TDS on Salary: How It's Calculated & Reduced

Every month, your employer deducts TDS from your salary before paying you. This TDS is essentially an advance tax payment to the government. Understanding how TDS is calculated helps you plan better, submit the right investment proofs at the right time, and avoid unnecessary tax deductions that reduce your monthly take-home pay.

Use our Salary Calculator to see exactly how TDS affects your in-hand salary, and read the Salary Structure guide to understand each component of your payslip.

How Your Employer Calculates TDS

At the beginning of FY 2025-26 (or when you join), your employer performs these steps to calculate TDS:

1. Estimate annual salary: Project your total salary for the year, including basic, HRA, special allowance, bonus, and variable pay.
2. Apply exemptions: Subtract HRA exemption, LTA, and other Section 10 exemptions (only under Old Regime).
3. Apply standard deduction: ₹75,000 under New Regime, ₹50,000 under Old Regime.
4. Apply deductions: Subtract 80C, 80D, 80CCD(1B), 80CCD(2), and Section 24(b) deductions based on your investment declaration (Old Regime only, except 80CCD(2)).
5. Compute tax: Apply the applicable slab rates to arrive at annual tax.
6. Divide by 12: Spread the annual tax equally across remaining months. This monthly amount is your TDS.

Investment Declaration vs Investment Proofs

There are two stages to reducing your TDS:

Stage 1: Investment Declaration (April-May)

At the start of the financial year, your employer asks you to submit Form 12BB with your planned investments. This is a declaration of intent — you state that you plan to invest ₹1.5 lakh in 80C instruments, pay ₹25,000 in health insurance, etc. The employer uses this declaration to compute lower TDS from month one. You do not need proofs at this stage.

Stage 2: Investment Proofs (January-February)

Between January and February, your employer asks for actual investment proofs — ELSS statements, PPF passbook, insurance premium receipts, rent receipts, home loan interest certificate, NPS contribution receipts. If your actual investments are lower than your declaration, TDS for the remaining months is increased to recover the shortfall. This is why March salaries often have higher TDS deductions.

To understand how HRA exemption reduces your TDS, use our HRA Calculator to compute the exact exemption amount.

TDS Under New Regime vs Old Regime

For FY 2025-26, the New Tax Regime is the default. Under the New Regime, TDS computation is simpler because almost no deductions are available (only ₹75K standard deduction and employer NPS under 80CCD(2)). Under the Old Regime, TDS is lower if you have significant deductions but requires more paperwork and proof submission.

If you want your employer to calculate TDS under the Old Regime, you must inform them at the start of the year (typically through the investment declaration form where you choose your regime). You can switch regimes every year as a salaried employee.

Worked Example: TDS on ₹12 Lakh Salary

Let us compute TDS for an employee earning ₹12 lakh annual salary under both regimes:

New Regime

• Gross salary: ₹12,00,000
• Less standard deduction: ₹75,000
• Taxable income: ₹11,25,000
• Tax before rebate: 0-4L nil + 4-8L at 5% (₹20,000) + 8-11.25L at 10% (₹32,500) = ₹52,500
• Section 87A rebate: ₹52,500 (full rebate as taxable income is under ₹12L)
• Tax payable: Nil
• Monthly TDS: ₹0

Old Regime (with ₹2.5L deductions)

• Gross salary: ₹12,00,000
• Less standard deduction: ₹50,000
• Less 80C: ₹1,50,000
• Less 80D: ₹25,000
• Less HRA: ₹75,000
• Taxable income: ₹9,00,000
• Tax: 0-2.5L nil + 2.5-5L at 5% (₹12,500) + 5-9L at 20% (₹80,000) = ₹92,500
• Cess: ₹3,700
• Total: ₹96,200
• Monthly TDS: ₹8,017

At ₹12 lakh, the New Regime gives zero tax (thanks to Section 87A rebate), while the Old Regime still results in ~₹96K tax. This is a clear case where the New Regime wins.

What to Do If Excess TDS Is Deducted

If your employer has deducted more TDS than your actual tax liability (common when you miss the proof submission deadline or change jobs), you have these options:

• Submit proofs before March payroll: Your employer can adjust the excess in remaining months
• Claim refund while filing ITR: File your ITR with actual deductions and claim the excess TDS as a refund
• Submit Form 12B to new employer: If you changed jobs, provide previous employer details so the new employer computes TDS correctly

Use our Salary Calculator to verify what your monthly take-home should be after correct TDS. Track TDS credits in Form 26AS on the Income Tax portal to ensure all deductions are reflected.

TDS on Non-Salary Income

While this guide focuses on salary TDS under Section 192, your employer may also deduct TDS on other payments:

• Interest income (Section 194A): Banks deduct 10% TDS on FD interest exceeding ₹40,000 (₹50,000 for senior citizens). Submit Form 15G/15H to avoid this if your total income is below the taxable limit.
• EPF withdrawal (Section 192A): 10% TDS on EPF withdrawal before 5 years of service (if amount exceeds ₹50,000). No TDS if PAN is linked and you submit Form 15G.