What Is TDS?
TDS, or Tax Deducted at Source, is a mechanism under the Income Tax Act, 1961 requiring the payer (in this case, the employer) to deduct tax at the time of making a payment (salary), and deposit it directly with the government on behalf of the recipient (employee), ensuring tax collection happens progressively throughout the year rather than as a single lump sum.
How TDS on Salary Is Calculated
The employer estimates the employee's total annual taxable income based on their salary structure, declared investments (IT declaration), and chosen tax regime, calculates the total annual tax liability, and then divides this by the number of remaining months to determine the monthly TDS deduction amount, adjusting as needed throughout the year based on actual investment proof submitted.
Key Aspects of TDS on Salary
- Governed under Section 192 of the Income Tax Act, specifically for salary income
- Calculated based on the employee's applicable tax slab under their chosen regime (old or new)
- Deducted monthly, with the final reconciliation reflected in Form 16 at year-end
- TDS deducted is deposited with the government by the employer and reflected in the employee's Form 26AS
Why Accurate TDS Calculation Matters
- Under-deduction can result in a significant tax liability for the employee at year-end, along with potential interest charges.
- Over-deduction, while eventually refundable, unnecessarily reduces the employee's monthly take-home pay.
- Employers face compliance penalties for TDS calculation errors or delayed deposit and filing.
How HR/Payroll Software Helps
Payroll systems automatically calculate and adjust TDS each month based on the employee's declared and verified investments, current tax regime choice, and updated slab rates, ensuring accurate, compliant deduction throughout the year.
See how Trilliant Software automates this →TDS (Tax Deducted at Source): Frequently Asked Questions
Can an employee change their tax regime choice for TDS purposes during the year?
What happens if too much TDS is deducted during the year?
This glossary entry is for general information and reflects common HR practice in India at the time of writing. Statutory thresholds, rates and deadlines change — verify against the latest official notifications or consult a qualified legal or tax advisor before acting.