TDS on Salary: How Does Your Employer Calculate It?

From April 1st, 2026, the TDS on salary is governed by a new law, the Income Tax Act 2025. It replaces the Income Tax Act 1961, which had run for over 60 years. The tax rates and slabs are unchanged, but the forms, the section numbers, and the working behind your monthly deduction have all been redone.

This reset leaves most salaried earners with the same few doubts. When does your employer deduct TDS, and when it doesn’t? How is the monthly TDS amount worked out? And how do you claim back anything extra with ITR filing?

What is TDS on salary?

TDS on salary stands for Tax Deducted at Source on your pay. It is the income tax your employer removes from your salary each month and deposits with the government against your PAN. Instead of paying a year’s tax in one go, you pay it in small monthly amounts as you earn. By the year’s end, these deductions add up to the tax due on your salary, and your final position is settled when you file your ITR. If your employer made a deposit mistake, they can easily rectify it because the Income Tax Department Enables Online Challan Correction Facility.

Is TDS applicable to all salary earners?

Not every salary earner sees a deduction, though. Under Section 392 of the Income Tax Act 2025, your employer cuts TDS only when your estimated yearly income crosses the basic exemption limit. This final tax figure is calculated only after applying all your eligible deductions and rebates. If your estimated tax for the year is zero, your employer will not deduct any TDS.

Three concepts determine this calculation at different stages. The standard deduction (₹75,000) comes off your gross salary right at the beginning. The basic exemption limit, which is ₹4 lakh under the new tax regime and ₹2.5 lakh under the old regime, dictates the threshold where your income officially enters the tax net. Finally, the Section 87A rebate reduces or completely cancels out your final tax bill if your total tax liability (excluding cess) falls within ₹60,000 for the new tax regime and ₹12,500 for the old tax regime.

Under the new tax regime, a salary of up to ₹12.75 lakh becomes completely tax-free. First, the ₹75,000 standard deduction is subtracted from your gross pay, reducing your taxable income to exactly ₹12 lakh. This ₹12 lakh is higher than the ₹4 lakh basic exemption limit; hence, applying the progressive slabs on ₹12 lakh gives tax on paper about ₹60,000.

Source: 1 Finance Research

As you can see, the Section 87A rebate brings tax liability to zero. As there’s no TDS to cut, which is why many salaried earners below this level find a blank TDS line on their payslips.

Even with zero TDS, you are still required to file your Income Tax Return (ITR) because your total income crosses the basic exemption limit. On the administrative side, your employer will report your TDS details every quarter using Form 138 (the renamed Form 24Q). To understand these employer deadlines, refer to the TDS Return Due Date FY 2026-27: Quarterly Filing Dates, New Forms & Penalties Under Income Tax Act 2025. After the tax year ends, they must provide you with Form 130 usually around June 15th. Form 130 replaces the old Form 16, serving as your official salary TDS certificate that outlines your allowed deductions and any tax paid on your behalf.

How to Calculate TDS on Salary in 5 Steps

Your employer follows a set 5-step method, projecting your whole year and working back to a monthly number. Employers must also strictly adhere to the TDS Return Due Date For FY 2026-27: Quarterly Filing Schedule, Challan Due Dates & Penalties.

Step 1: Estimate your yearly gross salary

Your employer adds up everything you will earn in the tax year, from April 1st to March 31st, including known bonuses and recurring allowances.

Step 2: Subtract the deductions and exemptions you qualify for

A deduction is an amount the law lets you take off your income before tax, like the standard deduction or Section 80C investments (like employee provident fund, ELSS mutual funds). An exemption is a part of your pay left out of tax from the start, such as House Rent Allowance (HRA).

Under the new tax regime, this is mostly the flat ₹75,000 standard deduction, with little else to claim. The old tax regime allows more, a ₹50,000 standard deduction plus the HRA, Section 80C investments, health insurance, and home loan claims you declare through Form 124, the renamed Form 12BB under the Income Tax Act 2025.

Step 3: Apply the slab rates of your chosen regime to the income that remains

The slab system works like a row of buckets. Your income fills them from the bottom up, and each bucket is taxed at its own rate. The first bucket is tax-free, the next is taxed at 5%, the one above at 10%, and so on.

Old Tax Regime Slab Rates for Individuals Below 60

New Tax Regime Slab Rates for the Year 2026-27

Step 4: Add the rebate, any surcharge, and the cess

The Section 87A rebate cancels your tax fully if your taxable income stays within a fixed limit. Under the new tax regime that limit is ₹12 lakh, where a rebate of up to ₹60,000 ensures a zero tax liability. Under the old tax regime the limit is ₹5 lakh, with a rebate of up to ₹12,500.

A surcharge is an additional tax charged on your income tax liability, not on your income. A 4% health and education cess is added on the tax that remains. It’s charged on the income tax you owe (including surcharges), raising dedicated funds for those sectors.

Step 5: Divide the year’s tax across the months left

With a full year ahead, your monthly TDS is the yearly tax divided by 12. A mid-year joiner has it spread across the months from their joining date.

How Much TDS is Deducted on Salary Per Month

Take an employee earning ₹15 lakh in gross salary under the new tax regime. After the ₹75,000 standard deduction, ₹14,25,000 is taxable, and the new slabs produce a tax of ₹93,750.

A 4% cess on ₹93,750 adds ₹3,750, lifting the yearly tax to ₹97,500. Divided across 12 months, it gives ₹8,125, which gives your monthly TDS on salary. The TDS rate on salary runs on an average rate, and not the top slab. For this earner, that average works out to 6.5%. For more comprehensive rate structures, view the New TDS Rates Chart – FY 2026–27.

How to Get a TDS Refund on Salary

Is TDS 100% refundable? It depends on your final tax for the year. If your TDS adds up to more than the tax you owe, the extra gets refunded once ITR filing is done. To ensure you receive this payout swiftly, check out these Important Points for Faster Processing of Income Tax Refunds: Tips to Get Your ITR Refund Quickly (AY 2026-27).

You file the ITR by July 31st after the tax year. To file accurately, ensure you know How to Choose the Correct ITR Form for AY 2026-27. Additionally, if you have business or professional income alongside your salary, remember that ITR-3 is available for AY 2026-27: Now Taxpayers Can File ITR-1, 2, 3, 4.

You can check your total TDS in your Form 130 and your Annual Information Statement (AIS) on the income tax portal. These are arguably the 2 Most Important Documents for ITR Filing in 2026: Don’t Ignore them. Want to learn how to monitor your TDS credits? Read: What Is Form 26AS? How to Check & Download Online for AY 2026-27.

A nil tax means every rupee of TDS is refunded to you. When you do owe some tax and the TDS deducted was larger, only the surplus over your liability returns. The reverse leaves a balance to settle, since a tax higher than the TDS means you pay the shortfall at ITR filing. Mismatches here can trigger notices; utilize smart tools and read How Income Tax Software Detects and Resolves ITR Scrutiny: AI-Based Tax Filing Guide to prevent this. If you do get flagged, don't panic, refer to the 143(2) Scrutiny Notice Explained: How to Check & Reply Online Step-by-Step Guide (AY 2025–26).