Under section 392(1) an employer deducts tax at the time of paying salary at the average rate of tax on the employee's estimated salary income for the tax year. For 2026-27 the new regime (section 202) is the default: nil to ₹4 lakh, then 5% to 30%, a ₹75,000 standard deduction and a rebate making taxable income up to ₹12 lakh tax-free. If the employee opts for the old regime, use the old slabs with a ₹50,000 standard deduction and the claims backed by Form No. 124 (earlier Form 12BB). Add 4% cess. Deposit by the 7th of the next month.
How to work out monthly TDS
- Estimate the year's gross salary: monthly pay × 12, plus known bonuses and arrears, less exemptions the regime allows.
- Deduct the standard deduction (₹75,000 new, ₹50,000 old) and, under the old regime only, professional tax and the employee's verified claims.
- Compute tax on the slabs, subtract the section 156 rebate (and marginal relief), add 4% cess.
- Subtract TDS already deducted this year (including any previous employer's, if declared) and divide the balance by the months left.
- Re-run the estimate whenever pay or declarations change.
Worked example: increment in October
Kiran earns ₹1,25,000 a month from April and stays in the new regime. At the start of the year the estimate is ₹15,00,000; taxable ₹14,25,000; tax ₹93,750 + cess ₹3,750 = ₹97,500, or ₹8,125 a month. From October her pay rises to ₹1,40,000.
| Step | Working | Amount |
|---|---|---|
| Revised annual salary | 6 × ₹1,25,000 + 6 × ₹1,40,000 | ₹15,90,000 |
| Taxable (new regime) | ₹15,90,000 − ₹75,000 | ₹15,15,000 |
| Slab tax | ₹20,000 + ₹40,000 + 15% of ₹3,15,000 | ₹1,07,250 |
| With 4% cess | ₹1,11,540 | |
| TDS April to September | 6 × ₹8,125 | ₹48,750 |
| Monthly TDS October to March | (₹1,11,540 − ₹48,750) ÷ 6 | ₹10,465 |
Try your own figures in the TDS on salary calculator.
Section numbers: old and new
| Item | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| TDS on salary | Section 192 | Section 392 |
| New regime rates | Section 115BAC | Section 202 |
| Standard deduction | Section 16(ia) | Section 19 (Table, Sl. 2) |
| Rebate | Section 87A | Section 156 |
| TDS certificate | Section 203, Form 16 | Section 395(4)(b), Form No. 130 |
| Quarterly statement | Section 200(3), Form 24Q | Section 397(3)(b), Form No. 138 |
| Employee claims | Form 12BB | Form No. 124 |
| Late fee / penalty | Sections 234E / 271H | Sections 427 / 461 |
For salary paid up to 31 March 2026 the 1961 Act and the old forms still apply, including corrections for those years.
Edge cases
- Two employers: the employee can report the other salary and TDS (Form No. 122 for the previous employer's details) so that you deduct at the right rate.
- Non-monetary perquisites: you may pay the tax on them yourself under section 392(2)(a).
- Other income and house property loss: the employee may give these for TDS; a house property loss is the only loss that can reduce salary TDS (section 392(4)).
- No PAN: TDS at a higher rate applies; collect PAN at joining.
FundRaksha HR recalculates TDS on every payroll run from the employee's regime and declarations, so March never brings a surprise deduction.
Sources
- www.incometaxindia.gov.in/w/section-392-6
- www.incometaxindia.gov.in/w/section-202-76
- www.incometaxindia.gov.in/w/section-19-206
- www.incometaxindia.gov.in/w/section-156-88
- www.incometaxindia.gov.in/documents/d/guest/finance-act-2026-pdf-1
- www.incometaxindia.gov.in/documents/d/guest/form-124-faqs
- www.incometaxindia.gov.in/documents/d/guest/form-130-faqs
Last reviewed: 2026-10-21. Information for Indian businesses; not legal advice.