Understanding TDS on Salary as per New Income Tax Rules 2025

Tax Deducted at Source (TDS) on salary is one of the most common tax compliances for employers in India. Every employer who pays taxable salary to an employee is required to calculate and deduct TDS from salary and deposit it with the government.

The rules around salary TDS have become particularly important after the changes introduced in the Finance Act, 2025 and the introduction of the Income Tax Act, 2025.

One important point to understand is that there are actually two changes to keep in mind: the revised income-tax slabs applicable from FY 2025-26 and the transition from the Income Tax Act, 1961 to the Income Tax Act, 2025 from 1 April 2026.

What is TDS on Salary?

TDS on salary is tax deducted by an employer from an employee's salary before the salary is paid.

The employer estimates the employee's total taxable salary for the year, considers the applicable exemptions and deductions, calculates the total tax payable and then deducts the appropriate amount of TDS from the employee's monthly salary.

For salary paid up to 31 March 2026, the provisions of Section 192 of the Income Tax Act, 1961 apply. For salary paid from 1 April 2026 onwards, the corresponding provision is Section 392(1) of the Income Tax Act, 2025.

What has changed under the new Income Tax rules?

The biggest change is not necessarily the manner in which salary TDS is calculated, but the restructuring of the law.

Under the Income Tax Act, 1961, salary TDS was covered by Section 192.

Under the Income Tax Act, 2025, salary TDS is covered by Section 392(1).

The Income Tax Department has clarified that the new Act mainly reorganises and simplifies the TDS provisions rather than changing the basic TDS framework.

Therefore, employers should not assume that the introduction of the new Act automatically means a completely different TDS system.

From when will the new salary TDS provision apply?

The transition is important for payroll teams.

For example, if March 2026 salary is paid on 31 March 2026, TDS will be governed by the old Income Tax Act.

If April 2026 salary is paid on 30 April 2026, TDS will be governed by the Income Tax Act, 2025.

New Tax Regime is the default regime

The new tax regime continues to be the default tax regime for individual taxpayers.

Employees can, subject to the applicable conditions, choose the old tax regime instead. For salary TDS purposes, the employer generally calculates TDS based on the tax regime selected/communicated by the employee and the information available to the employer.

Employees should therefore inform their employer about their preferred tax regime and provide the required details of deductions and exemptions where applicable.

New tax regime tax slabs for FY 2025-26

The revised tax slabs introduced from FY 2025-26 under the new tax regime are:

These slabs apply under the revised new tax regime for FY 2025-26. The Income Tax Department's guidance also confirms that the new regime is the default regime.

Rebate under the new tax regime

One of the major changes announced in Budget 2025 was the enhanced rebate available under the new tax regime.

For a resident individual, the rebate can result in no income tax where total income does not exceed ₹12 lakh, subject to the conditions applicable to the rebate.

For salaried employees, the benefit becomes even more relevant because of the standard deduction.

For example, where a salaried employee has salary income of ₹12.75 lakh and is eligible for the ₹75,000 standard deduction, the taxable income can come down to ₹12 lakh. In such a case, the employee may become eligible for the applicable rebate, subject to the conditions of the law.

Employers should calculate TDS based on the employee's estimated taxable income and applicable rebate rather than simply deducting tax based on gross salary.

Standard deduction for salaried employees

The standard deduction continues to be available to salaried taxpayers.

Under the new tax regime, the standard deduction is ₹75,000 for salary income.

Under the old tax regime, the standard deduction is ₹50,000.

The standard deduction is taken into account while calculating the taxable salary for TDS purposes.

Which salary components are considered for TDS?

The employer needs to consider the taxable components of the employee's salary while estimating annual taxable income.

These may include:

• Basic salary
• Dearness allowance
• House Rent Allowance, where taxable
• Bonus
• Commission
• Taxable allowances
• Perquisites
• Incentives
• Other taxable benefits provided by the employer

Not every component appearing in a salary slip is necessarily taxable in the same manner. The employer must determine the taxability of each component under the applicable tax regime.

HRA under the new tax regime

This is an important difference between the two tax regimes.

Under the old tax regime, eligible employees can claim exemption for HRA subject to the conditions prescribed under Section 10(13A).

However, HRA exemption is not available under the new tax regime.

Therefore, an employee receiving HRA but opting for the new tax regime should not expect the HRA exemption to reduce taxable salary.

What deductions can employees claim under the new regime?

The new tax regime allows fewer deductions compared with the old regime.

Generally, deductions such as:

• Section 80C
• Section 80D
• Section 80E
• Section 80G

are not available under the new regime, subject to specific exceptions provided under law.

Certain deductions, such as eligible employer contributions to NPS under Section 80CCD(2), continue to be available subject to the applicable conditions.

Therefore, employees should not simply submit every investment document to the payroll department and expect it to reduce TDS under the new regime.

How does an employer calculate TDS on salary?

The employer generally follows these steps:

Step 1 – Estimate annual salary

The employer estimates the employee's total salary for the relevant tax year.

Step 2 – Consider taxable allowances and perquisites

Taxable allowances, bonuses, incentives and taxable perquisites are added to the estimated income.

Step 3 – Reduce eligible exemptions and deductions

The employer considers deductions and exemptions permitted under the employee's selected tax regime.

Step 4 – Apply the standard deduction

The applicable standard deduction is reduced from salary income.

Step 5 – Calculate income tax

Tax is calculated according to the applicable tax slabs.

Step 6 – Consider rebate and surcharge, wherever applicable

The employer considers the applicable rebate and surcharge while arriving at the final tax liability.

Step 7 – Spread the tax over the remaining salary payments

The annual TDS liability is generally divided over the remaining salary payments so that the required tax is deducted during the year.

What if an employee joins a new company during the year?

If an employee joins another employer during the year, the new employer should obtain the relevant salary and TDS information from the employee so that the overall annual tax liability can be calculated appropriately.

This is important because TDS is based on the employee's estimated annual taxable income and not merely on the salary being paid by one employer in isolation.

What happens if the employee has income from other sources?

An employee may have income apart from salary, such as:

• Interest income
• Rental income
• Other taxable income

Where the employee provides the required information and supporting details, the employer may take such income into account while determining TDS, subject to the applicable provisions.

Employees should therefore provide accurate information to their employer rather than waiting until the ITR filing stage to disclose additional income.

TDS on salary under the Income Tax Act, 2025

From 1 April 2026, employers have to use the new Income Tax Act, 2025 for salary TDS.

The Income Tax Department has specifically clarified that salary TDS for Tax Year 2026-27 will be governed by Section 392(1) of the new Act. Employers are also required to reset their TDS calculations from 1 April 2026 based on the employee's projected income, deductions and selected tax regime for the new tax year.

This means payroll systems and salary TDS calculations should be updated from April 2026.

Does the new Income Tax Act change TDS rates?

Not necessarily.

The Income Tax Department has clarified that the new Income Tax Act largely retains the existing TDS rates and monetary thresholds. The major change is the consolidation and restructuring of the TDS provisions into a simpler format.

Therefore, employers should focus not only on the section number but also on correctly applying the applicable tax regime, tax slabs, deductions, exemptions and rebates.

Example of salary TDS calculation

Suppose an employee earns an annual salary of ₹15 lakh and chooses the new tax regime for FY 2025-26.

After considering the applicable standard deduction of ₹75,000, the taxable income would be approximately ₹14.25 lakh, before considering any other eligible adjustments.

The employer would then calculate tax according to the applicable slab rates and consider the rebate, if applicable.

Since the employee's taxable income is above the ₹12 lakh rebate threshold, the employee would generally have a tax liability, subject to the detailed provisions and marginal relief, if applicable.

The actual monthly TDS may differ depending on bonus, perquisites, other income, previous employment income and the timing of salary payments.

TDS on salary: old Act vs new Act

What should employers do?

Employers should ensure that their payroll systems are updated for the new tax year.

They should:

• Update payroll software for the Income Tax Act, 2025.
• Use Section 392(1) for applicable salary payments from 1 April 2026.
• Obtain the employee's tax regime declaration.
• Consider eligible deductions and exemptions.
• Calculate the standard deduction correctly.
• Apply the applicable tax slabs.
• Consider rebate and marginal relief wherever applicable.
• Recalculate TDS when salary or other relevant information changes.
• Deduct and deposit TDS within the prescribed timelines.
• File the quarterly TDS return correctly.
• Issue Form 16 to employees after the end of the financial year.

What should employees check in their salary slip?

Employees should not blindly rely on the TDS amount shown in the salary slip.

It is advisable to check:

1. Gross salary
2. Taxable allowances
3. Perquisites
4. Standard deduction
5. Eligible deductions
6. Tax regime selected
7. Total taxable income
8. Tax calculated
9. Rebate, wherever applicable
10. TDS deducted during the year

The TDS deducted by the employer should ultimately match the TDS reflected in the employee's Form 26AS/AIS, subject to the applicable reporting and processing timelines.

Final takeaway

The changes introduced in 2025 have made salary taxation more favourable for many employees, particularly those opting for the new tax regime. At the same time, the introduction of the Income Tax Act, 2025 has changed the statutory reference for salary TDS from Section 192 to Section 392(1) for salary payments made from 1 April 2026.

For employers, the key is to update payroll systems and correctly calculate TDS based on the employee's estimated annual taxable income, applicable tax regime, standard deduction, eligible deductions and rebate.

For employees, it is important to understand that TDS is only a method of collecting tax during the year. The final tax liability is determined when the income-tax return is filed and processed. ITR Filing