TDS on Salary Explained: How Your Employer Calculates It

TDS on salary is your employer's estimate of your full-year income tax, collected in monthly instalments. Each month the employer projects your taxable salary for the year, calculates tax under the regime you chose, including rebate and 4% cess, subtracts what it has already deducted, and spreads the rest over the remaining months. As of October 2026, this happens under Section 392 of the Income-tax Act, 2025 (old Section 192), and the year-end certificate is Form 130 (old Form 16).

If you want to see where TDS sits in your pay slip, our guide to CTC vs gross vs take-home salary walks through a full break-up. This article explains the calculation itself and the forms that change it.

What changed in 2026: new law, new form numbers

From tax year 2026-27 (1 April 2026 to 31 March 2027), the Income-tax Rules, 2026 renumbered almost every salary form. The process is the same, but the names on your HR portal will change.

For salary paid up to 31 March 2026, the old forms still apply.

How the employer calculates your TDS, step by step

1. Estimate gross salary for the year. Basic, allowances, bonus and taxable perquisites (such as a company car or rent-free accommodation) for April to March.
2. Apply your regime. The new regime is the default. If you do not tell your employer otherwise, it deducts TDS under the new regime. You can choose the old regime for TDS purposes by informing your employer, usually at the start of the year.
3. Subtract allowed exemptions and deductions.
   • New regime: standard deduction of ₹75,000 and the employer's NPS contribution (old Section 80CCD(2)), plus a few others.
   • Old regime: standard deduction of ₹50,000, professional tax, HRA exemption, LTA and the Chapter VIII deductions you declare in Form 124, such as old Sections 80C and 80D (now Sections 123 and 126).
4. Add other income you have declared in Form 122: salary from a previous employer this year, other income, and TDS or TCS on it. Only a loss from house property can be set off, and the new regime disallows that loss for a self-occupied house.
5. Compute annual tax on slab rates, apply the rebate under Section 156 (old Section 87A) and marginal relief if you qualify, then add 4% cess.
6. Divide by remaining months. Tax due for the year minus TDS already deducted, spread over the months left.

That is why TDS often jumps in January to March. Employers ask for proof of your declarations around then, and anything you declared but cannot prove is dropped, so the remaining tax is squeezed into fewer months.

Worked example: monthly TDS on ₹18 lakh salary (new regime, illustrative)

Kavya earns a fixed gross salary of ₹18,00,000 for tax year 2026-27 and stays in the default new regime.

Her effective rate is about 8.4% of gross salary, although her top slab is 20%. That gap is what "average rate" means. If she were in the old regime with large deductions, the employer would use her Form 124 figures instead. Check which regime gives the lower tax with our income tax calculator before you tell your employer.

The two declarations that change your TDS

Form 124 (old Form 12BB): deductions and exemptions

You submit this to your employer, not to the tax department. It lists:

• House rent: rent paid, and the landlord's PAN if annual rent exceeds ₹1 lakh. From tax year 2026-27 the form also asks about your relationship with the landlord.
• Leave travel concession: travel details and proof.
• Home loan interest: lender's name, address and PAN.
• Chapter VIII deductions: PPF, ELSS, life insurance, health insurance, NPS and others.

These mostly matter under the old regime. Our guide to HRA exemption rules shows how the HRA amount is worked out. If you skip Form 124, the employer simply deducts more TDS. You can still claim legitimate deductions when you file, if you are eligible for the old regime at that time, and get a refund.

Form 122 (old Forms 12B and 12BAA): previous salary and other income

Use this when you:

• Changed jobs in the year. Declare the salary paid and TDS deducted by your earlier employer.
• Have other income or TDS you want considered, such as FD interest with TDS, or TCS on a foreign remittance. The employer can then reduce your salary TDS by the tax already collected elsewhere.

Worked example: why job-changers end up owing tax (illustrative)

Arjun worked at Company A from April to September 2026 for ₹6,00,000 and joins Company B from October to March for ₹9,00,000. He does not submit Form 122.

The actual tax: ₹20,000 (5% on ₹4-8 lakh) + ₹40,000 (10% on ₹8-12 lakh) + ₹33,750 (15% on ₹2.25 lakh) = ₹93,750, plus cess. Both employers applied the rebate and standard deduction separately, so ₹97,500 falls due at filing, with interest for short advance tax if paid late. Had Arjun given Company B a Form 122, B would have spread the full liability over October to March, roughly ₹16,250 a month. If you are in this position mid-year, consider paying advance tax; see our advance tax guide.

Employer's side: deposit, returns and Form 130

• Deposit: TDS deducted in a month is generally deposited by the 7th of the following month, and March TDS by 30 April.
• Quarterly return: the employer files Form 138 (old Form 24Q) for each quarter. Due dates have stayed at 31 July, 31 October, 31 January and 31 May.
• Certificate: Form 130 is issued after the year ends, by 15 June. For tax year 2026-27, the first Form 130 reaches employees by 15 June 2027.

Your credit for TDS depends on the quarterly return. If tax was deducted but does not appear in Form 26AS or Form 168, ask HR to file a correction. Our guide to Form 16, AIS and 26AS covers fixing mismatches.

When TDS goes wrong, and what to do

• Too much TDS: claim the excess as a refund when you file your return.
• Too little TDS: pay the balance as advance tax during the year, or self-assessment tax before filing. Interest applies under old Sections 234B and 234C (now Sections 424 and 425) if advance tax was short.
• PAN not given or inoperative: TDS can be deducted at a higher rate. Link PAN with Aadhaar and update HR.
• Arrears of salary: relief for arrears that push you into a higher slab (old Section 89, claimed with Form 10E) can lower the tax. Check the current form on the portal before filing.
• Regime choice: what you tell your employer does not bind you. A salaried person can still pick either regime in a return filed by the due date.

Key takeaways

• As of October 2026, salary TDS is deducted under Section 392 of the Income-tax Act, 2025 (old Section 192), at the average rate on your estimated yearly tax.
• The new regime is the default for TDS. Income up to ₹12.75 lakh of salary has nil TDS because of the ₹75,000 standard deduction and the Section 156 rebate.
• Form 124 replaces Form 12BB for deductions, and Form 122 replaces Form 12B for previous-employer and other income.
• Form 130 replaces Form 16, with the first one due by 15 June 2027. The employer files quarterly TDS returns in Form 138.
• Job changers should declare earlier salary in Form 122, or pay advance tax, to avoid a lump-sum bill at filing.