TDS on Salary (Section 192/392): Complete Employer Guide for FY 2026-27

TDS on Salary: Complete Employer Guide for FY 2026-27

If you run payroll in India, you are a tax collector for the government. Every month, you must estimate how much income tax your employee will owe for the full year, divide that by the number of remaining months, and deduct that amount before paying the salary. That is TDS on salary. Getting the computation wrong, missing a deposit deadline, or failing to issue the annual TDS certificate triggers interest, penalties, and expense disallowance that can cost more than the TDS itself.

This guide covers every step of the employer's TDS obligation on salary for FY 2026-27, including the transition from the Income Tax Act, 1961 to the Income Tax Act, 2025.

Who Must Deduct TDS on Salary

Every person responsible for paying salary must deduct TDS. The employer's legal form does not matter. The obligation applies equally to:

• Private limited companies and public companies
• LLPs and partnership firms
• Proprietorship firms (if they have salaried employees)
• Hindu Undivided Families (HUFs) conducting business
• Trusts, societies, and NGOs
• Central and state government departments
• Local authorities and statutory bodies

The trigger condition is simple: if the employee's estimated total income under the head "salaries" for the financial year exceeds the basic exemption limit, the employer must deduct TDS. For the new tax regime (default from FY 2026-27), the basic exemption limit is Rs 4,00,000. For the old tax regime, it is Rs 2,50,000 for individuals below 60, Rs 3,00,000 for senior citizens (60 to 79), and Rs 5,00,000 for super senior citizens (80 and above).

There is no threshold on the employer side. A startup with 2 employees and a corporation with 50,000 employees have the same obligation.

The Transition: Section 192 vs Section 392

The Income Tax Act, 2025 replaced the Income Tax Act, 1961 effective April 1, 2026. TDS on salary, which was governed by Section 192, is now governed by Section 392 of the new Act. Section 393 covers TDS on all non-salary payments.

The transition rule is date-based:

The underlying computation method has not changed. Rates, slabs, and exemption limits remain the same. What changed is the section numbering, the form numbers, and the structural consolidation of the Act.

For salary pertaining to January through March 2026, you still file the old Form 24Q (due May 31, 2026). The first Form 138 filing covers Q1 of FY 2026-27 (April to June 2026) and is due by July 31, 2026.

How to Compute TDS on Salary: Step by Step

TDS on salary is not deducted at a flat rate. The employer must compute the tax at the average rate applicable to the employee's estimated total income for the year. Here is the step-by-step process:

Step 1: Estimate Annual Gross Salary

Add up all salary components the employee is expected to receive during the financial year:

• Basic salary
• Dearness allowance (DA)
• House Rent Allowance (HRA)
• Special allowances
• Bonuses and commissions
• Leave encashment (if taxable)
• Perquisites and profits in lieu of salary (valued as per rules)

Step 2: Deduct Exempt Allowances

Subtract exempt components under Section 10 (corresponding provisions under the new Act):

• HRA exemption under Section 10(13A): the least of actual HRA received, rent paid minus 10% of salary, or 50% of salary (metro) / 40% of salary (non-metro). See our HRA exemption guide for the calculation.
• Leave Travel Allowance (LTA): exempt for actual travel expenses within India, twice in a block of four years
• Standard deduction: Rs 75,000 under the new regime, Rs 50,000 under the old regime
• Other exempt allowances: children's education allowance (Rs 100 per child per month, up to 2 children), hostel expenditure allowance (Rs 300 per child per month), and uniform/dress allowance to the extent of actual expenditure

Step 3: Add Other Income Declared by Employee

The employee may declare other income through Form 122 (which replaces the old Form 12B and Form 12BAA). This includes:

• Income from house property (interest on home loan can result in a loss of up to Rs 2,00,000 under old regime)
• Interest income, rental income, or capital gains from non-salary sources
• TDS or TCS already deducted on such other income

The employer adjusts the TDS computation to account for this additional income and the taxes already deducted on it.

Step 4: Apply Deductions (Old Regime Only)

If the employee has opted for the old regime, subtract eligible deductions:

• Chapter VI-A deductions: Section 80C (up to Rs 1,50,000), Section 80D (health insurance), Section 80E (education loan interest), Section 80G (donations), and others. See our Section 80C guide and Section 80D guide.
• Section 24(b): Home loan interest deduction up to Rs 2,00,000 for self-occupied property. See our Section 24(b) guide.

Under the new regime, most deductions are not available. Only the standard deduction (Rs 75,000), employer's NPS contribution under Section 80CCD(2) (up to 14% of salary for central government employees, 10% for others), and family pension deduction (Rs 25,000) are allowed.

Step 5: Compute Tax on Net Taxable Income

Apply the applicable slab rates to the net taxable income.

New Regime Tax Slabs (FY 2026-27):

Old Regime Tax Slabs (FY 2026-27):

Add 4% Health and Education Cess on the tax amount.

Step 6: Apply Rebate Under Section 87A

Under the new regime, if net taxable income is up to Rs 12,00,000 (after standard deduction), the employee is eligible for a rebate of up to Rs 60,000. This effectively makes income up to Rs 12,00,000 tax-free under the new regime. Marginal relief applies for income slightly above this limit. See our Section 87A guide.

Under the old regime, the rebate is up to Rs 12,500 for taxable income up to Rs 5,00,000.

Step 7: Divide by Remaining Months

Divide the total annual tax liability by the number of months remaining in the financial year (including the current month). This gives the monthly TDS amount.

If the employee joins mid-year or receives variable pay (bonus, commission), the employer must recalculate the annual estimate and adjust the monthly TDS for the remaining months.

Worked Example: New Regime

Employee profile: Rahul, 32, salaried, no other income, opts for the new regime (default).

Step 1: Gross salary = Rs 16,80,000

Step 2: Standard deduction = Rs 75,000. HRA exemption is not available under the new regime. Net salary income = Rs 16,80,000 minus Rs 75,000 = Rs 16,05,000.

Step 3: No other income declared.

Step 4: No Chapter VI-A deductions under the new regime (except NPS employer contribution, which is not applicable here).

Step 5: Tax computation on Rs 16,05,000:

Step 6: Section 87A rebate does not apply (income exceeds Rs 12,00,000).

Step 7: Monthly TDS = Rs 1,25,840 / 12 = Rs 10,487 (rounded).

The employer deducts Rs 10,487 from Rahul's salary every month and deposits it with the government by the 7th of the following month.

The Default Regime and Employee Opt-Out

From FY 2026-27, the new tax regime is the default for all employees. The employer must compute TDS under the new regime unless the employee specifically opts out.

To opt for the old regime, a salaried employee (without business income) must:

1. Inform the employer at the start of the financial year by submitting Form 122
2. The employer then computes TDS under the old regime, allowing all applicable exemptions and deductions
3. The employee can change the regime choice every year

If the employee does not submit Form 122, the employer must deduct TDS under the new regime. The employee can still choose the old regime when filing the ITR, but the monthly TDS would have been computed under new regime rates and any excess or shortfall adjusts at the time of return filing.

Practical tip for employers: Collect regime declarations from all employees by April 15 each year. Employees who do not respond default to the new regime. Document this process to avoid disputes later.

Form 122: The Consolidated Employee Declaration

Form 122 is a new form under the Income Tax Rules 2026 that replaces and merges the old Form 12B and Form 12BAA. Employees submit this form to their current employer to declare:

• Salary from previous employer(s) during the same financial year, along with TDS already deducted by the previous employer
• Loss from house property (up to Rs 2,00,000 under old regime) to be set off against salary
• Other income (interest, rental, capital gains) and TDS/TCS already deducted on such income
• Tax regime choice (old vs new)

The employer uses this information to adjust the annual TDS computation. Without Form 122, the employer computes TDS based only on the salary they pay, and the employee may face a large tax demand or refund situation when filing the ITR.

For employees who switch jobs mid-year, Form 122 is essential. The new employer must factor in the salary already paid by the previous employer and adjust the remaining monthly TDS accordingly. Failing to do this often leads to under-deduction, because each employer treats the employee's salary independently against the full exemption limit.

Perquisites and Profits in Lieu of Salary

Perquisites are non-cash benefits provided by the employer. They are taxable in the hands of the employee and the employer must include their value when computing TDS. Common perquisites include:

• Company-provided accommodation: valued based on rules (15% of salary for government employees, population-based percentages for others)
• Motor car and driver: taxable value depends on whether the car is used for personal or official purposes
• Interest-free or concessional loans: the difference between the SBI lending rate and the actual rate charged is a taxable perquisite (if the loan exceeds Rs 20,00,000)
• Club membership: employer-paid club fees are a taxable perquisite
• ESOP and sweat equity: the fair market value on the date of exercise minus the exercise price is taxable as a perquisite. TDS is deducted in the month of exercise.

The employer must issue Form 12BA (or its equivalent under the new rules) along with the TDS certificate to report the value of each perquisite. This accompanies Form 130 and gives the employee a detailed breakdown.

TDS Deposit Deadlines

After deducting TDS from salary, the employer must deposit it with the government within strict timelines:

Deposits are made through the e-payment facility on the income tax portal using Challan 281. The employer must quote the correct TAN, assessment year, and payment code.

Interest for Late Deposit

Interest is calculated for each month or part of a month. Even a one-day delay into the next month counts as a full month.

Quarterly TDS Return: Form 24Q and Form 138

The employer must file a quarterly TDS return reporting all salary payments and TDS deductions for each employee.

Transition note: The Q4 return for FY 2025-26 (January to March 2026) is still filed in the old Form 24Q format by May 31, 2026. The first Form 138 filing covers Q1 of FY 2026-27 and is due by July 31, 2026.

The return has two annexures:

• Annexure I: filed every quarter, contains employee-wise salary and TDS details
• Annexure II: filed only with the Q4 return (January to March), contains the annual salary computation for each employee, including all exemptions, deductions, and tax computation

Annexure II is the foundation for generating Form 130 (or Form 16 under the old system). Any error in Annexure II flows directly into the TDS certificate.

Penalty for Late Filing

Late filing of the quarterly TDS return attracts a penalty of Rs 200 per day for each day of delay, capped at the total TDS amount. This penalty applies under Section 234E (corresponding provision under the new Act). For a company with 100 employees and Rs 5,00,000 in quarterly TDS, a 30-day delay means Rs 6,000 in penalties.

Issuing the TDS Certificate: Form 130 (Replaces Form 16)

After filing the Q4 return, the employer must issue a TDS certificate to every employee. From FY 2026-27 onward, this certificate is Form 130 instead of Form 16.

Issuance deadline: June 15 of the following assessment year.

For FY 2025-26, the employer must issue Form 16 (or Form 130 if the portal generates it in the new format) by June 15, 2026.

Structure of Form 130

Form 130 has three parts:

• Part A: Deductor and deductee details (PAN, TAN, name, address), quarter-wise TDS deducted and deposited. Generated from TRACES after filing the return.
• Part B: Summary of TDS reconciliation details.
• Part C: Annexure I (salary computation showing gross salary, exemptions, deductions, taxable income, and tax) or Annexure II (pension/interest for senior citizens).

The employer prepares the salary computation portion. Part A is system-generated. For a detailed walkthrough of Form 130, see our Form 130 guide.

Penalty for Non-Issuance

Failure to issue the TDS certificate by the deadline attracts a penalty of Rs 100 per day per certificate under Section 272A(2)(g). The penalty continues for each day of default until the certificate is issued. For a company with 50 employees issuing Form 130 thirty days late, the penalty is 50 x Rs 100 x 30 = Rs 1,50,000. The maximum penalty is capped at the total TDS amount.

Expense Disallowance for Non-Deduction

If the employer fails to deduct TDS (or deducts but does not deposit it before the due date for filing the return of income), the salary expense may be disallowed when computing the employer's business income:

• 30% disallowance for payments to resident employees
• 100% disallowance for payments to non-resident employees

This means the salary cost is not treated as a deductible business expense for the employer's income tax computation. For a company paying Rs 50,00,000 in annual salaries and failing to deduct TDS, the disallowance is Rs 15,00,000 (30%), which at 25% corporate tax rate increases the employer's tax liability by Rs 3,75,000.

The disallowance is reversed in the year in which TDS is actually deducted and deposited.

Adjustments During the Year

Mid-Year Salary Revision

If the employee receives a salary increment or bonus during the year, the employer must recalculate the estimated annual income and adjust the TDS for the remaining months. The revised monthly TDS covers both the additional income and the shortfall from earlier months where TDS was based on the lower estimate.

Employee Submits Investment Proofs

Most employers follow a two-phase process:

1. April to December: TDS is computed based on the employee's investment declarations submitted at the start of the year (planned investments)
2. January to March: The employer collects actual investment proofs and recalculates TDS. If the employee has invested less than declared, TDS for January to March increases to recover the shortfall.

The final Q4 TDS should reconcile the entire year's salary, exemptions, deductions, and tax paid.

Section 89(1) Relief for Arrears

If salary arrears or advance salary are paid in one financial year but relate to multiple years, the employee can claim relief under Section 89(1) by filing Form 10E on the income tax portal. The employer can factor this relief into TDS computation if the employee provides the Form 10E computation showing the relief amount. See our Section 89 guide.

Employer's Annual Compliance Calendar

Common Mistakes Employers Make

1. Not collecting regime declarations early. If you start TDS under the new regime and the employee later says they wanted the old regime, you cannot revise monthly deductions retroactively for months already deposited. Collect Form 122 by April 15.

2. Ignoring previous employer salary for mid-year joiners. Each employer deducts TDS independently on their salary only. If an employee earning Rs 8,00,000 from a previous employer joins you with a Rs 10,00,000 package, and you compute TDS on Rs 10,00,000 alone, the employee will face a Rs 50,000+ shortfall when filing the ITR. Collect Form 122 from every mid-year joiner.

3. Treating variable pay as guaranteed. Do not include performance bonuses in the TDS estimate unless they are confirmed. If you overestimate and deduct excess TDS, the employee's cash flow suffers for months until the ITR refund comes through.

4. Missing the 7th deposit deadline. Interest at 1.5% per month is calculated for each month or part of a month. A deposit on the 8th instead of the 7th adds one full month of interest. Automate challan payments.

5. Filing Annexure II with errors. The Q4 return's Annexure II drives the TDS certificate. Any error in salary breakup, deduction amounts, or tax computation flows directly into Form 130 and creates a mismatch when the employee files the ITR. Reconcile Annexure II against your payroll system before filing.

6. Not issuing Form 130 to employees who left mid-year. The TDS certificate must be issued to every employee from whom TDS was deducted during the year, including those who resigned or were terminated. Email the Form 130 to their last known email address and maintain proof of delivery.

Tax Garden's payroll compliance plans handle the entire salary TDS cycle: monthly computation, challan deposit, quarterly return filing, and Form 130 issuance. For related guides, see our TDS rate chart for FY 2026-27, TDS return filing guide for Form 24Q and 26Q, PF and ESI employer compliance guide, professional tax employer guide, gratuity employer guide, and the income tax slab rates for FY 2026-27.

Frequently Asked Questions

What is the TDS rate on salary for FY 2026-27?

There is no single flat TDS rate on salary. TDS is deducted at the average rate of income tax applicable to the employee's estimated total income. The employer computes the tax using the applicable slab rates (new regime or old regime) on the employee's projected annual salary after exemptions and deductions, and divides by the number of months remaining in the year. The effective rate varies for each employee based on their salary and deductions.

Is the new tax regime mandatory for salary TDS from April 2026?

The new tax regime is the default, not mandatory. If an employee does not submit Form 122 opting for the old regime, the employer must compute TDS under the new regime. However, the employee can still choose the old regime by declaring the option via Form 122. Salaried employees without business income can switch between regimes every year.

What happens if the employer deducts TDS under the wrong regime?

If TDS is deducted under the new regime but the employee files the ITR under the old regime (or vice versa), the difference is adjusted at the time of ITR filing. The employee either gets a refund or has an additional tax liability. There is no penalty on the employer for regime mismatch if the employer followed the default rule and the employee did not submit a regime declaration.

Must TDS be deducted on reimbursements like food coupons or medical reimbursement?

Non-taxable reimbursements are excluded from TDS computation. Medical reimbursement up to Rs 15,000 was exempt under the old regime but is no longer separately exempt under the new regime (the standard deduction of Rs 75,000 replaces it). Food coupons or meal vouchers provided through specified schemes may have limited exemption. The taxability depends on the specific allowance and the regime chosen.

Can an employer deduct lower TDS on salary?

The employer cannot unilaterally deduct lower TDS. However, the employee can apply to the Assessing Officer for a lower TDS certificate under Section 197 (corresponding provision under the new Act). Once issued, the employer deducts TDS at the rate specified in the certificate. This is useful for employees who have substantial deductions, losses, or advance tax credits that reduce their overall tax liability.

What is the penalty if the employer does not deduct TDS at all?

Non-deduction of TDS triggers multiple consequences: interest at 1% per month from the date TDS was deductible to the date of actual deduction, a penalty equal to the TDS amount under Section 271C (at the discretion of the Joint Commissioner), and potential disallowance of 30% of the salary expense (100% for non-resident employees) under Section 40(a)(ia) when computing the employer's business income.

Is TDS applicable on employer contributions to PF and NPS?

Employer contributions to PF (up to 12% of basic plus DA) and NPS (up to 10% of basic plus DA, 14% for central government) are not subject to TDS at the time of contribution. They become taxable only when withdrawn by the employee under specific conditions. However, employer PF contributions exceeding Rs 7,50,000 per year (combined across PF, NPS, and superannuation) are taxable as perquisites and must be included in TDS computation.

Sources

This guide is verified against Section 192 of the Income Tax Act, 1961 (TDS on salary, applicable up to March 31, 2026), Section 392 of the Income Tax Act, 2025 (TDS on salary, effective April 1, 2026), Section 393 of the Income Tax Act, 2025 (TDS on non-salary payments), and the Income Tax Rules 2026 notified by CBDT. Form 122 details confirmed from the Income Tax Department notification (incometaxindia.gov.in/documents/d/guest/fn-122). Form 130 structure and Form 138 quarterly filing requirements verified from ClearTax (cleartax.in/s/form-130-income-tax, cleartax.in/s/section-393-of-income-tax-act) and TaxGuru (taxguru.in/income-tax/form-130-tds-certificate-salary-replacing-form-16.html). TDS deposit deadlines and interest rates confirmed from Section 201(1A) and the Income Tax Department compliance portal (incometax.gov.in). Penalty provisions confirmed from Section 234E (late return filing), Section 271C (non-deduction), and Section 272A(2)(g) (non-issuance of TDS certificate). Tax slab rates for FY 2026-27 and standard deduction amounts verified from ClearTax (cleartax.in/s/income-tax-slabs), BajajFinserv (bajajfinserv.in/investments/income-tax-slabs), and BankBazaar. All rates, limits, and deadlines should be verified against incometax.gov.in before applying to specific payroll computations.