If your company has employees on payroll, TDS (Tax Deducted at Source) on salary is one of your most important compliance obligations. Get it wrong and you face penalties, interest, and disallowance of salary expenses. Here's everything you need to know as an employer for FY2024-25.

What Is TDS on Salary?

Under Section 192 of the Income Tax Act, every employer must deduct TDS from salaries paid to employees. Unlike other TDS provisions that apply fixed rates, TDS on salary is calculated at the employee's applicable income tax slab rate — because you're essentially functioning as the tax collector on behalf of the government.

💡 Key Principle

TDS on salary must be deducted at the time of payment. The rate is the estimated average income tax rate based on the employee's projected annual income for the financial year — recalculated every month as income changes.

Step-by-Step: How to Compute TDS on Salary

Step 1: Estimate Annual Income

At the start of each financial year, estimate the employee's total income including Basic Salary, HRA, Special Allowance, Bonus, Perquisites and any other heads of income.

Step 2: Get the Employee's Declaration

Collect Form 12BB from each employee — this declares their investments (80C, 80D, NPS), HRA exemption, LTA, home loan interest (Section 24), and their choice of New vs Old tax regime.

Step 3: Compute Taxable Income

Under the Old Regime: deduct HRA exemption (u/s 10(13A)), LTA (u/s 10(5)), Standard Deduction (₹50,000), and all 80C/80D/80CCD deductions declared.

Under the New Regime: only Standard Deduction (₹75,000 from FY2024-25 per Budget 2024) and NPS employer contribution (80CCD(2)) are deductible.

Step 4: Apply Tax Slabs

New Regime FY2024-25 slabs: ₹0–3L (Nil), ₹3–7L (5%), ₹7–10L (10%), ₹10–12L (15%), ₹12–15L (20%), above ₹15L (30%). Rebate u/s 87A available up to ₹7L income (net tax becomes zero).

Step 5: Divide by Remaining Months

Divide the annual estimated tax by 12 (or remaining months if mid-year joinee) to get monthly TDS deduction. Recalculate every month when salary changes, bonus is paid, or investment declarations are updated.

TDS Return — Form 24Q

Employers must file Form 24Q quarterly, reporting TDS deducted on salary payments. Due dates:

  • Q1 (Apr–Jun): 31 July
  • Q2 (Jul–Sep): 31 October
  • Q3 (Oct–Dec): 31 January
  • Q4 (Jan–Mar): 31 May

Form 16 — The Employee's TDS Certificate

Every employer must issue Form 16 to each employee by 15 June after the financial year ends. Form 16 has two parts:

  • Part A: TDS summary — quarterly deductions, deposits, TAN details (downloaded from TRACES)
  • Part B: Detailed salary breakup, exemptions claimed, deductions and final tax computation

Employees use Form 16 to file their ITR — making accuracy critical. Errors in Form 16 can cause mismatches in the employee's AIS/TIS and lead to income tax notices.

Depositing TDS to the Government

TDS deducted must be deposited using Challan ITNS 281:

  • For companies: By 7th of the following month (for all months except March)
  • For March salary: By 30 April
  • Penalty for late deposit: 1.5% per month interest under Section 201(1A)

Common Mistakes Employers Make

  • Not collecting Form 12BB — deducting at wrong rate
  • Forgetting to include perquisites (car, ESOP, rent-free accommodation) in taxable salary
  • Not updating TDS when a bonus is paid mid-year
  • Not verifying employee PAN — leading to TDS at 20% under Section 206AA
  • Mismatch between Form 24Q and actual payments leading to TRACES defaults

Lower Deduction Certificate (Section 197)

Employees who expect their actual tax liability to be lower than TDS being deducted can apply to the Income Tax Department for a lower deduction certificate. The employer then deducts TDS at the certificate rate.

Managing TDS on salary accurately requires monthly recalculations, quarterly returns, and year-end Form 16 generation. BYF handles end-to-end TDS compliance for employers — from payroll integration to TRACES filing and Form 16 issuance. Get in touch for a free consultation.