If you run payroll for a company in India, TDS on salary is one of those things you simply cannot get wrong. Deduct too little, and the company is on the hook for the shortfall plus interest. Deduct too much, and your employees are unhappy and chasing refunds for a year. Somewhere in the middle sits the number you are actually supposed to arrive at — and this guide walks you through exactly how to get there.
There is also a fair bit of confusion floating around this year, because the Income Tax Act, 2025 has now come into force from 1 April 2026, replacing the six-decade-old Income Tax Act, 1961. The good news, which we will keep repeating because people keep asking: the tax rates and slabs have not changed. What changed is the structure and the language of the law, not the money your employees owe. So if you were comfortable with the old calculations, you are not starting from scratch.
Let us break the whole thing down.
| Default regime | New regime (unless employee opts out) |
| Tax-free (salaried, new regime) | Up to ₹12,75,000 |
| Standard deduction | ₹75,000 (new) / ₹50,000 (old) |
| Rebate ceiling (new regime) | ₹12,00,000 taxable income |
| TDS deposit deadline | 7th of the following month |
| Governing law | Income-tax Act, 2025 (from 1 Apr 2026) |
What TDS on salary actually is
TDS stands for Tax Deducted at Source. Under salary, it simply means the employer is responsible for estimating each employee's annual tax liability and then cutting that tax in equal-ish monthly instalments before paying out the net salary. The employer then deposits this with the government and reports it.
The key word here is estimating. At the start of the financial year, you do not know exactly what an employee will earn over the next twelve months — there could be a bonus, a salary revision, an investment declaration that changes, and so on. So payroll teams work with the best estimate available at any point in time, and then true-up the deduction as the year progresses and the picture becomes clearer.
This is why the TDS on someone's March payslip often looks different from their April payslip. It is not an error. It is the system correcting itself as actual numbers replace estimates.
The first big decision: old regime or new regime
Every salaried employee in India can choose between two tax regimes, and the choice materially changes the TDS calculation. As an employer, you are required to ask each employee which regime they want to be taxed under, and then deduct accordingly.
The new tax regime is now the default. If an employee does not explicitly opt for the old regime, you calculate their TDS under the new regime. This is an important operational point — silence means new regime, not old.
The two regimes differ in a simple way. The new regime offers lower slab rates and a higher rebate, but it strips away almost all the deductions and exemptions people are used to — no HRA exemption, no 80C, no 80D, and so on. The old regime keeps all those deductions and exemptions but charges higher slab rates. Whichever produces a lower tax for that specific employee is the one they should pick, and that depends entirely on how much they invest and how much rent they pay.
Income tax slabs under the new regime — FY 2026–27
These are the slab rates you will be working with for salary earned during FY 2026–27. They were set in Budget 2025 and carried forward unchanged.
| Annual taxable income | Tax rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
On top of the tax computed from these slabs, a health and education cess of 4% is added. So the effective tax is always the slab tax plus 4% cess on that tax.
The two things that make income up to ₹12.75 lakh tax-free
This is the part that trips people up, so it is worth slowing down.
First, there is the standard deduction. Salaried employees get a flat standard deduction of ₹75,000 under the new regime. This is subtracted straight off the gross salary before you even look at the slabs. No proof, no declaration — it applies automatically to every salaried person.
Second, there is the rebate — Section 87A under the 1961 Act, renumbered Section 156 under the 2025 Act. Under the new regime, a resident individual whose taxable income is up to ₹12,00,000 gets a rebate of up to ₹60,000, which wipes out their tax entirely. So even though the slabs show tax being payable in the ₹4 lakh to ₹12 lakh range, the rebate cancels it out for anyone landing at or below ₹12 lakh of taxable income.
Put the two together. An employee earning ₹12,75,000 gross gets ₹75,000 knocked off as standard deduction, bringing taxable income to ₹12,00,000. The slab tax on that works out to ₹60,000, and the Section 87A rebate of ₹60,000 cancels it. Net tax: zero. That is where the much-quoted "₹12.75 lakh is tax-free" figure comes from — it is the ₹12 lakh rebate ceiling plus the ₹75,000 standard deduction.
One caveat worth knowing: the rebate applies only to income taxed at normal slab rates. Special-rate income, such as capital gains, does not get the rebate.
What about marginal relief
A common worry: what happens to someone who earns just slightly above ₹12 lakh? Do they suddenly pay tax on the whole thing?
No. There is a marginal relief provision built in precisely to prevent that cliff. If taxable income crosses ₹12 lakh by a small margin, the extra tax payable is capped so that it never exceeds the amount by which income crossed ₹12 lakh. In practice this means someone at, say, ₹12.10 lakh does not pay the full slab tax — they pay roughly the ₹10,000 by which they crossed the line, and no more. The system smooths the jump rather than letting it spike.
The old regime, in brief
If an employee opts for the old regime, the calculation changes in two ways. The slabs are different, and you now have to account for all the exemptions and deductions they are eligible for.
The old regime slabs are: nil up to ₹2,50,000, then 5% up to ₹5,00,000, then 20% up to ₹10,00,000, and 30% above ₹10,00,000. The Section 87A rebate under the old regime is much smaller — ₹12,500, making income up to ₹5,00,000 tax-free. The standard deduction under the old regime is ₹50,000.
The reason anyone still chooses the old regime is the deductions: HRA exemption for those paying rent, 80C for investments like PF, ELSS, life insurance and so on up to ₹1,50,000, 80D for health insurance, interest on home loan, and others. For an employee with a home loan and a full ₹1.5 lakh of 80C investments and significant HRA, the old regime can still come out cheaper. For most others, especially younger employees who do not invest heavily, the new regime usually wins.
Step-by-step: calculating monthly TDS
Here is the actual process payroll runs, regardless of which software you use.
Step one — project the annual gross salary. Take the employee's monthly salary components and multiply out for the year, adding any known fixed payments like an annual bonus if it is already committed.
Step two — apply exemptions (old regime only). If the employee is on the old regime, reduce the gross by eligible exemptions such as HRA, LTA where claimed, and so on. On the new regime, you skip most of this.
Step three — subtract the standard deduction. ₹75,000 on the new regime, ₹50,000 on the old.
Step four — subtract Chapter VI-A deductions (old regime only). This is 80C, 80D, home loan interest, NPS and the rest, based on the employee's investment declaration. On the new regime, almost none of these apply.
Step five — arrive at taxable income, then apply the slabs. Compute the tax using the appropriate regime's slab table.
Step six — apply the Section 87A rebate if the employee qualifies, then add 4% cess.
Step seven — divide by the remaining months. Take the annual tax figure, subtract any TDS already deducted earlier in the year, and divide the balance by the number of months left in the financial year. That is the current month's TDS.
That last step is why the deduction shifts during the year. Each month the estimate is refreshed and the remaining tax is re-spread over the remaining months.
A worked example
Let us take Priya, a software engineer, on a gross salary of ₹18,00,000 for the year. She has not submitted any investment declaration and has not opted for the old regime, so she defaults to the new regime.
Her gross is ₹18,00,000. Subtract the standard deduction of ₹75,000, and her taxable income is ₹17,25,000.
Now apply the new regime slabs. The first ₹4 lakh is nil. The next ₹4 lakh (₹4 lakh to ₹8 lakh) at 5% is ₹20,000. The next ₹4 lakh (₹8 lakh to ₹12 lakh) at 10% is ₹40,000. The next ₹4 lakh (₹12 lakh to ₹16 lakh) at 15% is ₹60,000. The remaining ₹1,25,000 (₹16 lakh to ₹17.25 lakh) at 20% is ₹25,000.
Add those up: ₹20,000 + ₹40,000 + ₹60,000 + ₹25,000 = ₹1,45,000. Her income is well above ₹12 lakh, so no Section 87A rebate. Add 4% cess of ₹5,800, and her total annual tax is ₹1,50,800.
Spread over twelve months, that is roughly ₹12,567 of TDS per month. If payroll started deducting from April, every month carries that figure, give or take rounding. If she later submits an investment declaration or her salary is revised, the annual figure is recomputed and the monthly deduction adjusts for the remaining months.
The 1961-to-2025 section renumbering — a quick map
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, and every familiar section number changed. Nothing about the tax owed changed — only the numbering and language. Crucially, the timing depends on which year you are dealing with: a return for FY 2025-26 (filed in 2026) still uses the old 1961 numbering, while Tax Year 2026-27 onwards uses the new numbers. Keep both to hand during the transition.
| What it is | 1961 Act (FY 2025-26) | 2025 Act (Tax Year 2026-27+) |
|---|---|---|
| TDS on salary | Section 192 | Section 392 |
| Rebate (the ₹12 lakh one) | Section 87A | Section 156 |
| Standard deduction | Section 16(ia) | Section 19(1) |
| New tax regime | Section 115BAC | Section 202 |
| Common deductions (80C, 80D, 80E…) | Chapter VI-A | Chapter VIII (Sections 123 onwards) |
| Annual salary TDS certificate | Form 16 | Form 130 |
| Quarterly salary TDS return | Form 24Q | Form 138 |
| Consolidated tax statement | Form 26AS | Form 168 |
| Late-filing fee on the return | Section 234E | Section 427 (₹200/day) |
A note on the regime election: a salaried employee with no business income does not file any separate form to choose the old regime — they simply select it in their income-tax return. Form 10-IEA is only required where there is business or professional income.
Form 16 and the year-end
At the end of the year, the employer issues the annual salary TDS certificate to every employee from whom TDS was deducted. For FY 2025-26 that certificate is Form 16, due by 15 June 2026. From Tax Year 2026-27 it is Form 130, which replaces Form 16 under the Income-tax Act, 2025 — three parts instead of two, and generated from TRACES only after the quarterly returns are filed. The first Form 130 falls due on 15 June 2027. Either way, the certificate is the official statement of salary paid and tax deducted and deposited against the employee’s PAN, and its figures must reconcile with what was actually deposited and reported in the quarterly returns.
Where employers usually slip up
A few recurring mistakes are worth flagging.
Treating the new regime as optional when it is now the default. If an employee does not respond on regime choice, you deduct under the new regime, not the old.
Forgetting to true-up after a salary revision or a bonus payout. The moment a known number changes, the annual projection must be redone, or the employee ends up with a large deduction stacked into the final months.
Applying old-regime deductions to new-regime employees. On the new regime, 80C and HRA exemption simply do not apply, and accidentally allowing them understates the TDS.
Missing the deposit and return deadlines. Deducting correctly is only half the job. The tax must be deposited by the seventh of the following month, and the quarterly return filed on time, or interest and late fees kick in. Note that the quarterly salary TDS return is now Form 138, which replaced Form 24Q from 1 April 2026 — the Q1 return for the quarter ended 30 June 2026 was due by 31 July 2026.
How a unified system handles this
The reason TDS goes wrong so often is that the inputs live in different places. Salary structures sit in payroll, investment declarations come in through some HR portal or an email thread, salary revisions get approved somewhere else, and bonuses are decided by finance. When these are stitched together manually, the projection is only as current as the last time someone updated the spreadsheet.
When payroll, salary structures, tax declarations and the general ledger all sit on a single database, the TDS engine always works off live data. An approved salary revision instantly flows into the annual projection. A submitted investment declaration updates the regime comparison without anyone re-keying it. The deduction stays correct month to month because nothing has to be synced across tools. This is the core idea behind how Helion handles statutory compliance — one source of truth, so the tax number is always computed off the real, current picture rather than a stale copy.
If you are evaluating how to run payroll for a growing team across multiple entities without the month-end reconciliation scramble, this is exactly the problem worth solving first.
This guide reflects the position under the Income Tax Act, 2025, applicable to income earned during FY 2026–27 (Tax Year 2026–27). Tax slabs, rebate and standard deduction figures are as set in Budget 2025 and carried forward. This is general information for employers and not a substitute for advice from a qualified chartered accountant on your specific situation.
Frequently asked questions
Which tax regime applies if an employee does not choose one?
The new regime is the default. If an employee does not explicitly opt for the old regime, the employer calculates TDS under the new regime. Silence means new regime, not old.
Is income up to ₹12.75 lakh really tax-free?
For a salaried employee on the new regime, yes. The standard deduction of ₹75,000 brings a ₹12,75,000 gross down to ₹12,00,000 of taxable income; the slab tax on that is ₹60,000, and the rebate of up to ₹60,000 for a resident individual with taxable income up to ₹12,00,000 cancels it. The rebate applies only to income taxed at normal slab rates, not to special-rate income such as capital gains.
What happens if income crosses ₹12 lakh by a small amount?
Marginal relief prevents a cliff. Where taxable income crosses ₹12 lakh by a small margin, the extra tax payable is capped so that it never exceeds the amount by which income crossed the threshold. Someone at ₹12.10 lakh pays roughly the ₹10,000 by which they crossed, not the full slab tax.
What is the standard deduction for salaried employees?
₹75,000 under the new regime and ₹50,000 under the old regime. It is subtracted from gross salary before applying the slabs, applies automatically to every salaried person, and requires no proof or declaration.
Why does monthly TDS change during the year?
Because the employer works from an estimate. Each month the annual projection is refreshed, any TDS already deducted is subtracted, and the balance is re-spread over the remaining months of the financial year. A salary revision, a bonus or a late investment declaration all change the projection, so the March deduction often differs from the April one.
Have the tax slabs changed under the Income-tax Act, 2025?
No. The Income-tax Act, 2025 came into force from 1 April 2026, replacing the Income-tax Act, 1961, but the rates and slabs set in Budget 2025 were carried forward unchanged. What changed is the structure, numbering and language of the law, not the amount of tax payable.
Which TDS forms apply from Tax Year 2026-27?
The annual salary TDS certificate is Form 130, which replaces Form 16, and the quarterly salary TDS return is Form 138, which replaces Form 24Q. Form 16 remains correct for FY 2025-26, due by 15 June 2026; the first Form 130 falls due on 15 June 2027. Form 130 is generated from TRACES after the quarterly returns are filed and cannot be prepared offline.
When must TDS be deposited?
By the seventh of the following month, with the quarterly return filed by its due date. Missing either attracts interest and late fees, so deducting the right amount is only half the obligation.