TDS on Salary: How Your Employer Works It Out, Why It Changes Mid-Year, and How to Get It Right

Every month your employer deducts income tax from your salary and pays it to the government on your behalf. That is TDS - tax deducted at source - under Section 192, and it is why most salaried people never write a cheque to the tax department. But the amount on your payslip is not "your tax"; it is your employer's running estimate of it, based on what they know about your year. When that estimate is wrong you either overpay and wait for a refund, or underpay and get a bill in July. This guide explains how the estimate is built, what you can do to make it accurate, and what the year-end reconciliation looks like.

How the monthly TDS figure is built

Section 192 requires the employer to estimate your total taxable salary for the whole financial year, compute the tax on it using the slabs, and deduct that tax in equal monthly instalments. The process every April:

1. Project annual salary: monthly CTC components times 12, plus known bonuses.
2. Apply the regime. The new regime is the default. If you want the old regime for TDS purposes, you have to tell the employer - usually via a declaration in the payroll portal in April.
3. Subtract what the regime allows: standard deduction (₹75,000 / ₹50,000), employer NPS under 80CCD(2); in the old regime also HRA exemption, LTA, professional tax, and the Chapter VI-A deductions you have declared (not yet proved).
4. Compute tax on the projected taxable income, including the 87A rebate, surcharge and cess.
5. Divide by the months remaining and deduct that amount each month.

The consequence: in the new regime, if your projected taxable salary is ₹12 lakh or less (gross salary up to ₹12.75 lakh), the projected tax is zero and no TDS is deducted at all. If you are seeing TDS at that salary, your payroll is either on the old regime or using outdated slabs - ask.

Why TDS jumps (or drops) in the middle of the year

The April estimate is revised whenever the inputs change, and the revised annual tax is spread over the months left. That is why the same event has a bigger monthly effect the later it happens:

• A raise or bonus increases projected income; the extra tax for the whole year is recovered over the remaining months.
• Proof submission in January-March. In the old regime, payroll assumes your declared 80C / HRA / home-loan deductions through the year, then asks for proofs around January. Whatever you cannot prove is removed from the deductions, and the tax on it is deducted from the last two or three payslips. This is the classic "why is my March salary so low" moment.
• Joining mid-year without Form 12B. The new employer taxes only their months of salary, starting from the nil slab. The shortfall surfaces at filing.
• Regime switch. Some employers allow a one-time switch mid-year; the difference is adjusted in the following months.

None of this changes what you owe for the year - only when it is collected. But an under-deduction that you do not top up with advance tax can attract interest under Sections 234B and 234C, so it is worth catching early.

Form 12BB: declaring and proving your deductions (old regime)

If you opt for the old regime, Form 12BB is the statement in which you declare the deductions you want the employer to consider for TDS. It covers four things, and each needs evidence at proof time:

Two practical rules. First, declare what you will actually do, not the maximum - an inflated declaration just moves the tax to March. Second, the employer's rejection of a proof is not final: anything you can substantiate can still be claimed in your ITR, with the excess TDS coming back as a refund.

In the new regime Form 12BB is nearly irrelevant - there are no 80C, HRA or 24(b) claims to declare. The only item payroll needs is your employer NPS contribution, which they already know.

Telling your employer about other income (and other TDS)

Section 192 lets you report income from other sources to your employer so the TDS on your salary covers it. This matters in two directions:

• Adding income - FD interest, rental income, or a loss from house property (the ₹2 lakh home-loan interest on a self-occupied house, in the old regime). Declaring interest means the tax on it is spread across your salary TDS, and you avoid advance-tax instalments and 234B/234C interest.
• Reporting TDS and TCS already suffered - since October 2024, Form 12BAA lets you tell your employer about tax deducted on your other income (bank TDS on interest, TDS on rent you receive) and TCS you have paid (on foreign remittances, car purchases). The employer reduces your salary TDS by that amount, so you are not over-deducted and waiting a year for a refund.

Neither is compulsory. The alternative is to handle other income yourself through advance tax - see our advance tax guide - which is what freelancers with a side salary usually do.

The regime you choose for TDS is not final

For a salaried person with no business income, the regime declared to the employer only governs withholding. When you file the ITR you can pick either regime afresh, and the difference is settled as a refund or a self-assessment tax payment. So the April declaration is not a commitment - it is a way to keep TDS close to the real number.

The default is the new regime. If you say nothing, that is what payroll applies. Choose the old regime for TDS only if you are confident your deductions will beat the break-even - run both through the calculator with realistic numbers first. Choosing old and then failing the proofs is the most common cause of a painful March payslip.

Taxpayers with business or professional income are different: they must file Form 10-IEA to opt out of the new regime, and can switch back only once. That is a filing matter, not a TDS one, but it is why freelancers who also have a salary should think harder before choosing the old regime.

Year-end: Form 16, the reconciliation, and refunds

By 15 June the employer issues Form 16, showing the total salary, the deductions applied and the TDS deposited. The tax department's Form 26AS shows the same TDS from its side. At filing:

• If TDS exceeds your final tax (you chose the new regime at filing after old-regime TDS, or you claimed deductions payroll rejected, or you were over-deducted at a previous job), the excess is refunded - typically within two to six weeks of e-verification, with interest under Section 244A at 0.5% a month from April if the refund is more than 10% of the tax.
• If TDS falls short, you pay the balance as self-assessment tax before submitting the return. If the shortfall is over ₹10,000 and you did not pay advance tax, interest under 234B (1% a month from April) and 234C applies.

The clean outcome - TDS equals tax, nothing owed, nothing refunded - is achievable. It takes an honest April declaration, Form 12B if you change jobs, Form 12BAA if you have other TDS, and proofs submitted on time. Our Form 16 guide shows how to check the result.

Frequently asked questions