What is TDS on salary?
Tax Deducted at Source (TDS) on salary is the income tax an employer deducts every month before paying your salary. It ensures taxes are collected throughout the year rather than as a lump sum at year-end.
Why TDS deduction is important for salaried employees
TDS provides a steady way to pay taxes, prevents
penalties
for late payment, and keeps your tax compliance in check. It also helps avoid a sudden financial burden at the end of the financial year.
Income Tax Slabs – Old vs New Regime
India currently offers two taxation systems: the old regime with higher rates but multiple exemptions, and the new regime with lower rates but limited deductions.
Normal slab rates under the old regime
The old regime uses progressive income tax slab rates:
- Up to ₹2.5 lakh: Nil
- ₹2.5–5 lakh: 5%
- ₹5–10 lakh: 20%
- Above ₹10 lakh: 30%
Taxpayers can claim exemptions like
HRA
, standard deduction, and deductions under Sections 80C, 80D, etc.
Reduced rates under the new regime
The new regime offers lower rates but removes most deductions:
- Up to ₹2.5 lakh: Nil
- ₹2.5–5 lakh: 5%
- ₹5–7.5 lakh: 10%
- ₹7.5–10 lakh: 15%
- ₹10–12.5 lakh: 20%
- ₹12.5–15 lakh: 25%
- Above ₹15 lakh: 30%
Key differences between the two regimes
The old regime favors those claiming multiple deductions, while the new regime benefits taxpayers with fewer investments or exemptions.
TDS Calculation on Salary
Employers calculate
TDS
based on your annual income, chosen tax regime, and eligible deductions.
Steps to calculate TDS under old regime
- Compute gross annual income.
- Subtract eligible exemptions (like HRA) and deductions (Sections 80C, 80D, etc.).
- Apply the old regime slab rates to the taxable income.
- Divide the total tax by 12 to determine monthly TDS.
Steps to calculate TDS under new regime
- Calculate total annual salary.
- Apply new regime slab rates without most exemptions (only standard deduction and a few specified allowances allowed).
- Divide total tax liability by 12 to find monthly TDS.
Role of exemptions and deductions
Under the old regime, exemptions and deductions can significantly reduce taxable income. The new regime restricts these, so your TDS is usually higher if you have multiple investments.
Example Comparisons
Practical examples help understand how TDS differs under each regime.
Example 1 – Salary ₹7,50,000
- Old regime: After deductions like 80C (₹1.5 lakh), taxable income may drop to ₹6 lakh. Tax roughly = ₹32,500.
- New regime: Taxable income remains ₹7.5 lakh. Tax roughly = ₹37,500.
Example 2 – Salary ₹10,00,000
- Old regime: With deductions of ₹1.5 lakh, taxable income = ₹8.5 lakh. Tax roughly = ₹72,500.
- New regime: Taxable income = ₹10 lakh. Tax roughly = ₹75,000.
Which regime gives more savings?
If you invest enough to claim deductions, the old regime usually saves more tax. If you don’t, the new regime with lower rates may be better.
Choosing Between Old vs New Regime
Choosing the right regime depends on your income level and investment habits.
Who should opt for the old regime
- Taxpayers who claim multiple deductions like HRA, 80C, 80D.
- Those with home loan interest or large insurance premiums.
Who benefits from the new regime
- Individuals with fewer deductions.
- Young earners without major investments.
Employer’s role in TDS deduction
Employees must inform employers of their chosen tax regime. Employers deduct
TDS
based on that choice and file it with the Income Tax Department.
Common Mistakes in TDS on Salary
Avoid these mistakes to prevent excess
TDS
or penalties.
Incorrect tax regime declaration
Failing to inform your employer about your chosen regime leads to default deductions, often under the old regime.
Not considering deductions/exemptions
Missing eligible deductions means higher taxable income and more TDS.
Delay in submitting proof of investments
If proofs are not submitted on time, employers may deduct higher TDS
Conclusion
Understanding TDS on salary calculation and the old vs new tax regime helps you pick the best option for your finances. Evaluate your deductions, compare both regimes annually, and declare your choice to your employer to avoid excess tax
