—Guide
Payroll TDS on Salary: Regime Choice, Form 16 and Common Errors
How employers calculate TDS on salary, how the new and old tax regimes affect it, what Form 16 must show, and the payroll TDS errors that lead to notices and employee complaints.
Employers must deduct income tax from salaries every month, based on each employee's estimated tax for the year. Getting it wrong means either employees face a large tax bill at filing time, or the employer faces short-deduction demands. This guide covers the essentials.
The Basic Method
Estimate each employee's annual taxable salary, calculate the tax under their chosen regime, and deduct it evenly over the remaining months, adjusting as salaries and declarations change.
Regime Choice
The new tax regime is the default. Employees who want the old regime must tell the employer, usually at the start of the year. The new regime has lower rates, a higher standard deduction, and a rebate that makes income up to ₹12 lakh effectively tax-free for residents (more for salaried employees after the standard deduction), but it doesn't allow most exemptions and deductions such as HRA and Section 80C-type investments.
Old-regime Declarations and Proofs
- Collect declarations for rent, investments, insurance and home loan interest at the start of the year.
- Collect proofs before the final months, and recompute TDS on actual proofs.
- Collect the landlord's PAN where rent exceeds the prescribed limit.
Form 16
Form 16 is the annual TDS certificate. Part A comes from the TRACES portal and shows TDS deposited; Part B shows the salary computation. Issue it by the due date after the year-end, usually mid-June.
Common Errors
- Ignoring salary from a previous employer for mid-year joiners.
- Deducting under the wrong regime.
- Treating allowances as exempt under the new regime.
- Not valuing perquisites like cars or accommodation.
- Late deposit or mismatched challans in Form 24Q.
- Wrong PAN, leading to higher deduction and credit issues.
Tax Law Changes
Salary for FY 2025-26 is taxed under the Income-tax Act, 1961. From tax year 2026-27, the Income-tax Act, 2025 applies, with new forms and section numbers; the core approach to salary TDS continues, but payroll systems need updating.
Getting Help
Think Filing handles salary TDS, Form 24Q and Form 16 as part of payroll services.