How much TDS is deducted on salary?

Most salaried Indians have no idea how their employer arrives at the TDS amount that vanishes from their CTC every month. The number is not random. It comes from a 5-step calculation that any payroll team in Income Tax India follows the same way.

Once you understand the math, you can predict your TDS to the rupee, plan your investments to reduce it, and never be surprised by a refund or a tax shortfall in March.

What TDS on salary really is

TDS stands for Tax Deducted at Source. Section 192 of the Income Tax Act requires every employer paying salary above the basic exemption limit to deduct the estimated annual income tax in monthly installments before paying the salary. The deducted amount goes to the government, and you get credit for it when filing your tax return.

Two important properties:

• It is an estimate — based on what your employer believes your annual income and deductions will be.
• It is reconciled when you file your return — any over- or under-deduction is settled then.

The 5-step TDS calculation

Every employer follows roughly the same five steps in payroll software.

Step 1: estimate annual gross salary

The employer projects your full-year earnings: basic, HRA, special allowances, bonuses (if known), reimbursements, and the value of any perquisites such as company car or rent-free housing.

For a 12 lakh per year CTC employee, the gross salary in the projection might be 11 lakh after stripping out non-salary CTC items such as PF employer contribution and gratuity.

Step 2: subtract exempt allowances

Some allowances are partly or fully exempt from tax under the old regime:

• HRA (House Rent Allowance) — exempt up to the lower of three calculations: 50% of basic in metros (40% non-metros), actual HRA received, or rent paid minus 10% of basic.
• LTA (Leave Travel Allowance) — exempt for two journeys in a 4-year block within India.
• Standard deduction — flat 50,000 rupees against salary income.

Note: if you are on the new regime, most of these exemptions disappear. The standard deduction is still allowed, but HRA, LTA, and most others are not.

Step 3: subtract allowed deductions

Old regime deductions that reduce taxable income:

• Section 80C — up to 1.5 lakh (EPF, PPF, ELSS, life insurance, home loan principal, etc.).
• Section 80D — health insurance premiums (up to 75,000 if covering senior citizen parents).
• Section 80CCD(1B) — extra 50,000 in NPS.
• Section 24(b) — home loan interest up to 2 lakh on self-occupied property.

The employer will only consider deductions you have declared at the start of the financial year through your investment declaration form. If you do not declare in time, the employer cannot account for them in TDS.

Step 4: apply the slab rates

The employer applies the income tax slab rates to your projected taxable income. The two regimes have different slabs.

Add 4 percent health and education cess on the calculated tax. Apply surcharge if income crosses 50 lakh, 1 crore, 2 crore, or 5 crore thresholds.

Step 5: divide by 12 for monthly TDS

The full-year tax computed at step 4 is divided by 12 (or 11 if joining mid-year) to arrive at the monthly TDS. The number can be revised mid-year if you submit fresh investment proofs or if your salary structure changes.

By March, the employer reconciles the actual deductions with proofs. If you over-declared, additional tax is deducted in March. If you under-declared, you might see a small refund in your March payslip or claim it through your tax return.

A worked example for a 12 lakh CTC employee

Let us run the math for Vikram, 28, on a 12 lakh annual CTC, picking the old regime:

• Gross salary projection: 11.4 lakh (after stripping employer PF).
• HRA exemption: 1.2 lakh (he lives in rented Bangalore housing).
• Standard deduction: 50,000 rupees.
• Section 80C: 1.5 lakh (EPF + ELSS).
• Section 80D: 25,000 (own + parents).
• Section 80CCD(1B): 50,000 (NPS).

Total deductions: 1.2L + 0.5L + 1.5L + 0.25L + 0.5L = 3.95 lakh. Taxable income: 11.4 minus 3.95 = 7.45 lakh.

Tax under old regime: nil up to 2.5L + 5% on 2.5L (12,500) + 20% on 2.45L (49,000) = 61,500 rupees. Add 4% cess: 63,960 rupees per year. Monthly TDS = 5,330 rupees.

Compare with the new regime where Vikram's slab rates are lower but he loses HRA and most 80 deductions: tax of roughly 64,000 rupees including cess. Roughly the same. Old regime wins for him by a hair.

How to legally reduce your TDS

1. Submit investment declaration in April — not March. Early declaration spreads the benefit across all 12 months.
2. Maximise 80C, 80D, and 80CCD(1B) before March 31 each year.
3. Claim HRA correctly with rent receipts and your landlord's PAN if rent is over 1 lakh per year.
4. Submit Form 12BB to your employer with all deduction declarations and proofs.
5. If you have rental income or capital losses, submit them through Form 12BB to reduce TDS.

Common TDS surprises

• Bonuses are taxed in the month received but TDS is calculated on annual income, not the bonus alone.
• If you switch jobs mid-year and forget to declare prior salary to your new employer, you may face a big shortfall in March.
• Joining bonuses are fully taxable as salary, even if recovered later for early exit. The recovery, if it happens, is treated separately.
• Stock-based compensation (RSUs, ESPP) is taxed as salary at vesting, often through a sell-to-cover method that the employer arranges.

Where to verify the rates

Slab rates and surcharge thresholds are revised in every Union Budget. Always verify against the current year's notification on the Income Tax Department portal before doing your own math.

TDS on salary is not a mystery once you walk through the five steps. Spend an hour on your declaration form in April, and you save yourself March-end surprises every year. Even better, you may discover that the old regime versus new regime decision is much closer than the headlines suggest — sometimes only a few thousand rupees apart.