2), employers is required to issue salary certificate in the Form No. 130 and the particulars of perquisites and profits in lieu of salary in Form No. 123. The statement should contain details of:

• Salary
• Perquisites
• Profits in lieu of salary
• Value of taxable benefits
• Tax deducted

Employees should carefully verify these details.

13. Provident Fund Withdrawal and TDS

Section 392(6) and 392(7) contain important provisions relating to provident fund withdrawals.

Recognised Provident Fund

TDS may apply where:

• The accumulated balance becomes taxable
• Conditions for exemption are not satisfied

EPF Withdrawal is Rs. 50,000 or more

Under section 392(7):

• TDS at 10% applies,
• If the amount includible in total income

14. TDS on Salary Paid in Foreign Currency

Where salary is paid in foreign currency:

• The salary is converted into Indian Rupees at the prescribed exchange rate

TDS is then calculated on the INR equivalent.

15. Due Dates for Deposit of Salary TDS by Employer

Rule 218 prescribes the due dates.

(i) For Non-Government Employers

Salary Paid in March

TDS deposit due date:

• On or before 30 April

Salary Paid in Other Months

TDS deposit due date:

• Within 7 days from end of the month

For Government Offices:

Different procedures apply depending on:

• Challan payment
• Book adjustment system

16. Quarterly Payment Facility in Special Cases

The Assessing Officer may permit quarterly payment of TDS in specified cases. The quarterly due dates are:

This facility is available only with prior approval.

17. What Employees Should Check Every Month

Every salaried employee should regularly review:

• Salary slips
• Monthly TDS deduction
• PAN correctness
• Regime selection
• Investment declarations
• Form 26AS
• Annual Information Statement (AIS)
• Employer tax deposit compliance

Failure by the employer to deposit TDS may create difficulties while filing the return.

18. Common Mistakes Employees Must Avoid

(a) Not Declaring Previous Salary

This may lead to:

• Lower TDS
• Self-assessment tax liability
• Interest liability

(b) Submitting False Investment Proof

Incorrect claims may result in:

• Additional tax
• Interest
• Penalty

(c) Ignoring Form 26AS/AIS

Employees should verify whether:

• Employer has actually deposited TDS
• Correct amount is reflected

(d) Waiting Until Year-End

Investment declarations and supporting proofs should be submitted on time.

19. Difference Between Investment Declaration and Investment Proof

Employees often confuse these two stages.

20. Can Employees Claim Additional Deductions in Income Tax Return?

Yes, even if the employer does not consider certain deductions while deducting TDS, employees can still claim eligible deductions while filing the income- tax return. However:

• Proper evidence should be maintained.
• The claim must be legally admissible.

21. Consequences of Incorrect TDS Deduction

For Employer

The employer may face:

• Interest liability
• Penalty
• Disallowance consequences
• Prosecution in serious cases

For Employee

The employee may face:

• Additional self-assessment tax
• Interest liability
• Refund delays
• Scrutiny notices

22. Practical Checklist for Salaried Employees

Before the financial year begins:

• Choose tax regime carefully
• Estimate annual income
• Plan deductions and exemptions

During the year:

• Submit Form No. 122 if required
• Provide investment declarations timely
• Track monthly TDS
• Preserve bills and proofs

Before year-end:

• Submit Form No. 124 with supporting evidence
• Verify tax computation
• Check Form 26AS and AIS

After year-end:

• Obtain salary TDS certificate
• Verify TDS credit
• File income-tax return correctly

23. Key Forms Relevant for Employees

24. Important Takeaways

Every salaried employee should remember the following:

• TDS is only an advance collection mechanism.
• Final tax liability is determined while filing the income-tax return.
• Correct disclosure to employer avoids future tax demands.
• Only house property loss can be adjusted by employer.
• Supporting evidence is mandatory for most claims.
• Employees should verify TDS credit in Form 26AS/AIS.
• Wrong declarations can lead to tax exposure.
• Salary from previous employer must always be disclosed.
• Provident fund withdrawals may attract TDS in certain cases.
• Proper tax planning at the beginning of the year helps avoid large deductions later.

Conclusion

The TDS provisions under section 392 of the Income-Tax Act, 2025 and the related Income-Tax Rules, 2026 aim to ensure timely collection of taxes from salary income while allowing employees to claim eligible exemptions, deductions and adjustments. From 1 April 2026, salaried employees must become more proactive in tax compliance by:

• Furnishing accurate income details
• Submitting supporting evidence on time
• Monitoring TDS deductions regularly
• Verifying tax credits before filing returns

A clear understanding of the salary TDS framework helps employees avoid unnecessary tax disputes, interest liability and refund delays while ensuring smooth compliance under the new tax regime.

Disclaimer

The information contained in this article is intended solely for general informational and educational purposes and does not constitute legal, tax, accounting or professional advice. Readers are advised to refer to the relevant provisions of the Income-Tax Act, 2025 and the Income-Tax Rules, 2026 and to consult qualified professionals before taking any decision based on the contents of this article. The views expressed are personal and intended solely for academic and knowledge-sharing purposes.