TDS on salary explained — how your employer calculates and deducts tax

Q: What is TDS on salary?

TDS (Tax Deducted at Source) on salary is the income tax your employer deducts from your monthly salary and deposits with the government on your behalf. It is not an extra tax — it is an advance payment of your income tax liability, spread across 12 months. At the end of the year, TDS is credited against your total tax liability when you file your ITR.

Q: What happens if my employer deducts too much or too little TDS?

If excess TDS is deducted, you will receive a refund when you file your ITR. If too little TDS is deducted, you will need to pay the balance as self-assessment tax before or at the time of filing your ITR. In either case, the correct tax is settled through ITR filing.

Q: How do I reduce TDS deduction from salary?

Submit investment declarations to your employer at the start of the financial year using Form 12BB. Declare 80C investments, 80D premiums, HRA exemption claims, and home loan interest. Your employer will reduce TDS based on these declarations. Submit actual proof documents (usually in January–February) to finalize.

Updated July 2026 · FY 2026-27 (AY 2027-28)

Every month, your employer deducts a portion of your salary as TDS (Tax Deducted at Source) and sends it to the government on your behalf. This is not an additional tax — it is an advance payment of your income tax, spread across the year. Understanding how TDS is calculated helps you declare investments correctly, avoid surprises in March, and ensure you are not overpaying throughout the year.

What is TDS on salary?

TDS under Section 192 of the Income Tax Act requires every employer to estimate your annual tax liability at the start of the financial year and deduct a proportionate amount from your salary each month. By March, the total TDS deducted should approximately equal your full year's tax liability.

TDS is not final tax — it is a prepayment. When you file your ITR in July, you declare your actual income, actual deductions, and actual tax. If TDS deducted is more than the actual tax, you get a refund. If less, you pay the balance as self-assessment tax.

How your employer calculates TDS — step by step

Your employer's payroll system runs this calculation at the start of the year (and recalculates it whenever you update your declarations):

Estimate annual gross salary — All salary components for the year: basic, HRA, special allowance, LTA, bonus, and any other taxable components.
Subtract exemptions — HRA exemption (if you submitted rent receipts), LTA exemption (if claimed), and standard deduction (₹75,000 under new regime for FY 2026-27).
Subtract Chapter VI-A deductions — 80C (EPF + declared investments), 80D (health insurance premium), 80CCD(1B) (NPS), and any other deductions you declared. Only applicable under old regime.
Compute tax on net taxable income — Apply the appropriate tax slabs, deduct any 87A rebate, add 4% health and education cess.
Divide by 12 — The annual tax liability divided by remaining months gives monthly TDS.

TDS is recalculated dynamically. If you submit proof of investments in February, your employer adjusts the remaining months' TDS to recover any shortfall or refund any excess.

Form 12BB — your investment declaration form

At the beginning of each financial year (April), your employer's HR or payroll system asks you to declare your planned investments and exemptions for the year. This is done through Form 12BB.

What you declare on Form 12BB:

HRA exemption — Name and address of landlord, monthly rent, landlord's PAN (mandatory if rent exceeds ₹1 lakh per year)
LTA (Leave Travel Allowance) — If you plan to claim travel exemption
Section 80C investments — Planned EPF, PPF, ELSS, LIC premium, home loan principal
Section 80D — Health insurance premiums for family and parents
Home loan interest under 24(b) — Name of lender, interest payable
NPS under 80CCD(1B) — Planned NPS contributions
Any other deductions — 80E (education loan interest), 80G (donations), etc.

This is a declaration, not proof. You submit actual documents (insurance premium receipts, rent receipts, investment statements) in January or February when your employer finalises the year's TDS.

Do not over-declare investments you haven't made or don't plan to make. Your employer will ask for proof in January-February. If you can't provide proof, your TDS will spike in the last 2-3 months to recover the deficit — often a nasty salary surprise in February or March.

How to verify your TDS in Form 26AS

Every rupee of TDS your employer deducts must be deposited with the government and will appear in your Form 26AS — a tax credit statement available on the income tax portal. You should verify this at least twice a year:

Log in to incometax.gov.in with your PAN
Go to e-File → Income Tax Returns → View Form 26AS
Under Part A, look for TDS by your employer (identified by their TAN)
Verify that the TDS amount matches what is on your payslips

If TDS is missing from Form 26AS but was deducted from your payslip, it means your employer has not deposited it with the government. Raise this with your employer's payroll team immediately — unfiled TDS does not give you credit when you file your ITR, and you may end up paying tax twice.

What if TDS is too high or too low?

Situation	What happens	What to do
TDS > actual tax liability	You are owed a refund	File ITR — refund credited to bank account, usually within 2–3 months with interest
TDS < actual tax liability	You have tax payable	Pay self-assessment tax via Challan 280 before or at filing; also check if advance tax was due
TDS exactly matches	Nil tax / nil refund	File ITR anyway — it is mandatory if income exceeds the basic exemption limit

What happens when you change jobs mid-year

When you join a new employer, they typically start TDS computation fresh — assuming you had no income before joining. This causes under-deduction of TDS because your previous income is not accounted for. To prevent a large tax demand at the end of year, disclose your previous employer's salary and TDS to your new employer using Form 12B. Your new employer will then include this in the TDS calculation for the remaining months.

If you don't do this and end up with under-deducted TDS, you will need to pay the balance plus potential interest under Section 234B or 234C when filing your ITR.

Frequently asked questions

What is TDS on salary?

TDS (Tax Deducted at Source) on salary is the income tax your employer deducts from your monthly pay and deposits with the government. It is an advance payment of your annual tax liability. At ITR filing, TDS is credited against your actual tax — excess becomes a refund, shortfall becomes tax payable.

How do I reduce TDS deduction from salary?

Submit your investment declarations at the start of the year via Form 12BB. Declare 80C investments, health insurance (80D), HRA exemption (if you pay rent), and home loan interest. Your employer will reduce TDS based on these declarations. Submit proof documents in January-February to finalise.

What happens if my employer deducts too much or too little TDS?

If excess TDS is deducted, you will get a refund when you file your ITR (with interest if the refund is substantial). If too little TDS is deducted, you pay the balance as self-assessment tax at ITR filing. Large under-deductions may also attract interest under Sections 234B and 234C.

Is TDS the same as income tax?

TDS is an advance payment of income tax. It is not separate from income tax — it is deducted throughout the year so you don't have to pay the entire year's tax at once. Your final income tax liability is calculated when you file your ITR, and TDS already paid is set off against it.

What is Form 26AS and why should I check it?

Form 26AS is your tax credit statement on the income tax portal — it shows all TDS deducted by your employer (and others) and deposited with the government in your name. You should verify it at least twice a year to ensure TDS is being deposited correctly. If TDS is on your payslip but not in Form 26AS, your employer has not paid it to the government, which means you won't get credit for it when filing your ITR.

Disclaimer: This guide reflects tax rules for FY 2026-27. Tax laws and TDS rates are subject to change. Verify with a chartered accountant for your specific situation. This is for informational purposes only and not professional tax advice.