TDS
Table of Contents
TDS stands for Tax Deducted at Source. It is a tax collection method where tax is deducted before making certain payments, such as salary, professional fees, interest, rent, commission or contractor payments. In HR and payroll, TDS most commonly refers to tax deducted from employee salary.
For employees, TDS means a part of their income tax is deducted from salary every month instead of being paid fully at the end of the year. For employers, it is a payroll responsibility that must be calculated, deducted, deposited and reported correctly.
TDS in salary payroll
In salary payroll, TDS is calculated based on the employee’s estimated taxable income for the financial year. Payroll teams consider salary, allowances, perquisites, declared deductions, exemptions, chosen tax regime and applicable income tax slab rates before calculating monthly TDS.
Under Section 192 of the Income-tax Act, the person responsible for paying salary must deduct income tax on estimated salary income at the time of payment. The Income Tax Department’s current TDS compliance guidance also states that salary TDS for FY 2025–26 is handled under Section 192 of the old Act, while salary paid from April 2026 onwards follows the new Act’s salary TDS provision.
Why TDS changes during the year
TDS is not always the same every month. It can change when an employee receives a bonus, increment, arrears, incentives, leave encashment or taxable reimbursements. It may also change when the employee submits investment declarations, rent proofs, tax-saving documents or chooses a different tax regime where allowed.
This is why payroll teams need updated employee declarations and accurate payroll inputs before finalizing salary. If TDS is under-deducted, the employee may have additional tax payable later. If it is over-deducted, the employee may need to claim a refund while filing the income tax return.
TDS records and employee documents
The TDS amount deducted from salary is recorded in the taxpayer’s account through form number 16, Form 26AS and Annual Information Statement. The form number 16 is normally generated by the employer to assist the employee in filing his/her income tax returns by providing information about salaries earned and deductions.
In addition to that, for the HR and payroll department, TDS impacts payslips, payroll reporting, statutory filing and proof of tax calculations at year-end. Proper payroll management will ensure that salary structures, declarations and deductions remain in alignment.
Key takeaway
TDS is the tax deducted before salary or other eligible payments are made. In payroll, it requires careful calculation based on estimated annual income, tax regime, exemptions, deductions and salary changes. For employers, correct TDS handling supports payroll compliance. For employees, it helps spread income tax payment across the year instead of paying it all at once.
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