TDS on Salary 2026-27: How Employers Deduct Tax, Forms and Due Dates (Income Tax Act 2025)

Under the Income Tax Act 2025, an employer deducts tax on salary under section 392(1). There is no fixed TDS percentage. The employer estimates the employee's salary income for the tax year, works out the tax on it at the rates in force, and deducts that tax at the average rate, spread over the payments of the year. The employee can shift the number up or down by giving declarations in Form 122 and proof of claims in Form 124.

This guide covers who must deduct, how the average rate is built, what the employee can tell the employer, how the tax is deposited and reported, and the special cases in section 392(2) to (8). Every figure is taken from the Act as amended by the Finance Act 2026 and the Income-tax Rules, 2026, with the section or rule number beside it. Examples use tax year 2026-27. Last reviewed against that text on 10 November 2026.

Who has to deduct TDS on salary under section 392?

Section 392(1) puts the duty on "any person responsible for paying" income chargeable under the head "Salaries". In practice that is the employer. The deduction is made at the time of payment, so each monthly payroll is a deduction point.

If you need the basics of what counts as salary first, read our guide to income from salary under the 2025 Act.

How is TDS on salary calculated? The average-rate method

Section 392(1) says the deduction is made "at the average rate of income-tax computed on the basis of the rates in force for the tax year in which the payment is made, on the estimated income of the assessee under this head for such year". In plain steps:

The standard deduction is in section 19(1), Table Sl. No. 2: Rs 75,000 or the salary, whichever is less, where tax is computed under the new regime in section 202(1), and Rs 50,000 or the salary, whichever is less, in any other case.

What are the tax rates the employer applies under the new regime?

Section 202(1) gives these slabs for an individual or HUF who has not opted out of the new regime:

Total income	Rate
Up to Rs 4,00,000	Nil
Rs 4,00,001 to Rs 8,00,000	5%
Rs 8,00,001 to Rs 12,00,000	10%
Rs 12,00,001 to Rs 16,00,000	15%
Rs 16,00,001 to Rs 20,00,000	20%
Rs 20,00,001 to Rs 24,00,000	25%
Above Rs 24,00,000	30%

Under section 156(2), a resident individual taxed under section 202(1) gets a deduction (rebate) of the full tax or Rs 60,000, whichever is less, when income does not exceed Rs 12,00,000. Just above that level, the rebate equals the amount by which the tax exceeds the income over Rs 12,00,000, so tax payable never goes beyond that excess. The options and details of the old regime are not covered here; the employer uses the regime that applies to the employee.

The examples below show tax before any surcharge or cess, which are not in the sections used for this article. Check the rates for your case before applying them to payroll.

Worked example 1: salary of Rs 18,00,000

Assumptions: Ravi is a resident individual with salary of Rs 18,00,000 for 2026-27 from one employer, no other income, new regime, no other claims.

Step	Working	Amount (Rs)
Salary		18,00,000
Less standard deduction	Section 19(1), Sl. No. 2(a)	75,000
Income under Salaries	18,00,000 - 75,000	17,25,000
Tax on 4,00,001 to 8,00,000	4,00,000 x 5%	20,000
Tax on 8,00,001 to 12,00,000	4,00,000 x 10%	40,000
Tax on 12,00,001 to 16,00,000	4,00,000 x 15%	60,000
Tax on 16,00,001 to 17,25,000	1,25,000 x 20%	25,000
Annual tax	20,000 + 40,000 + 60,000 + 25,000	1,45,000
Rebate, section 156(2)(b)	Tax 1,45,000 does not exceed income over 12,00,000 (5,25,000), so no rebate	Nil
Monthly TDS	1,45,000 / 12	about 12,083
Average rate	1,45,000 / 17,25,000	about 8.41%

Each month Ravi's employer deducts about Rs 12,083 (before any surcharge and cess). If his pay changes midway, the employer re-estimates and spreads the remaining tax over the remaining months.

Worked example 2: salary of Rs 12,75,000 and the rebate

Assumptions: Meena is a resident individual with salary of Rs 12,75,000 for 2026-27, new regime, no other income.

Step	Working	Amount (Rs)
Salary less standard deduction	12,75,000 - 75,000	12,00,000
Tax	4,00,000 x 5% = 20,000; 4,00,000 x 10% = 40,000	60,000
Rebate, section 156(2)(a)	Income does not exceed 12,00,000; lower of 60,000 tax and 60,000	60,000
Tax payable, so TDS	60,000 - 60,000	Nil

The employer deducts nothing. A small step up in income changes the picture: if her income under Salaries were Rs 12,10,000, tax would be 60,000 + (10,000 x 15%) = Rs 61,500. The income exceeds Rs 12,00,000 by Rs 10,000, so under section 156(2)(b) the rebate is 61,500 - 10,000 = Rs 51,500, and tax payable is Rs 10,000.

What can an employee tell the employer to change the TDS?

Section 392(4)(a) lets the employee give particulars "at his option" that raise or lower the tax to be deducted. Rule 204(1) says the first, third, fourth and fifth of these (salary from other employers, house property loss, other income, tax already deducted or collected) go in Form 122; section 157 relief goes in Form 39 (rule 73(4)):

Particular (section 392(4)(a))	Effect
Salary from any other employer in the same tax year	Adds to estimated income, so the average rate rises
Relief under section 157 (arrears, advance salary, profits in lieu of salary, family pension arrears)	Can reduce the tax; for a Government servant or an employee of a company, co-operative society, local authority, university, institution, association or body, particulars go to the employer in Form 39 (rule 73(4))
Loss under house property for the same tax year	Reduces income
Income under any other head (not a loss)	Adds to estimated income
Tax already deducted or collected at source under Chapter XIX-B	Reduces the tax the employer must deduct

Section 392(4)(b) closes the door on other reductions: the tax on salary can be cut only for a house property loss and for tax deducted or collected under other provisions of the chapter.

What proof can the employer ask for?

Section 392(5)(b) and rule 205 require the employee to furnish evidence of claims in Form 124:

• House rent allowance: name, address and PAN of the landlord(s) where total rent paid in the year is more than Rs 1,00,000, and the relationship with the landlord, if any.
• Leave travel concession or assistance: evidence of expenditure.
• Interest deduction under house property: name, address and PAN of the lender.
• Deductions under Chapter VIII: evidence of investment or expenditure.

The employer in turn must give the employee a statement of perquisites and profits in lieu of salary (section 392(5)(a), rule 204(2)). It goes in the relevant columns of Form 130 if salary for the year is Rs 1,50,000 or less, and in Form 123 if it is more.

Real-life example: Arun changes jobs in October

Arun worked for Company A from April to September and Company B from October. Company B's payroll, left alone, would estimate only six months of salary and apply a low average rate. If Arun does nothing, he may face a shortfall at the time of filing. If he gives Company B a Form 122 showing Company A's salary and the tax deducted so far, Company B can estimate the whole-year income and deduct accordingly (section 392(4)(a)(i) and (v)). Giving the particulars is optional, so the call is Arun's.

Real-life example: Sana's rent receipts

Sana pays Rs 1,20,000 rent in the year and claims house rent allowance. Her employer asks for Form 124 with the landlord's name, address and PAN, because total rent paid is above Rs 1,00,000 (rule 205, Sl. No. 1). Without those details the employer does not have the evidence the rule asks for, so Sana should hand them over with Form 124 before the payroll cut-off.

Which tax regime does the employer use, and what if the employee has no PAN?

Section 202(1) applies to a person unless that person exercises an option under section 202(4). For a person with no business or profession income, such as a salaried employee, the option is exercised along with the return of income under section 263(1) for the tax year (section 202(4)(b)). The Act text does not itself say the employee must tell the employer a choice in advance, so check your payroll policy on how the employer records the regime for TDS.

Separately, section 397(2) requires every person receiving an amount on which tax is deductible to give a valid PAN to the deductor. If the PAN is not furnished, tax is deducted at the higher of the rate in the relevant provision, the rate or rates in force, or 20% (section 397(2)(b)(i)). Employees should therefore give their PAN to payroll at joining.

What if the employer deducted too little or too much?

Section 392(5)(c) lets the employer increase or reduce the deduction later in the same tax year "for adjusting any excess or deficiency arising out of any previous deduction or failure to deduct". This is how a mid-year correction is made, for example after a bonus, an increment or late proof of investments, without revising earlier statements.

When and how is TDS on salary deposited?

Compliance	Rule	Due date
Deposit of tax deducted (non-Government deductor)	Rule 218(2)	7 days from end of the month of deduction, so the 7th of the next month. For March, 30 April.
Deposit by a Government office	Rule 218(1)	Same day without a challan; within 7 days from month-end with a challan
Quarterly TDS statement for salary, Form 138	Rule 219(1), (4)	31 July, 31 October, 31 January, and 31 May following the tax year
TDS certificate to the employee, Form 130	Rule 215(1)	15 June of the financial year after the tax year in which tax was deducted
Employee's declaration of other income and tax	Rule 204(1)	Form 122, at the employee's option, to the employer
Employee's proof of claims	Rule 205(1)	Form 124, to the employer

In special cases the Assessing Officer, with the prior approval of the Joint Commissioner, may permit quarterly deposit of tax deducted under section 392(1) (rule 218(4)). This is an exception and not the default.

What are the special rules in section 392(2) to (8)?

• Tax on perquisites paid by the employer (392(2)). For a non-monetary perquisite taxable under section 17(1), the employer may choose to pay the tax itself, on the whole or part of that income, instead of deducting it. The tax is worked out at the average rate on salary including the perquisite, and it is treated as tax deducted at source. A certificate for such payment is covered by rule 215.
• Eligible start-ups (392(3)). For specified securities or sweat equity shares under section 17(1)(d), an eligible start-up referred to in section 140 deducts or pays tax at the rates for the tax year of allotment or transfer, within the time specified in section 289(3).
• Provident fund and superannuation fund payments (392(6)). Trustees of a recognised provident fund deduct as provided in Schedule XI, Part A, paragraph 10 where paragraph 9 applies. Trustees of an approved superannuation fund deduct tax on the employer's contribution and interest paid to the employee to the extent provided in Schedule XI, Part B, paragraph 7.
• EPF withdrawals (392(7)). The trustees of the Employees' Provident Funds Scheme, 1952 deduct 10% when the aggregate payment is Rs 50,000 or more and the balance is taxable because Schedule XI, Part A, paragraph 8 does not apply.
• Salary in foreign currency (392(8)). The rupee value is calculated at the exchange rate prescribed.

Quick reference

Item	Position
Section	392(1)
Rate	Average rate on estimated annual salary income at rates in force
Standard deduction (new regime)	Rs 75,000 or salary, if lower (section 19(1), Sl. No. 2(a))
Employee declaration	Form 122 (rule 204)
Proof of claims	Form 124 (rule 205)
Perquisite statement	Form 130 columns if salary up to Rs 1,50,000, else Form 123 (rule 204(2))
Deposit	7th of next month, 30 April for March (rule 218(2))
Quarterly statement	Form 138 (rule 219)
Certificate	Form 130 by 15 June (rule 215)
EPF withdrawal TDS	10% if Rs 50,000 or more (392(7))

Common mistakes with TDS on salary

• Using the monthly salary as the base. The estimate is for the whole tax year. A bonus or an increment later in the year changes the average rate for the remaining months.
• Ignoring salary from a previous employer. Without Form 122, the new employer sees only its own payments and the average rate comes out too low.
• Accepting claims without evidence. Rule 205 lists what the employee must furnish. The employer is entitled to ask for it under section 392(5)(b).
• Reducing tax for reasons outside the Act. Section 392(4)(b) allows a reduction only for a house property loss and tax deducted or collected under the chapter.
• Missing the March deposit date. Tax deducted in March is due by 30 April, not the 7th of April.
• Not issuing the certificate. Form 130 is due by 15 June after the tax year, and employees need it for their return.

The rent side of this story is covered in our guide to TDS on rent under the Income Tax Act 2025.

Where this is in the Act

• Section 392(1): deduction at the average rate on estimated salary income
• Section 392(2): employer paying tax on non-monetary perquisites
• Section 392(3): eligible start-ups, section 17(1)(d) securities
• Section 392(4) and (5): employee particulars, evidence of claims, adjustments
• Section 392(6) and (7): provident fund and superannuation fund payments
• Section 392(8): salary in foreign currency
• Section 19(1), Sl. No. 2: standard deduction; section 202(1): new regime slabs; section 156: rebate
• Rules 204 and 205: Forms 122, 123, 124 and 130; rule 215: certificates; rule 218: deposit; rule 219: Form 138 statements; rule 73(4): Form 39 for section 157 relief

For a CA firm or an in-house payroll team, the hard part is rarely the arithmetic. It is knowing which employees have filed Form 122, which deposits fall due, and which quarterly statements are pending. Finexo's practice management software tracks these deadlines across a client book. It does not compute TDS or file statements for you. This article is general information and not tax advice.