The statutory income tax deducted by an employer from an employee's salary at payout time and remitted directly to the central government.
- Category
- Payroll & Compensation
- Legal status
- Governed by Indian law
- Relevant to
- HR, payroll & finance
- Reading time
- 3 min
What is Tax Deducted at Source (TDS)?
Tax Deducted at Source (TDS) on salary, under section 392 of the Income-tax Act, 2025 (section 192 of the Income Tax Act, 1961 for salary paid before 1 April 2026), requires employers to estimate an employee's annual taxable income, account for declared tax-saving investments and exemptions (such as 80C, 80D, NPS and HRA under the old regime), calculate annual income tax, and deduct it evenly from each month's salary.
Why Tax Deducted at Source (TDS) matters
The single largest statutory payroll deduction for salaried staff; employers must deposit deducted TDS by the 7th of the following month and issue Form 130 (earlier Form 16).
How Tax Deducted at Source (TDS) works in practice
- 1
Define the rule
Write down how Tax Deducted at Source (TDS) is calculated or applied in your offer letters and compensation policy, including the components it is based on.
- 2
Configure it once
Set Tax Deducted at Source (TDS) in the salary structure so every employee is processed with the same formula instead of manual spreadsheets.
- 3
Run & validate
Process the monthly payroll, then review variances, arrears and exceptions linked to Tax Deducted at Source (TDS) before approving the run.
- 4
Report & reconcile
Match payslips, bank transfers and statutory challans so Tax Deducted at Source (TDS) is traceable during audits.
Work out the numbers with the free TDS calculator.
Real-world example
Based on an engineer's ₹14,00,000 annual taxable salary, the payroll engine calculates ₹96,000 annual tax, deducting ₹8,000 monthly as TDS.
Indian statutory reference
Section 392 of the Income-tax Act, 2025, in force from 1 April 2026 (section 192 of the Income Tax Act, 1961 before that). The quarterly return is Form 138 (earlier Form 24Q) and the annual certificate is Form 130 (earlier Form 16).
Rates, limits and state rules change often. Confirm against the latest notification or with your compliance advisor.
Best practices and common mistakes
Best practices
- Document how Tax Deducted at Source (TDS) is calculated in the compensation policy and share it with employees.
- Keep salary components mapped to the correct statutory heads (PF, ESIC, PT, TDS).
- Reconcile payroll registers against bank and challan data every month.
- Review structures after every law or wage-ceiling revision.
- Retain payroll records for the period prescribed by law.
Common mistakes
- Treating Tax Deducted at Source (TDS) inconsistently across employee groups or locations.
- Calculating on the wrong wage base, which flows into PF, gratuity and bonus errors.
- Changing salary components mid-year without updating tax projections.
- Relying on manual spreadsheets that break during mid-month joiners and exits.
Managing Tax Deducted at Source (TDS) in SleetHR
SleetHR applies Tax Deducted at Source (TDS) through configurable salary structures, auto-calculates statutory deductions, and generates payslips, registers and challans from the same source of truth.