1. How Salary TDS Works
Under Section 391 of ITA 2025, every employer must deduct TDS from salary at the employee average rate of income tax. The average rate is computed on the estimated total income for the full Tax Year — including salary, perquisites, bonus, and any other income declared by the employee. This differs from all other TDS sections that have fixed percentage rates.
2. Monthly TDS Computation Steps
- Estimate annual gross salary: basic, HRA, all allowances, perquisites, bonus
- Less: Exempt allowances — HRA exemption (calculated per Rules), LTA claimed, employer NPS contribution, meal vouchers
- Less: Standard deduction Rs 75,000
- Add: Employee declared other income — house property income/loss, interest income
- Less: Deductions under Chapter VIII (old regime) declared in Form 12BB — Section 123, 125(1B), 126, home loan interest
- Compute income tax on net taxable income at applicable slab rates (chosen regime)
- Divide annual tax by 12 = monthly TDS
3. Form 12BB: Declaration by Employee
Form 12BB is submitted by the employee to the employer at the start of each Tax Year. It declares:
- Tax regime choice (new or old regime)
- HRA details: monthly rent, landlord name, address, PAN (mandatory if annual rent exceeds Rs 1 lakh)
- LTA: amount and travel details
- Home loan interest: lender name, account number, annual interest, property address
- All investment proofs for old regime deductions: LIC premiums, PPF deposits, ELSS SIP, NSC, school fees
In January-February, final investment proofs are submitted and TDS is adjusted for the last 2 months.
4. Multiple Employers
When an employee changes jobs, the new employer must be given a statement (Form 12B) of salary paid and TDS deducted by the previous employer. Without this, the new employer treats their salary in isolation — leading to under-deduction and a demand at ITR filing. The employee is responsible for notifying the new employer.
5. Form 16: Certificate to Employee
Employers must issue Form 16 to all employees by 15 June of the assessment year. Part A (from TRACES) shows quarterly TDS deposited. Part B shows the complete salary computation — components, exempt allowances, perquisites, deductions, and final tax. Form 16 is the primary document for salaried ITR filing. Discrepancies between Form 16 and AIS must be reconciled before filing.
6. Section 89 Relief for Salary Arrears
If salary arrears for previous years are received in the current year, the taxpayer can claim Section 89 relief — ensuring tax is computed as if the arrears were taxed in the years they related to, not bunched in the current year. Form 10E must be filed online on the IT Portal before filing ITR. Without Form 10E, the portal rejects the Section 89 claim and demands full current-year slab tax on arrears.
7. Perquisites in Salary TDS
Taxable perquisites (rent-free accommodation, company car, ESOP, club membership) must be valued per IT Rule 3 and included in gross salary for TDS. Many employees discover a large TDS demand in the last months because perquisites were not included throughout the year. Employers should compute perquisite value at the start of the year and spread TDS accordingly.
8. Why TaxClue
Salary TDS errors — wrong regime, missed perquisites, unclaimed deductions, multiple employers — create demands or refunds. TaxClue reviews Form 16, reconciles AIS, and files accurate salaried ITR. Contact us under ITA 2025.