Every employer paying salary above the basic exemption limit must deduct TDS (Tax Deducted at Source) under Section 192 of the Income Tax Act. Unlike TDS on other payments (which uses a fixed rate), TDS on salary is computed by estimating the employee's annual tax liability and spreading it over 12 months. Here's how it works.
How TDS on Salary is Calculated — Step by Step
- Estimate annual gross salary including all allowances (DA, HRA, special allowance, etc.)
- Subtract exemptions: HRA exemption, LTA exemption, standard deduction of ₹75,000 (new regime) or ₹50,000 (old regime)
- Subtract deductions claimed (80C, 80D, NPS, home loan interest under Sec 24 etc.) — only under old regime
- Compute tax on estimated net taxable income using applicable slab rates
- Add surcharge (if income > ₹50 lakh) and cess (4%)
- Divide annual tax by 12 to get monthly TDS
- Adjust for taxes already deducted in earlier months of the year
New Regime vs Old Regime TDS — Employee's Choice
From FY 2023-24, the new tax regime is the default. Employees who want the old regime (to claim 80C, HRA, LTA etc.) must inform their employer by submitting a declaration. Employees can change their regime choice at ITR filing time (if it differs from what was used for TDS calculation, there may be refund or additional tax at the time of filing).
Form 12BB — Investment Declaration
Employees submit Form 12BB to their employer at the start of the financial year (April) declaring their expected investments and deductions (80C, 80D, HRA, home loan etc.). The employer uses this declaration to calculate TDS throughout the year. At year-end (January–February), employers typically ask for actual proofs — if you claimed more deductions than you actually made, TDS will be adjusted upward.
HRA Calculation for TDS
If you live in a rented house, HRA exemption reduces your taxable salary and therefore the TDS deducted. HRA exemption is the minimum of: (a) Actual HRA received, (b) Rent paid minus 10% of basic salary, (c) 50% of basic salary (metro cities) or 40% (non-metro). You need to submit rent receipts to your employer; landlord PAN is required if annual rent > ₹1 lakh.
Multiple Employers in Same Year — Who Deducts TDS?
If you change jobs during the year: your new employer is responsible for TDS on salary paid by them. However, you should inform your new employer of your salary from the previous employer (via Form 12B) — otherwise, TDS may be under-deducted on the aggregate income and you'll have a large self-assessment tax bill at filing. Also: both employers deduct TDS independently at appropriate rates if you hold two jobs simultaneously (rare but possible for part-time jobs).