TDS on Salary in 2026: How Your Employer Works Out the Monthly Deduction

If you run payroll for a small business, or you are a salaried employee trying to understand the tax line on your payslip, this guide is for you. Salary TDS works differently from TDS on vendor payments: there is no flat rate. The employer estimates your tax for the full year and spreads it across the months. Since 1 April 2026 the rules sit in section 392 of the Income-tax Act, 2025, which replaced section 192 of the 1961 Act, and most of the forms have new numbers. Below you will find how the estimate is made, how the two tax regimes change it, what to declare and prove, how perquisites are taxed, and two employees' monthly TDS worked out in rupees.

Quick answer

TDS on salary is deducted every month by the employer at the average rate of tax on your estimated salary for the year (section 392(1), formerly section 192). The employer applies the new regime unless you opt for the old one, allows the standard deduction, takes your declarations and proofs into account, and deposits the tax by the 7th of the next month.

• New regime: slabs from nil up to ₹4 lakh to 30% above ₹24 lakh; no tax up to ₹12 lakh of income after rebate

• Standard deduction: ₹75,000 (new regime) or ₹50,000 (old regime)

• Declarations: Form 124 for claims and proofs (was 12BB), Form 122 for other income and previous employer (was 12B)

• Reporting: quarterly Form 138 (was 24Q) and annual certificate Form 130 (was Form 16) by 15 June after the end of the tax year

• No PAN: tax at the higher of the average rate or 20%

How salary TDS works under section 392

Section 392(1) puts the duty on "any person responsible for paying" income chargeable under the head Salaries. That covers a company paying its staff, a partnership firm paying employees, a proprietor running a shop with five workers, and a household employing a driver on a salary if the driver's income is taxable. There is no threshold in the section itself: if the employee's estimated taxable salary leads to tax payable, the employer must deduct, and if the estimate shows no tax, nothing is deducted.

The deduction is made at the time of payment, not when salary is credited in the books. This is a deliberate difference from most non-salary TDS, which is triggered at the earlier of credit or payment. It matters at the transition: the Income Tax Department's FAQs say salary is governed by the date of payment, so March 2026 salary paid in the first week of April 2026 falls under section 392 of the new Act, while March salary paid on 31 March 2026 stayed under section 192.

The rate is the "average rate of income-tax" on the employee's estimated salary income for the year, worked out at the rates in force for that tax year. In practice an employer does four things at the start of the year: estimates the full-year salary including allowances, bonuses and perquisites; subtracts the exemptions and deductions the chosen regime allows; computes tax on the result including rebate and cess; and divides that tax by twelve, or by the remaining months for someone who joins mid-year. Each month the figure is revisited when something changes.

Section 392(5)(c) lets the employer increase or reduce later deductions to make good any excess or shortfall from earlier months within the same tax year. That is how a payroll team fixes a missed bonus or a late proof without filing anything special. What it cannot do is carry an over-deduction into the next year; any excess left at 31 March is claimed by the employee as a refund in the return.

Salary TDS at a glance (tax year 2026-27)

₹75,000

Standard deduction

new regime; ₹50,000 old

₹12 lakh

Income with nil tax

new regime, after rebate

4%

Health & education cess

on tax plus surcharge

15 June

Form 130 due

after the tax year ends

New regime or old regime: what the employer applies

Section 202 of the Income-tax Act, 2025 makes the new regime the default for individuals. Its slab table is: nil up to ₹4 lakh; 5% ₹4–8 lakh; 10% ₹8–12 lakh; 15% ₹12–16 lakh; 20% ₹16–20 lakh; 25% ₹20–24 lakh; 30% above ₹24 lakh. Under section 156(2), a resident individual in the new regime whose total income does not exceed ₹12 lakh gets a rebate of the full tax up to ₹60,000, which is why most people earning up to that level pay nothing. Just above the line, marginal relief stops the tax from exceeding the income above ₹12 lakh.

The old regime still exists, with lower slab thresholds — nil up to ₹2.5 lakh; 5% ₹2.5–5 lakh; 20% ₹5–10 lakh; 30% above ₹10 lakh for individuals under 60 — and a much smaller rebate of ₹12,500 where total income does not exceed ₹5 lakh. What it offers in return is the long list of exemptions and deductions: house rent allowance, leave travel concession, professional tax, interest on a home loan for a self-occupied house, and deductions for provident fund, life insurance, ELSS, tuition fees, health insurance and NPS. The new regime switches almost all of these off; section 202(2) lists what is excluded, and the main survivors are the standard deduction and the employer's contribution to NPS.

An employee without business income chooses the regime for the year. For TDS, the practice is that the employee tells the employer at the start of the year (or when joining) which regime to use; if no choice is communicated, the employer must apply the default new regime. The choice given to the employer is not binding for the return. A salaried employee can switch when filing — the regime option for people without business income is exercised along with the return under section 202(4)(b). The catch is that if TDS was deducted under the new regime and you move to the old regime in the return, you claim a refund; if it was deducted under the old regime and you move to the new one, you may get a refund too, because new-regime tax is usually lower. Problems arise only when declarations at the TDS stage were wrong and the shortfall has to be paid with interest.

Professional tax shows the difference neatly. Under the old regime the tax on employment paid to your state (up to ₹2,500 a year) is deducted from salary under section 19(1) Table Sl. No. 1; under the new regime it is not, though the employer still has to deduct and pay it to the state. Our professional tax guide explains the state rates.

New vs old regime for salary TDS

Point	New regime (default, s.202)	Old regime (on option)
Standard deduction	₹75,000	₹50,000
Rebate (s.156)	Up to ₹60,000 if income ≤ ₹12 lakh	₹12,500 where total income does not exceed ₹5 lakh
HRA, LTA exemption	Not allowed	Allowed with proof
Professional tax	Not deductible	Deductible
Investments (old 80C etc.)	Not allowed	Allowed with proof
Home-loan interest, self-occupied	Not allowed	Allowed (loss set off against salary)
Employer NPS contribution	Allowed	Allowed

Standard deduction

New regime (default, s.202)

₹75,000

Old regime (on option)

₹50,000

Rebate (s.156)

New regime (default, s.202)

Up to ₹60,000 if income ≤ ₹12 lakh

Old regime (on option)

₹12,500 where total income does not exceed ₹5 lakh

HRA, LTA exemption

New regime (default, s.202)

Not allowed

Old regime (on option)

Allowed with proof

Professional tax

New regime (default, s.202)

Not deductible

Old regime (on option)

Deductible

Investments (old 80C etc.)

New regime (default, s.202)

Not allowed

Old regime (on option)

Allowed with proof

Home-loan interest, self-occupied

New regime (default, s.202)

Not allowed

Old regime (on option)

Allowed (loss set off against salary)

Employer NPS contribution

New regime (default, s.202)

Allowed

Old regime (on option)

Allowed

Declarations, proofs and the new form numbers

Section 392(5)(b) requires the employer to collect "evidence or proof or particulars of prescribed claims" before allowing them in the TDS calculation. Under the Income-tax Rules, 2026 the employee gives this in Form 124, which replaced Form 12BB. The usual rhythm is a declaration in April or on joining, followed by actual proofs by January or February, when the payroll team checks rent receipts, the rent agreement, the landlord's PAN where rent is above ₹1 lakh a year, home-loan interest certificates, insurance premium receipts and investment statements. Commentary on the new form says employees claiming HRA must also disclose any relationship with the landlord, and attach the rent or loan agreement.

Form 122 (which replaced Form 12B) covers the particulars in section 392(4): salary received from another employer earlier in the same year, a loss under the head house property, other income such as interest or rent, and TDS or TCS already suffered. Giving these to your employer is optional, but it makes the TDS more accurate. The law sets a one-way rule: these particulars can increase the TDS, but the salary TDS can be reduced only for a house property loss and for tax already deducted or collected under other provisions. A capital loss or business loss cannot be used to cut your salary TDS.

Form 123 (formerly Form 12BA) runs in the other direction: it is the employer's statement of perquisites and profits in lieu of salary, required by section 392(5)(a). It is issued where salary exceeds ₹1,50,000; for lower salaries the perquisite details are shown within Form 130. Where an employee gets a perquisite in kind and also cash salary that is not enough to cover the tax, the employer can pay the tax on the non-monetary perquisite itself under section 392(2) — in that case the tax paid by the employer is not added back to the employee's income.

Perquisites and allowances under the 2026 Rules

Perquisites are valued under rule 15 of the Income-tax Rules, 2026, which replaced rule 3 of the 1962 Rules, and several values went up sharply from 1 April 2026. As reported by payroll advisers summarising the notified rules: free meals provided by the employer during working hours are tax-free up to ₹200 a meal (it was ₹50), and this now applies in the new regime too. Gifts and vouchers are tax-free up to ₹15,000 a year in a year (it was ₹5,000).

The car perquisite also changed. Where the employer owns the car, pays the running costs and you use it for both office and personal travel, the monthly value is ₹5,000 a month for engines up to 1.6 litres and ₹7,000 a month for larger engines, plus ₹3,000 a month if a driver is provided. Those amounts are added to taxable salary every month and push up the TDS. For an employee on a 20% or 30% slab, a mid-sized car with a driver adds roughly ₹2,000 to ₹3,000 a month to TDS.

Allowances work the other way: they are part of salary unless an exemption applies. House rent allowance is exempt under the old regime to the lowest of actual HRA, rent minus 10% of salary, and 50% of salary in the eight cities (Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad) or 40% of salary elsewhere. Our HRA calculation guide works through it. Under the new regime HRA is fully taxable.

Two less common cases also sit in section 392. An eligible start-up that allots ESOP shares can defer the TDS on that perquisite under section 392(3). And the trustees of the Employees' Provident Fund must deduct 10% when a taxable accumulated balance of ₹50,000 or more is paid out — for instance on withdrawal before five years of service — under section 392(7).

Worked example: two employees, tax year 2026-27

Both employees are residents under 60 and paid monthly. Figures are rounded to the rupee; surcharge does not apply below ₹50 lakh.

Employee A — Arjun, new regime (default). Gross salary ₹15,00,000 a year (₹1,25,000 a month), no perquisites. He does not opt for the old regime.

• Taxable salary: ₹15,00,000 − ₹75,000 = ₹14,25,000
• Tax: nil on the first ₹4 lakh + ₹20,000 (₹4–8 lakh at 5%) + ₹40,000 (₹8–12 lakh at 10%) + ₹33,750 (₹2,25,000 at 15%) = ₹93,750
• Rebate: none, as income exceeds ₹12 lakh and the tax (₹93,750) is less than the excess over ₹12 lakh (₹2,25,000), so marginal relief does not help
• Cess at 4%: ₹3,750 → annual tax ₹97,500
• Monthly TDS: ₹97,500 ÷ 12 = ₹8,125

Employee B — Bhavna, old regime (opted). Gross salary ₹18,00,000 a year (₹1,50,000 a month). She lives in rented accommodation in Mumbai and her HRA exemption works out to ₹3,00,000. She declares ₹1,50,000 of old-80C investments, ₹75,000 of health insurance premiums (self and senior-citizen parents) and ₹50,000 of NPS. Professional tax is ₹2,500.

• Salary after HRA exemption: ₹18,00,000 − ₹3,00,000 = ₹15,00,000
• Less standard deduction ₹50,000 and professional tax ₹2,500: ₹14,47,500
• Less deductions ₹2,75,000: taxable income ₹11,72,500
• Tax: ₹12,500 (₹2.5–5 lakh at 5%) + ₹1,00,000 (₹5–10 lakh at 20%) + ₹51,750 (₹1,72,500 at 30%) = ₹1,64,250
• Cess: ₹6,570 → annual tax ₹1,70,820
• Monthly TDS: ₹1,70,820 ÷ 12 = ₹14,235

There is a lesson in Bhavna's numbers. Under the new regime her tax would be ₹1,45,000 plus cess, or ₹1,50,800 — about ₹20,000 less than under the old regime, even with ₹6.25 lakh of exemptions and deductions. Payroll teams should show employees both figures before they choose; many people still opt for the old regime out of habit. Since she has no business income, Bhavna can choose the new regime in her return and claim the extra TDS as a refund.

What happens when proofs fall short. In January 2027 Bhavna submits proofs in Form 124, but she has invested only ₹1,00,000 under the old-80C heads, not ₹1,50,000. The employer recomputes: taxable income rises to ₹12,22,500, tax to ₹1,79,250, and with cess to ₹1,86,420. By December the employer has deducted 9 × ₹14,235 = ₹1,28,115. The remaining ₹58,305 is spread over January, February and March, so her TDS jumps to about ₹19,435 a month for the last quarter. This is exactly the adjustment section 392(5)(c) allows.

Just above ₹12 lakh — marginal relief. Chitra, also in the new regime, earns ₹12,90,000. Her taxable salary is ₹12,15,000 after the standard deduction. Slab tax is ₹62,250, but marginal relief under section 156(2)(b) caps it at the income above ₹12 lakh, which is ₹15,000. With cess, annual tax is ₹15,600, so monthly TDS is ₹1,300. Without marginal relief she would have paid over ₹64,000.

Deposit, return, certificate: the employer's calendar

Once deducted, salary TDS follows the same deposit-and-report cycle as other TDS. It is paid to the government under the employer's TAN by the 7th of the next month; for March the deadline is 30 April. Challans quote section 392 and a salary payment code — 1002 for employees other than government employees, with 1001 and 1003 for state and central government staff. Delay costs interest of 1.5% a month or part of a month from deduction to payment, and failing to deduct at all costs 1% a month or part of a month from the date it was deductible, under section 398(3).

Each quarter the employer files a salary statement in Form 138, which replaced Form 24Q, by 31 July, 31 October, 31 January and 31 May. The final quarter's statement carries the full-year salary break-up. A late statement attracts a fee of ₹200 a day until filed, capped at the TDS amount. Our TDS return filing guide covers the statement process, penalties and corrections in detail.

After the year ends the employer downloads the annual certificate, Form 130 (formerly Form 16), from the TRACES portal and gives it to each employee by 15 June after the end of the tax year. For tax year 2026-27 that is 15 June 2027. Form 16 is still the right certificate for salary paid up to 31 March 2026. See our Form 16 guide for what each part shows and how to check it.

Salary TDS calendar for tax year 2026-27

April 2026 / on joining

Employee chooses regime and declares claims (Form 124) and other income (Form 122)

7th of every month

Deposit the previous month's salary TDS

31 July 2026

Q1 Form 138 statement

31 October 2026

Q2 Form 138 statement

January–February 2027

Proofs collected; TDS for the rest of the year recalculated

31 January 2027

Q3 Form 138 statement

30 April 2027

Deposit March TDS

31 May 2027

Q4 Form 138 with full-year salary details

15 June 2027

Issue Form 130 to every employee

Special situations

Changing jobs mid-year. Each employer deducts only on the salary it pays unless you tell it about the earlier job. If you do not, both employers give you the rebate and the lower slabs, and you end up with a shortfall in your return. Give the new employer your previous salary and TDS in Form 122 so the remaining months carry the right rate. Each employer issues its own Form 130 for its period of employment.

Arrears and advance salary. Arrears paid in a later year can push you into a higher slab. Relief under section 157 (the old section 89) is claimed through Form 39, which replaced Form 10E, and the employer can take it into account for TDS when you are a government or company employee.

Employee without PAN. Section 397(2) requires a payee to give a valid PAN. If an employee does not, tax is deducted at the higher of the average rate and 20%. For most mid-level salaries that makes a dramatic difference, so collect PAN at onboarding.

Employees below the tax line. If an employee's estimated income is within the rebate, the monthly TDS is nil. The employer should still keep the regime choice and declarations on file, and include the employee in the Form 138 statement where salary is reportable. Some employees with large interest income ask for TDS to be deducted from salary to avoid advance tax instalments; that is allowed through Form 122.

Small employers. A shopkeeper or a professional with a few staff has the same duties as a large company once any employee's tax becomes payable — a TAN, monthly deposit, Form 138 and Form 130. Our TAN registration guide covers getting one.

Running salary TDS each month

1. 1

   Collect PAN, regime choice and declarations

   At joining or in April: PAN, old or new regime, Form 124 declarations, Form 122 for other income or a previous employer.

2. 2

   Estimate the year's salary

   Include basic, allowances, bonus, perquisites at rule 15 values; subtract exemptions and deductions allowed in the chosen regime.

3. 3

   Compute annual tax and the monthly figure

   Apply slabs, rebate or marginal relief, and 4% cess; divide by the months remaining.

4. 4

   Deposit by the 7th

   Pay under your TAN with section 392 and payment code 1002 (non-government employees).

   e-Filing portal
5. 5

   Re-check after proofs and pay changes

   Recalculate when proofs arrive or pay changes, and spread the difference over the remaining months.

6. 6

   File Form 138 quarterly and issue Form 130

   Statements by 31 July, 31 October, 31 January and 31 May; certificates from TRACES by 15 June after the end of the tax year.

Common mistakes and how to fix them

Applying the old regime by default. If an employee has not opted, the law says the new regime applies. Deducting under the old regime with assumed investments usually under-deducts, and the employer can be treated as in default for the shortfall.

Accepting declarations without proofs at year-end. Declarations are for estimating the early months. By the last quarter, claims that are not supported by evidence in Form 124 should be dropped from the calculation. If an employee later shows proof, the deduction is claimed in the return.

Missing perquisites. Car, accommodation, interest-free loans and gift cards above the limit belong in salary. The higher 2026 values for cars and chauffeurs catch many payroll systems still set to the old ₹1,800 and ₹900 figures.

Quoting section 192 after 1 April 2026. Challans and statements for salary paid from April 2026 must quote section 392 and the new payment code; the Department warns that old section references can cause processing errors that need a correction statement.

Employee side: not checking the AIS. The Annual Information Statement (Form 168, replacing Form 26AS) shows what your employer actually reported. Compare it with your payslips and Form 130 before filing. If TDS was deducted but not reported, ask the employer to file a correction — you cannot get the credit otherwise.

Official links

• Income-tax Act, 2025 — Gazette textSection 392 (salary TDS), s.19, s.156, s.202
• TDS compliance FAQs (new Act transition)Date-of-payment rule for salary, deposit dates
• Form 138 user manualQuarterly salary statement (old 24Q)
• TRACESDownload Form 130, check defaults, corrections
• e-Filing portalPay TDS, file statements, view AIS

What to do next

Employers: before the next payroll run, confirm every employee's regime choice, update perquisite values to the 2026 figures and make sure the challan quotes section 392. Then generate payslips that show the TDS line clearly with our free salary slip generator. Employees: compare your monthly TDS with the examples above; if it looks too high, check which regime your employer is using and whether your Form 124 proofs were accepted. For the bigger picture of how TDS works across payments, read what TDS is and how it works.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

How is TDS on salary calculated each month?

Your employer estimates your taxable salary for the whole tax year, works out the tax on it under the regime you have chosen (including rebate and 4% cess), and divides that annual tax over the months left in the year. This is the 'average rate' method in section 392(1) of the Income-tax Act, 2025, which replaced section 192. If your pay, declarations or proofs change, the remaining months are adjusted.

Is TDS deducted if my salary is below ₹12 lakh?

Under the new regime, a resident individual whose total income does not exceed ₹12 lakh gets a rebate of up to ₹60,000, so tax is nil. With the ₹75,000 standard deduction, salary up to ₹12.75 lakh with no other income usually means no TDS. The employer still has to report you in the quarterly salary statement and give you a Form 130 if any tax was deducted.

What happens if I don't tell my employer which tax regime I want?

The new regime under section 202 of the Income-tax Act, 2025 is the default. If you do not intimate the old regime, the employer deducts tax at new-regime rates and ignores old-regime claims such as HRA exemption and investment deductions. Salaried people without business income can still pick the old regime when filing the return, but a large shortfall at that stage means paying the difference as self-assessment tax.

Which form replaced Form 12BB for investment proofs?

From 1 April 2026, employees submit evidence of claims such as rent, home-loan interest and deductions in Form 124, which replaced Form 12BB under the Income-tax Rules, 2026. Details of salary from a previous employer and other income go in Form 122 (formerly Form 12B). The employer must collect these to estimate income under section 392(5)(b).

Can my employer deduct more TDS to cover my interest or rental income?

Yes, if you ask. Under section 392(4) you can report other income — interest, rent, capital gains — and TDS or TCS suffered elsewhere, and the employer then factors them into the monthly deduction. The salary TDS can be reduced only for a loss under the head 'house property' and for tax already deducted or collected under other provisions; other losses cannot cut it.

When is TDS on salary deposited and reported?

The employer deposits salary TDS by the 7th of the next month (30 April for March), files the quarterly statement in Form 138 (formerly Form 24Q) by 31 July, 31 October, 31 January and 31 May, and issues Form 130 (formerly Form 16) by 15 June after the end of the tax year. Check that the TDS appears in your Annual Information Statement before you file your return.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.The Income-tax Act, 2025 (Act No. 30 of 2025), Gazette of India Extraordinary, 21 August 2025 — Ministry of Law and Justice (Legislative Department) · accessed 9 October 2026
2. 2.TDS Compliance — e-Filing help (FAQs on the transition to the Income-tax Act, 2025) — Income Tax Department (e-Filing portal) · accessed 9 October 2026
3. 3.Form 138 — user manual — Income Tax Department (e-Filing portal) · accessed 9 October 2026
4. 4.Rule 215, Income-tax Rules 2026 — certificates of TDS/TCS — TaxHeal (reproducing the notified rule) · accessed 9 October 2026
5. 5.Rethinking payroll under India's Income Tax Rules 2026 — India Briefing (Dezan Shira & Associates) · accessed 9 October 2026
6. 6.India: changes in Income Tax Act and Rules effective 1 April 2026 — Mercans · accessed 9 October 2026
7. 7.Income tax slab rates for tax year 2026-27: new regime vs old regime — TaxAJ · accessed 9 October 2026
8. 8.TDS / TCS rate chart tax year 2026-27 — TDSMAN · accessed 9 October 2026