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The 2-Minute Summary
Salary TDS is unlike every other TDS provision. There is no fixed rate like 1% or 10%. Instead, the employer estimates your total salary income for the full Tax Year, calculates the tax you would owe at the applicable slab rates, and spreads that tax equally across the remaining months. That monthly deduction is your TDS. Think of it this way. If you owe Rs. 1,20,000 in tax for the full year and you are paid monthly, your employer deducts Rs. 10,000 every month. You never get the full salary credited to your account. The tax leaves before you see it.
Example: Priya earns Rs. 14 lakh annually. After standard deduction of Rs. 75,000, declared ELSS of Rs. 1.5 lakh, and health insurance of Rs. 25,000, taxable income is Rs. 12 lakh. Tax at applicable slabs is Rs. 1,30,000. Monthly TDS = Rs. 1,30,000 / 12 = Rs. 10,833.
Under Income Tax Act 1961: Section 192 of the Income Tax Act 1961. Renamed Section 392(1) in the 2025 Act. Substance unchanged.
At a Glance
| Item | Details |
| New Act Reference | Section 392(1) of Income Tax Act 2025 |
| Old Act Reference | Section 192 of Income Tax Act 1961 |
| Who Deducts | Any employer paying salary income |
| TDS Rate | Average rate of income tax (not a fixed %) |
| Threshold | Basic exemption limit as per applicable slab |
| When to Deduct | At the time of actual payment of salary |
| Form for TDS Certificate | Form 16 (issued by employer to employee) |
| TAN Required | Yes |
How the Average Rate is Calculated
The employer does this computation at the start of the Tax Year and revises it whenever there is a change in salary or declared investments.
- Step 1: Estimate the employee’s total gross salary for the full Tax Year.
- Step 2: Deduct the standard deduction (Rs. 75,000 under new regime, Rs. 50,000 under old regime).
- Step 3: Reduce any declared exemptions like HRA, LTA, and house property loss.
- Step 4: Reduce Chapter VIII deductions declared by the employee (LIC, PPF, ELSS, home loan principal, etc.) if under the old regime.
- Step 5: Compute tax on the remaining income at the applicable slab rates including cess.
- Step 6: Divide the tax by the number of months remaining in the Tax Year. That is the monthly TDS.
The employer can increase or reduce TDS in any month to adjust for excess or shortfall from prior months. The goal is zero gap at the end of the year.
Multiple Employers: Section 392(4)(i)
If an employee works for two employers simultaneously or changes jobs mid-year, a coordination problem arises. Each employer computes TDS independently on the salary they pay, often missing the combined income picture. The employee can voluntarily disclose income from the other employer to one employer under Section 392(4)(i). That employer then consolidates both salaries and deducts TDS on the total. This prevents under-deduction and a large tax demand at filing time.
Example: Suresh changes jobs in October 2026. From April to September he earned Rs. 6 lakh at Company A. He joins Company B and informs them of his earlier Rs. 6 lakh. Company B adds Rs. 6 lakh to their estimate of his future salary and deducts TDS on the combined income for October to March.
If the employee does not disclose, both employers compute TDS independently. The employee then has a tax shortfall when filing and must pay self-assessment tax with interest.
House Property Loss and Other Income: Section 392(4)(iii) and (iv)
An employee can declare a loss from house property to the employer. For example, if you have a home loan and your interest outgo creates a loss under house property, you can declare this. The employer reduces the taxable salary by up to Rs. 2 lakh (the set-off limit) and reduces TDS accordingly. An employee can also declare other income under any head, like income from other sources, to the employer. This increases TDS deduction.
TDS on salary can never be reduced below zero on account of these declarations. The employer can only adjust downward if there is actual tax payable.
Non-Monetary Perquisites: Section 392(2)
When an employer gives a non-monetary perquisite, like a company car or rent-free accommodation, the employer has two choices. Either deduct the perquisite value’s tax from the salary cash component, or pay the tax on behalf of the employee from the company’s own funds. If the employer pays, that payment itself is not treated as additional income in the employee’s hands.
Example: Ravi’s employer provides a company car worth Rs. 50,000 per year as a perquisite. The employer chooses to pay Rs. 15,000 tax on it from company funds rather than deducting from Ravi’s salary. Ravi’s take-home is unaffected.
ESOPs in Eligible Start-ups: Section 392(3)
Employees of government-notified eligible start-ups who receive ESOPs do not have TDS deducted at the time of allotment. TDS is deferred to the earliest of three events: when the employee sells the shares, when the employee leaves the start-up, or the time specified under Section 289(3) from the end of the relevant Tax Year.
Example: Deepak receives ESOPs from an eligible start-up in Tax Year 2026-27. No TDS at allotment. He sells the shares in 2029. TDS applies on the perquisite value at the time of sale.
Practical Compliance Checklist
- If you are an employer: Collect investment declarations from employees at the start of the year in the prescribed form. Revise TDS whenever salary or declarations change. Collect proof of investments by February.
- If you changed jobs this year: Inform your new employer of salary earned from the previous employer. Without this, you will face a tax shortfall and interest at filing.
- If you have a home loan: Declare the house property loss to your employer under Section 392(4)(iii). Your TDS will reduce by up to Rs. 60,000 per year at the 30% slab on Rs. 2 lakh interest.
- If your employer is giving you an ESOP from an eligible start-up: Confirm with HR that TDS has been properly deferred and not deducted at vesting.
- If you are switching tax regimes: Inform your employer at the start of the year. The standard deduction and available investment deductions differ between the old and new regimes and affect the monthly TDS amount.
Salary TDS is the most widespread TDS provision in India. Nearly every salaried person is affected by it every month. The average rate method ensures tax is spread evenly rather than collected in a lump sum. Getting the declarations right at the start of the year avoids surprises at filing time.
