TDS on Salary — A Complete Guide for Employers

Introduction

TDS on salary is one of the most misunderstood compliance obligations for Indian employers. Many small and medium businesses either over-deduct, under-deduct, miss deadlines, or fail to issue Form 16 on time — each of which creates problems for the employer, the employee, or both.

This guide covers everything an employer needs to know: who must deduct TDS, how to calculate the correct amount, when and how to deposit it, and what happens if things go wrong.

Who Must Deduct TDS on Salary?

Any employer — whether a company, LLP, partnership, individual, HUF, or trust — who pays salary to an employee is required to deduct TDS under Section 192 of the Income Tax Act, provided:

• The employee's estimated salary for the financial year exceeds the basic exemption limit applicable to them
• The salary is paid from India

Basic exemption limits (FY 2024-25 — New Tax Regime):

Note: Under the new tax regime (Section 115BAC), a standard deduction of ₹75,000 is available, effectively making income up to ₹3,75,000 exempt from tax (plus rebate under Section 87A for income up to ₹7,00,000).

If an employee's total salary is below the applicable limit, no TDS needs to be deducted.

How to Calculate TDS on Salary

Unlike TDS on other payments (which is a fixed percentage), TDS on salary is based on the estimated income tax that the employee would pay on their salary for the year. The process:

Step 1: Estimate the employee's gross salary for the year

Include basic salary, HRA, allowances, bonus, and any other perquisites.

Step 2: Apply deductions and exemptions (if employee opts for Old Regime)

• HRA exemption (Section 10(13A))
• Standard Deduction (₹50,000 under old regime)
• Chapter VI-A deductions (80C, 80D, 80G, etc.) — based on declarations from the employee

Step 3: Compute estimated taxable income

Step 4: Apply applicable tax slabs to compute estimated tax for the year

Step 5: Divide by 12

The monthly TDS amount = Estimated annual tax / 12 (or remaining months of the financial year)

Important: The employee must submit a Form 12BB declaration at the beginning of the financial year, declaring their intended investments and deductions. TDS is computed on this basis. At year-end, if actual investments differ, the TDS for the final months is adjusted.

Old Regime vs New Regime — and Employee Choice

From FY 2023-24, the new tax regime is the default. Employees must explicitly opt for the old regime by informing their employer. Employers must deduct TDS based on whichever regime the employee has opted for.

New Tax Regime slabs (FY 2024-25):

Surcharge and health/education cess (4%) apply on the tax computed above.

Rebate under Section 87A: If total income ≤ ₹7,00,000 under new regime, the tax liability is nil (rebate of up to ₹25,000 applies).

When to Deposit TDS

TDS deducted from employees' salaries must be deposited with the government by the 7th of the following month.

TDS is deposited via Challan 281 on the income tax e-filing portal (TIN-NSDL / Protean).

Consequences of late deposit:

• Interest @ 1.5% per month (or part of a month) from the date of deduction to the date of deposit (Section 201(1A))
• Penalty may also be levied under Section 271C if TDS is not deposited after deduction

Quarterly TDS Returns — Form 24q

Employers must file a quarterly TDS return (Form 24Q) for TDS deducted on salary. This return provides the government with details of:

• TDS deducted and deposited
• Challan details (BSR code, date, amount)
• Employee-wise salary and deduction details
• PAN of each employee

Quarterly deadlines:

Consequences of late filing:

• Late filing fee: ₹200 per day under Section 234E (starting from the due date)
• Penalty under Section 271H: ₹10,000 to ₹1,00,000 for non-filing or filing with incorrect information

Form 16 — Employer's Obligation

After the financial year ends, each employer must issue Form 16 to every employee from whom TDS was deducted. Form 16 is the employer's certificate of TDS deduction and is the primary document employees use to file their Income Tax Return.

Deadline to issue Form 16: June 15 following the end of the financial year (e.g., for FY 2024-25, issue by June 15, 2025).

Form 16 has two parts:

• Part A: Challan-wise TDS deposited (auto-generated from TRACES portal)
• Part B: Salary computation — gross salary, deductions, net taxable income, tax liability

Employers must download Part A from TRACES and prepare Part B manually (or through payroll software).

Consequence of not issuing Form 16: Employees cannot file their returns accurately, and the employer faces a penalty of ₹100 per day under Section 272A(2)(g) for each day of default.

Common Mistakes to Avoid

Mistake 1: Not collecting Form 12BB declarations from employees.

If an employee does not submit their investment declaration, the employer has no basis to allow Chapter VI-A deductions. TDS gets over-deducted, the employee gets a refund when they file their return — but they are unhappy and the employer faces needless queries.

Mistake 2: Using incorrect PAN for employees.

TDS deducted against an incorrect PAN does not get credited to the employee's account. The employee's Form 26AS won't reflect the deduction, causing problems when they file their return. Verify every employee's PAN at the time of joining.

Mistake 3: Not adjusting TDS at year-end for actual investments.

Many employers deduct TDS based on the employee's declaration at the start of the year and never revisit it. If the employee's actual investments (80C, 80D, etc.) at year-end differ from the declaration, the final few months of TDS should be adjusted.

Mistake 4: Late deposit of TDS.

Interest at 1.5% per month adds up quickly. A ₹5 lakh TDS amount deposited two months late costs ₹15,000 in interest — plus the potential penalty.

Mistake 5: Not filing Form 24Q on time.

The late filing fee of ₹200 per day under Section 234E can easily exceed the TDS amount itself for small businesses if ignored long enough.

Key Takeaways

• Any employer paying salary must deduct TDS under Section 192 if the employee's salary exceeds the basic exemption limit
• TDS is based on estimated annual tax — not a fixed percentage — and must be recomputed each month
• Employees must explicitly opt for the old tax regime; the new regime is the default
• Deposit TDS by the 7th of the following month (April 30 for March)
• File Form 24Q every quarter — late filing attracts ₹200/day under Section 234E
• Issue Form 16 by June 15 after the financial year ends
• Use correct PANs; mismatch causes credit failure in the employee's Form 26AS

When to Seek Professional Help

Payroll TDS gets complex when employees have multiple income sources, salary restructuring mid-year, perquisites, ESOPs, or stock options. Similarly, if your business has missed TDS deposits or has pending Form 24Q filings with late fees, a CA can help you regularise the position and minimise penalties.