TDS on Salary: How Employers Should Calculate and Deposit It

TDS on salary is not a monthly calculation on monthly income. It is an annual tax estimate, divided by the months remaining, and revised whenever the estimate changes. Treating it as a monthly computation is the root of most year-end surprises.

The basic method

1. Project the employee's total annual salary income
2. Apply the chosen tax regime
3. Deduct eligible exemptions and deductions (old regime) or the standard deduction (new regime)
4. Compute tax on the resulting taxable income, add 4% health and education cess
5. Subtract TDS already deducted this financial year
6. Divide the balance by the months remaining

Old regime versus new regime

Employees choose. Your payroll must support both and let them switch at declaration time.

• New regime — lower slab rates, standard deduction available, but most exemptions (HRA, LTA, 80C and so on) are unavailable. Simpler, and better for employees without significant deductions.
• Old regime — higher rates offset by HRA, LTA, 80C, 80D, home loan interest and more. Better for employees with rent, home loans and investments.

The new regime is the default if the employee makes no declaration. Collect declarations early and in writing.

Handling employee declarations

At the start of the financial year, collect intended investments and exemptions. At year end, collect proof.

• April–May — collect declarations, begin deducting on that basis
• December–January — collect actual proof: rent receipts, insurance premiums, 80C evidence, home loan certificates
• February–March — recompute on actuals and true up the remaining deductions

HRA exemption calculation

Under the old regime, HRA exemption is the least of:

• Actual HRA received
• Rent paid minus 10% of basic salary
• 50% of basic (Delhi, Mumbai, Kolkata, Chennai) or 40% of basic (elsewhere)

Rent above ₹1,00,000 per year requires the landlord's PAN. Without it, you cannot allow the exemption.

Deposit and filing

• Deposit — by the 7th of the following month (April–February). For March, by 30 April.
• Form 24Q — quarterly return: 31 July, 31 October, 31 January, and 31 May for Q4
• Form 16 — issue to employees by 15 June following the financial year

Late deposit attracts 1.5% interest per month. Late filing attracts ₹200 per day under section 234E. Both are avoidable with a calendar reminder.

Common errors

• Not recalculating the projection after a salary revision or bonus
• Allowing declared deductions without collecting proof
• Missing the landlord PAN requirement on high rent
• Incorrect or missing PAN, which triggers deduction at 20%
• Ignoring income the employee reports from a previous employer in the same year
• Failing to account for perquisites — company car, accommodation, interest-free loans