The Core Narrative

TDS (Tax Deducted at Source) on salary is the government's 'Pay As You Earn' mechanism. Instead of asking employees to pay their entire annual tax liability in one lump sum at year-end, the employer deducts a portion of the estimated tax from each monthly salary and deposits it with the government. It is, in essence, an interest-free loan from the employee to the government, collected by the employer as an unpaid intermediary.

The calculation is a monthly projection exercise. In April, the payroll system estimates the employee's total annual income (based on their CTC, declared investments, and chosen tax regime), computes the annual tax liability, and divides it by 12. Each month, as new information comes in (actual bonus paid, investment proofs submitted, regime change), the system recalculates the remaining tax and adjusts the monthly TDS.

The choice between the Old Tax Regime (lower rates but with exemptions like HRA, 80C, 80D) and the New Tax Regime (lower rates, no exemptions) adds another layer. Each employee's optimal choice depends on their personal financial situation, and the payroll system must support both calculations simultaneously.

Getting TDS wrong has cascading consequences: under-deduction leads to a surprise tax bill for the employee (and penalties for the employer), while over-deduction locks up the employee's money until they file their return and get a refund.

7.4.2

Key Takeaways

TDS Deposit Deadline: The 7th of the following month. For March salary, the deadline extends to April 30. Late deposit attracts 1.5% per month interest.

Old vs New Regime: Under the Old Regime, exemptions (HRA, 80C, 80D) reduce taxable income. Under the New Regime (default from FY 2023-24), no exemptions but lower slab rates.

The 'Projection Method': TDS is calculated by projecting annual income, computing annual tax, deducting tax already paid in prior months, and spreading the remaining liability over remaining months.

Form 24Q: The quarterly TDS return filed with TRACES. Errors in 24Q lead to mismatches in employees' Form 26AS and prevent them from filing their personal returns.

7.4.3

Practical Scenarios

"An employee receiving ₹15,000 less in their March salary because they failed to submit investment proofs by the January deadline—the system had to recover the under-deducted TDS from the last two months' salaries."

"A payroll team filing a correction statement for Q2 Form 24Q because 50 employees' PAN numbers had typos, causing mismatches in their Form 26AS and triggering notice from the tax department."

Academy Pro-Tips

Start investment proof collection in January and close it by January 31. Give employees a 2-week window, not a last-minute scramble in March.

Run a 'TDS Projection Report' every quarter showing each employee's estimated annual tax, TDS deducted so far, and remaining liability—share it with employees for transparency.

Invest in a payroll system that integrates with TRACES for direct e-filing of 24Q and automatic Form 16 generation—manual filing for large organizations is a recipe for errors.

Points to Remember

Employers who deduct TDS but fail to deposit it with the government face criminal prosecution under Section 276B of the Income Tax Act—it is treated as misappropriation of government funds.
The New Tax Regime is the default from FY 2023-24. Employees who want to opt for the Old Regime must explicitly inform the employer—ensure your system captures this preference annually.

7.4.1