What is TDS?

TDS stands for Tax Deducted at Source. It is a system under the Income Tax Act, 1961 where the person making a payment deducts tax before paying the balance. For salaried employees, the employer estimates the annual income tax liability and deducts a portion each month before paying salary.

TDS on salary depends on the tax regime, gross salary, standard deduction, exemptions such as HRA, deductions under Chapter VI-A like Section 80C and rebates such as Section 87A. Employers calculate the taxable income for the year, compute the tax, and spread the deduction across 12 months. If the employer deducts more TDS than the actual tax liability, the employee can claim a refund when filing the income tax return. If too little is deducted, the employee must pay the balance as self-assessment tax. Employers usually ask employees to submit Form 12BB and investment proofs so that TDS is calculated as accurately as possible each month.

TDS must be deposited by the 7th of the next month using challan ITNS 281. Employers must also file quarterly Form 24Q and issue Form 16 to employees after the year ends.

Worked example

An employee has an annual gross salary of ₹12,00,000 and opts for the new tax regime in FY 2025-26.

| Item | Amount | |---|---| | Gross salary | ₹12,00,000 | | Standard deduction (new regime) | ₹75,000 | | Taxable income | ₹11,25,000 | | Tax before rebate | ₹52,500 | | Section 87A rebate (income ≤ ₹12 lakh) | ₹52,500 | | Net tax payable | ₹0 |

Because the projected net tax is nil, the employer may not deduct TDS if the estimate holds through the year.

Related reading

Read the TDS on salary guide or use the tax regime calculator.