When you receive your monthly paycheck, you may have noticed that the amount credited to your bank account is slightly lower than your gross salary. One major reason for this difference is TDS on salary, or Tax Deducted at Source. But what exactly does it mean? Why is it deducted? And how can you ensure that you’re not paying more than you should?
In this comprehensive blog, we’ll walk you through everything you need to know about TDS on salary, including its legal framework, who deducts it, how it's calculated, and how you can verify and claim refunds, if applicable.
Understanding the Concept of Salary
Before we delve into TDS, it’s important to understand what qualifies as “salary” under Indian law.
Salary is the remuneration paid regularly by an employer to an employee in return for services rendered. It can include:
Basic salary
House Rent Allowance (HRA)
Special allowances
Bonus and commissions
Pension
Gratuity
Perquisites (non-cash benefits like company car, accommodation, etc.)
Retirement benefits
As per the Income Tax Act, 1961, all these components fall under the head "Income from Salary" and are taxable, unless specifically exempted.
What is TDS on Salary?
TDS on salary refers to the income tax that an employer is required to deduct from the salary of an employee before making the payment. This tax is then deposited with the central government on behalf of the employee.
TDS ensures that taxes are collected at the point of income generation, making it easier for the government to collect taxes and for individuals to pay them without a lump-sum burden at the end of the financial year.
Legal Framework: Section 192 of the Income Tax Act
The process of TDS deduction from salaries is governed by Section 192 of the Income Tax Act, 1961.
According to this section:
Every employer, whether a private company, government organization, partnership, or individual, must deduct TDS before paying salary.
The deduction must be based on the estimated income of the employee during the financial year, after considering exemptions and deductions available under the Income Tax Act.
The TDS amount must be deposited with the government within the specified timelines.
Unlike other TDS sections, there is no fixed percentage for TDS on salary. Instead, it depends on the income tax slab rates applicable to the employee for that financial year.
Who is Required to Deduct TDS on Salary?
It’s a common misconception that only large corporations deduct TDS. In reality, any employer who pays salary to employees and falls under the tax jurisdiction is legally obligated to deduct TDS, regardless of their size or structure.
Here are some types of entities that must deduct TDS under Section 192:
Private and Public Companies
Sole Proprietors
Partnership Firms
Limited Liability Partnerships (LLPs)
Hindu Undivided Families (HUFs)
Trusts and Charitable Organizations
Associations of Persons (AOP)
Bodies of Individuals (BOI)
As long as an employer-employee relationship exists, and the salary paid exceeds the basic exemption limit, TDS must be deducted.
How is TDS on Salary Calculated?
1. Estimate Annual Salary Income
The employer begins by estimating the employee’s annual income from salary, including allowances, bonuses, and perquisites.
2. Subtract Exemptions and Deductions
Next, exemptions such as HRA (if applicable), Leave Travel Allowance (LTA), and deductions under Chapter VI-A (like Section 80C, 80D, etc.) are considered to reduce the taxable income.
3. Apply the Income Tax Slabs
Once the net taxable income is determined, income tax is calculated based on current slab rates applicable to the financial year. If the employee has opted for the new tax regime, exemptions may not apply, and flat slab rates are used.
4. Divide the Tax by 12 Months
The total tax liability for the year is divided equally across the remaining months of the financial year, and the resulting amount is deducted as TDS each month.
5. Adjustments if Necessary
If the employee's income or investments change during the year, the employer can revise the estimated tax and adjust the TDS accordingly.
Important Note:
If the employee does not provide PAN (Permanent Account Number), the employer is required to deduct TDS at a flat rate of 20%, irrespective of the slab rate.
What is the Rate of TDS on Salary?
Unlike other sections of the Income Tax Act where fixed TDS rates are defined, Section 192 follows slab-based tax rates applicable to individuals. These slab rates may vary based on age, income level, and whether the employee has chosen the old or new tax regime.
Example:
Suppose your net taxable income is ₹7,00,000 under the old tax regime:
Income up to ₹2.5 lakh: Nil
₹2.5 – ₹5 lakh: 5% = ₹12,500
₹5 – ₹7 lakh: 10% = ₹20,000
Total Tax = ₹32,500 (excluding cess)
This amount is divided by 12, so approximately ₹2,708 is deducted from your salary each month.
TDS Certificate: What is Form 16?
Every employer must issue Form 16 to their employees at the end of the financial year. This certificate acts as a detailed statement of:
Gross salary paid
Deductions claimed
TDS deducted and deposited with the government
PAN and TAN details
Summary of tax computation
Employers are required to issue Form 16 by May 31 of the following financial year. It is an essential document when filing your Income Tax Return (ITR).
How to Check TDS Deduction on Your Salary
Keeping track of the TDS deducted from your salary is important. You can verify it using:
1. Form 26AS
Form 26AS is a consolidated annual tax statement available on the Income Tax Department’s TRACES website. It shows:
All TDS deductions made by employers
Advance taxes paid
Refunds issued
High-value transactions
Cross-check the TDS amount in Form 26AS with the deductions in Form 16 to ensure consistency.
2. Annual Information Statement (AIS)
Recently introduced by the Income Tax Department, the AIS provides an extended summary of income, taxes, and financial transactions. It's accessible through the income tax e-filing portal.
TDS Returns by Employers
Employers who deduct TDS must also file quarterly TDS returns (Form 24Q) with the government. These returns contain:
Employee details
PAN and address
TDS deducted and deposited
Salary structure
Failure to file these returns or incorrect filing can lead to penalties for the employer.
Can You Get a Refund of TDS on Salary?
Yes, TDS on salary is fully adjustable against your total tax liability. If your employer deducted more tax than your actual liability, you can claim a refund by filing your income tax return.
Some common reasons for excess TDS include:
Incomplete declaration of deductions at the start of the year
Change in salary during the year
Failure to declare losses (e.g., house property loss)
After filing the ITR, the refund is processed by the Income Tax Department and credited to your bank account.
Tips to Avoid Excess TDS Deduction
To ensure accurate TDS deduction and avoid the hassle of refund claims, follow these tips:
Submit Form 12BB with all deduction proofs to your employer
Declare investments and insurance premiums early in the year
Choose between the old and new tax regime based on your tax planning
Provide correct PAN and personal details
Update your employer if there is a significant change in salary or income
Tax Deducted at Source (TDS) on salary is a system designed to simplify tax collection and ensure timely payment of taxes to the government. While it may seem like a burden at first, it actually helps in spreading your tax payment throughout the year and avoiding last-minute stress during tax season.
Understanding how TDS on salary works empowers you to plan your finances better, make the most of available deductions, and avoid overpayment. Always monitor your salary slips, Form 16, and Form 26AS to stay informed and tax-compliant.
Remember, taxes are not just an obligation—they’re a step toward nation-building. But smart tax planning ensures you do your part without paying more than you owe.
