TDS on Salary in India

Did you know that TDS on salary is a mandatory deduction by employers if an employee's salary exceeds ₹2.5 lakhs per annum? Employers are liable to remit the collected and deducted TDS (Tax Deducted at Source) to the government. Knowledge about TDS on salary in India is important considering your take-home pay is affected by exemptions, deductions and other applicable calculations.

This blog focuses on how to calculate TDS on salary for accurate income tax payments in the year 2025.

Quick Overview

• The employer deducts the Tax Deducted at Source (TDS) from the employee's salary. 
• TDS rates shall vary on the basis of income tax slab rates.
• The employer shall deposit the TDS to the government on the employee’s behalf. 
• Employees shall get credit for TDS while filing the income tax return. 
• This allows tax liability to get distributed throughout the year, helping entities avoid a lump sum payment.

TDS on Salary Meaning 

TDS (Tax Deducted at Source) on salary is the tax that employers deduct from employees' salaries under Section 192 of the Income Tax Act. Employers remit the amount of tax deducted to the government as a contribution to revenue generation. 

Employers need to obtain a TAN (Tax Deduction and Collection Account Number) registration before they deduct TDS from employees' salaries. They can deduct TDS if the employee's income from salary is more than the exemption limit.

Steps to Calculate TDS on Salary Under Section 192

You can follow the steps below to calculate TDS on employee salary:

Step 1: Compute Earnings

Calculate the total earnings of an employee, including perks, bonuses and commissions.

Step 2: Collect and Corroborate Investment Declaration

As an employer, ensure to collect investment proof from employees to consider tax exemptions in the TDS calculation and deduction process.

Step 3: Compute the Exemption Amount

Deduct all the exemptions and eligible deductions under various sections from an employee's gross salary to obtain the taxable income or net salary. TDS needs to be deducted from the net salary.

Step 4: Deposition of TDS

Employers need to deposit the collected TDS with the Central Government of India.

Notably, the rate of TDS on salary for income below ₹2.5 lakh per annum is Nil. However, for income between ₹2.5 lakh and ₹5 lakh, the percentage of TDS on salary is 10%; for ₹5 lakh to ₹10 lakh, it is 20% and above ₹10 lakh, it is 30%. 

Senior citizens enjoy higher exemption limits, different tax rates and slabs.

Formula to Calculate TDS on Salary

Calculating TDS on salary is essential to ensure the right amount of tax is deducted every month based on your income slab. Employers use a standard formula to compute this deduction after considering exemptions, deductions and rebates applicable under the Income Tax Act

Here is the formula to calculate TDS on salary:

Income Tax Rate = Income Tax Payable (computed with income tax slab rates) / Estimated Revenue for the Financial Year

Consider the following example for better understanding: 

Say that an employee, XYZ, has an annual salary of ₹600,000. Here's what the breakdown looks like: 

• Estimated Revenue for the Financial Year: ₹600,000 
• Deductions under Section 80C: ₹150,000 (e.g., PPF, LIC) 
• Taxable Income: ₹450,000 

Referring to the income tax slab rates for the present financial year as per the old tax regime: 

Tax Payable:  

• Up to ₹250,000: Nil 
• ₹250,001 to ₹500,000: 5% of ₹200,000 = ₹10,000 
• Taxable income: ₹10,000 (as ₹450,000 comes under the 5% slab, although we've already calculated for ₹200,000; the remaining amount of ₹50,000 is not taxed at a higher rate in this scenario) 
• Income Tax Rate = ₹10,000 / ₹600,000 = 1.67% TDS should be deducted. 

Applying the TDS Calculation Formula:

Income Tax Rate = Income Tax Payable / Estimated Revenue for the Financial Year 

In the case of this example, the income tax rate is around 1.67%. The value would be used to calculate the monthly TDS deduction. 

Monthly TDS Deduction: ₹600,000 / 12 = ₹50,000 (salary received monthly) 

TDS per month: ₹50,000 x 1.67% = ₹835 

The above-mentioned example shows how TDS on salary is calculated in India. 

What Is TDS Calculated on?

TDS on salary is calculated under Section 192 of the Income Tax Act. It is based on the employee’s estimated annual income after accounting for eligible exemptions and deductions. If this income exceeds the basic exemption limit, the employer is required to deduct tax accordingly each month from the salary payments.

Salary comprises 2 components, namely:

• Salary 
• Perquisites. 

Prerequisites include the benefits provided by the employer such as fuel subsidy, canteen and hotel expenses, travel expenses and others.

CTC (Cost to Company) or salary thus, includes:

• Basic pay
• Travel allowance
• Dearness allowance
• Medical allowance
• Special allowance, among others.

Note that employees can, however, claim tax exemptions on house rent allowance, conveyance allowance and medical allowance to reduce their tax liability.

When Is TDS on Salary Deducted?

Employers need to deduct TDS every month while paying salaries to their employees. However, the TDS deduction applies to salary payment and not salary accrual. As a result, for advance payment or arrears, employers have to deduct TDS while paying the relevant amount to employees.

If an employer fails to deduct TDS from an employee's salary when a certain employee's income is above the exemption threshold, the concerned employer will be subject to interest and penalties by the Income Tax Department.  

Who Deducts TDS on Salary?

The following categories can deduct TDS from an employee's salary:

• Individuals
• Partnership firms
• Limited Companies (Public and Private)
• Hindu Undivided Families (HUF)
• Trusts
• Co-operative Societies

Applicable TDS Exemptions 

Besides TDS on employee salary, a salaried individual can claim exemptions under Section 80C up to ₹1.5 lakh, 80CCG up to ₹25,000 and 80D for medical insurance premiums paid. Here is the list of investments eligible for tax exemptions and deductions:

• Public Provident Fund (PPF)
• Tax-saving fixed deposits
• Equity-linked Savings Scheme (ELSS)
• National Savings Certificate (NSC)
• Employee Provident Fund (EPF)
• House Rent Allowance
• Transport or conveyance allowance
• Insurance Premiums
• Home loan principal repayment
• Savings under Section 80C of the Income Tax Act, 1961

TDS on salary under Section 192 ensures that salaried individuals pay necessary tax on their income to the government, based on the slab rates. Employers deposit the deducted TDS with the government on behalf of the employee. 

Notably, TDS calculation is based on the net salary or taxable income after deductions and exemptions before adding health and education cess.

TDS on fixed deposit (FD) interest income applies if the total interest earned by a non-senior citizen is more than ₹40,000 during a financial year. For the 2025-26 financial year, the limit for senior citizens has increased from ₹50,000 to ₹1 lakh for TDS deduction on FD interest income.

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