TDS on Salary: How It Works, How to Calculate It, and How to Claim Refund in AY 2026-27

If you are a salaried employee in India, a portion of your salary never reaches your bank account — your employer deducts it as TDS (Tax Deducted at Source) and deposits it with the government on your behalf. While TDS simplifies tax collection, many employees don't fully understand how it's calculated, what they can do to reduce it, or when they're entitled to a refund.

This guide breaks down TDS on salary under Section 192 of the Income Tax Act for AY 2026-27 (FY 2025-26), with practical examples and actionable tips.

What Is TDS on Salary?

TDS on salary is a mechanism where your employer estimates your annual tax liability at the start of the financial year and deducts it in equal monthly instalments from your salary. This deduction is governed by Section 192 of the Income Tax Act.

Unlike TDS on other income types (where a flat rate is applied), TDS on salary is calculated at your applicable slab rate after considering all exemptions and deductions you've declared to your employer.

Key Points About Salary TDS

• Your employer is legally obligated to deduct TDS if your estimated total income exceeds the basic exemption limit
• The deduction happens every month, spread evenly across the year
• Your employer issues Form 16 as proof of TDS deducted — this is essentially your TDS certificate for salary income
• The deducted amount is deposited with the government and reflected in your Form 26AS and AIS

How Is TDS on Salary Calculated? Step-by-Step

Your employer follows a specific process each year to determine your monthly TDS amount. Here's how it works:

Step 1: Compute Gross Salary

This includes basic pay, DA (Dearness Allowance), HRA, special allowances, bonuses, commissions, and any perquisites or profits in lieu of salary.

Step 2: Allow Exemptions

Certain salary components are exempt from tax:

Step 3: Deduct Chapter VI-A Deductions (Old Regime Only)

If you've opted for the old tax regime and submitted investment proofs to your employer, deductions under sections like 80C, 80D, 80CCD(1B), and others are subtracted from your taxable income.

Under the new tax regime, most deductions aren't available — only the standard deduction of Rs 75,000 and employer's NPS contribution under 80CCD(2) apply.

Step 4: Compute Tax at Slab Rates

Your employer applies the applicable tax slabs based on the regime you've chosen.

New Tax Regime Slabs (Default for AY 2026-27):

Note: Under the new regime, taxpayers with income up to Rs 12,00,000 pay zero tax due to the Section 87A rebate (Rs 12,75,000 including standard deduction).

Step 5: Add Surcharge and Cess

• Surcharge: Applicable if total income exceeds Rs 50 lakh (10% to 25% depending on income level)
• Health & Education Cess: 4% on total tax including surcharge

Step 6: Divide by 12

The final annual tax amount is divided into 12 equal monthly instalments. This is the TDS deducted from your salary each month.

Practical Example: TDS Calculation

Rahul's Profile (FY 2025-26, New Regime):

• Annual CTC: Rs 15,00,000
• Basic Pay: Rs 7,50,000
• HRA: Rs 3,75,000
• Special Allowance: Rs 3,75,000

Calculation:

Tax under New Regime:

Rahul's employer will deduct approximately Rs 8,125 from his salary every month.

What Happens When You Switch Jobs Mid-Year?

When you switch jobs during the financial year, TDS can become complicated:

• New employer may not know about previous income: If you don't share your previous employer's Form 12B (or Form 16 from the old employer), the new employer calculates TDS only on the salary they pay. This can result in under-deduction.
• Double basic exemption benefit: Each employer independently applies the basic exemption limit, leading to lower TDS than what's actually owed.
• Year-end surprise: You may discover a shortfall when filing your return and need to pay self-assessment tax.

What to do: Always submit Form 12B to your new employer with details of salary earned and TDS deducted by the previous employer. This helps the new employer compute TDS correctly for the remainder of the year.

How to Reduce TDS Legally

If you feel too much TDS is being deducted, you have several options:

1. Submit Investment Declarations Early

At the start of the financial year (April), submit your planned investments and expenses to your employer through the investment declaration form. This lets them factor in deductions when calculating TDS from the very first month.

2. Choose the Right Tax Regime

If you have substantial deductions (home loan, 80C investments, HRA, NPS), the old regime may result in lower TDS. If not, the new regime with its higher exemption limit and rebate might be better. Use a tax calculator to compare before declaring your choice.

3. Submit Actual Proofs on Time

Most employers ask for investment proofs between January and March. If you miss this window, your employer will calculate TDS without those deductions for the remaining months — resulting in higher deduction in the last quarter.

4. Declare Other Income Sources

If you have rental income, interest income, or capital gains, inform your employer. While this increases TDS, it prevents a large self-assessment tax bill later. You can also declare losses (like capital losses from stock markets) that can offset gains.

5. Apply for Lower TDS Certificate (Section 197)

If you have significant deductions or losses that your employer can't fully account for, you can apply to the Assessing Officer for a certificate authorising TDS at a lower rate or nil rate. This is filed using Form 13 on the TRACES portal.

When Can You Claim a TDS Refund?

Excess TDS is one of the most common reasons Indian taxpayers file returns — and it's perfectly legitimate. You may be entitled to a refund if:

• Your employer deducted TDS but your total income is below the taxable limit (common for those who join work mid-year or take unpaid leave)
• You didn't submit investment proofs on time, so the employer over-deducted TDS in the final months
• You have losses (capital losses, house property loss) that reduce your net taxable income below what the employer estimated
• You switched from old to new regime (or vice versa) while filing, and the new regime results in lower tax

How to Claim the Refund

1. File your ITR before the due date (July 31 for most salaried individuals)
2. Correctly report all salary income, TDS, and deductions
3. The ITR form auto-calculates whether you owe tax or are due a refund
4. If a refund is due, it's processed by CPC Bangalore and credited directly to your bank account (typically within 30-60 days of e-verification)

49Tax's AI automatically pulls your TDS details from Form 26AS and matches them with your Form 16, flagging any discrepancies before you file.

Common TDS Issues and How to Fix Them

TDS Mismatch Between Form 16 and Form 26AS

Sometimes the TDS your employer shows on Form 16 doesn't match what's reflected in Form 26AS. This happens when:

• The employer deposited TDS late
• There's a PAN or TAN mismatch in the employer's TDS return
• Quarterly TDS returns weren't filed correctly

Fix: Ask your employer's payroll or finance team to verify and correct their TDS returns. The income tax department relies on Form 26AS/AIS data for processing, not Form 16.

TDS Deducted but Not Deposited

In rare cases, an employer deducts TDS from your salary but fails to deposit it with the government. This is a serious issue — the tax department may deny you credit for that TDS.

Fix: Check your Form 26AS regularly (at least quarterly). If TDS doesn't appear, escalate with your employer immediately. The employer faces penalties under Section 276B for non-deposit.

Incorrect Tax Regime Applied

If your employer applies the wrong tax regime, your TDS will be miscalculated for the entire year.

Fix: Verify the regime shown on your payslip or Form 16 Part B. You can always choose the correct regime while filing your ITR, and any excess TDS will be refunded.

TDS on Salary vs Other TDS

It's worth understanding how salary TDS differs from TDS on other income:

Key Deadlines to Remember

Final Takeaway

TDS on salary isn't a "set it and forget it" system — small actions like submitting investment proofs on time, choosing the right regime, and sharing Form 12B when switching jobs can save you thousands in unnecessary deductions and avoid refund hassles later. Check your Form 16 against Form 26AS at least once a year, and file your return well before the deadline to get any excess TDS refunded quickly.