TDS on salary: how it works and how to reduce it
TDS on salary is income tax your employer deducts from each month’s pay under Section 192 and deposits with the government for you. Under the default new regime for FY 2025-26, salary up to ₹12,75,000 a year attracts zero TDS — ₹12,00,000 of taxable income plus the ₹75,000 standard deduction — thanks to the enhanced Section 87A rebate. Above that, seven slabs run from 5% to 30%.
General guidance, not tax advice
The short answer
What is TDS on salary?
Under Section 192 of the Income Tax Act, your employer estimates your tax for the year on the regime you choose, splits it across twelve months, and withholds that share from each pay cheque — this is TDS (Tax Deducted at Source). The employer deposits it with the government, reports it in your Form 16 and Form 26AS, and you reconcile the total when you file your income-tax return. It is a pay-as-you-earn mechanism, not an extra tax.
New-regime income-tax slabs (FY 2025-26)
The new regime under Section 115BAC is the default for FY 2025-26 (AY 2026-27). It carries a ₹75,000 standard deduction and a Section 87A rebate of up to ₹60,000, which together take a salaried income of up to ₹12,75,000 to nil tax. A 4% health and education cess applies on the tax computed from the slabs below.
Indicative slabs for general guidance only, not tax advice. The old regime remains optional, with a ₹50,000 standard deduction, an 87A rebate up to ₹12,500 (income up to ₹5,00,000) and the full set of deductions. Confirm the current position before you run payroll.
The one-line version
Below ₹12,75,000 on the new regime, your salary TDS is zero. Above it, declare your deductions early.
How TDS on salary is calculated
Section 192 does not use a flat percentage. Instead, your employer estimates your total annual salary, applies the standard deduction and any declared exemptions, works out the tax on your chosen regime’s slabs, adds 4% cess, and then divides that yearly figure across the remaining months of the financial year. Each month’s deduction is roughly one-twelfth of your projected annual liability.
Because it is an estimate, TDS re-balances through the year: a mid-year hike, a bonus, or a late investment declaration all change the projection, and the employer adjusts the remaining months so the full-year tax still lands correctly by March. That is why the amount on your salary slip can move month to month.
To model the take-home effect of a raise or a change in cover, the CTC calculator and salary hike calculator show the numbers before they hit your pay cheque.
How employees can reduce TDS on salary
You cannot avoid tax you genuinely owe, but you can stop over-withholding by making sure every eligible deduction reaches your employer before they compute your TDS. These are the four levers that matter most.
Submit your investment declaration on time
Give your employer Form 12BB with proof of rent, home-loan interest and eligible investments at the start of the year. Without it, the employer deducts TDS on your full salary and you wait for a refund after filing your return.
Pick the right tax regime
The new regime is the default and gives the ₹75,000 standard deduction and the enhanced Section 87A rebate, but drops most deductions. The old regime keeps 80C, 80D, HRA and home-loan interest. Compare both for your numbers before you declare a choice.
Use Section 80C and 80D (old regime)
Under the old regime, Section 80C shelters up to ₹1,50,000 (EPF, PPF, ELSS, life cover, children’s tuition) and Section 80D covers health-insurance premium — including a voluntary top-up on top of your employer’s group cover.
Claim HRA and home-loan interest
On the old regime, House Rent Allowance under Section 10(13A) and home-loan interest of up to ₹2,00,000 under Section 24(b) are among the largest levers a salaried employee has to bring taxable income — and therefore monthly TDS — down.
Health cover is a tax-efficient benefit
One of the cleanest levers on the old regime is Section 80D, which lets an employee deduct the health-insurance premium they pay — up to ₹25,000 for self and family, and a further ₹25,000 (₹50,000 where a parent is a senior citizen) for parents. That is real taxable income removed before TDS is calculated.
It works two ways with employer cover. The premium your employer pays for group health insurance is treated as a business expense and is not a taxable perquisite in the employee’s hands. And a voluntary top-up an employee buys on their own — over and above the company plan — is 80D-eligible, so it lowers both the health-cover gap and the tax bill at once.
For the employer’s own side of this — structuring pay and benefits so both the company and its people keep more — see the guides on tax-efficient CTC structuring and optimising your salary structure.
The employer’s TDS duties under Section 192
Deduct and deposit monthly
Estimate each employee’s annual tax on their declared regime, deduct the proportionate TDS every month, and deposit it with the government by the 7th of the following month (by 30 April for March). Late deposit attracts interest of 1.5% a month and can disallow the salary expense.
File returns and issue Form 16
File the quarterly Form 24Q TDS return, collect each employee’s regime choice and Form 12BB declaration, and issue Form 16 by 15 June after the financial year closes. Form 16 is the employee’s proof of salary and tax deducted when they file their return.
Due dates and rates are set by statute and revised periodically. Confirm the current position with a tax advisor or the income-tax portal before acting.
Declare early, and let benefits do double duty
The single biggest cause of over-deducted TDS is a missing declaration. Give payroll your rent proof, investments and health-cover premium at the start of the year, not in February, and each month’s deduction reflects the tax you actually owe.
It also reframes benefits. On the old regime, the health-insurance premium an employee funds is a deduction, not just a cost — which is exactly where a well-structured group plan plus voluntary top-up earns its place.
Frequently asked questions
What is TDS on salary and why is it deducted?
TDS (Tax Deducted at Source) on salary is income tax your employer withholds from each month’s pay under Section 192 of the Income Tax Act and deposits with the government on your behalf. It spreads your annual tax across the year instead of a lump sum, and the total deducted appears in your Form 16 and Form 26AS, which you use when filing your return.
How much salary is tax-free under the new regime in FY 2025-26?
For FY 2025-26 (AY 2026-27), a salaried individual on the default new regime pays zero tax on income up to ₹12,75,000 — that is ₹12,00,000 of taxable income plus the ₹75,000 standard deduction — because the Section 87A rebate was raised to ₹60,000. Above that, the seven-slab structure applies, running from 5% to 30%.
How can I reduce the TDS deducted from my salary?
Submit your investment and rent declaration (Form 12BB) to your employer early so eligible deductions are factored in. On the old regime you can use Section 80C (up to ₹1,50,000), Section 80D for health-insurance premium, HRA and home-loan interest. On the new regime the main levers are the ₹75,000 standard deduction and the ₹60,000 Section 87A rebate.
Does health insurance help reduce TDS on salary?
Yes, on the old regime. Section 80D lets you deduct the premium you pay for health cover — up to ₹25,000 for yourself and family, and a further ₹25,000 (₹50,000 for senior citizens) for parents. Premium your employer pays for group cover is not a taxable perquisite, and a voluntary top-up you fund yourself is 80D-eligible, making it a tax-efficient benefit.
What are the employer’s duties for TDS on salary?
Under Section 192 the employer must estimate each employee’s annual tax on their chosen regime, deduct the proportionate TDS every month, deposit it with the government by the 7th of the following month, file quarterly Form 24Q returns, and issue Form 16 by 15 June after the financial year ends. Late deposit attracts interest and penalties.
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