How TDS on Salaries Is Calculated
At the start of each financial year (or at onboarding for mid-year joins), each employee submits an investment declaration to the HR/payroll team. The declaration includes: whether they are opting for the old or new tax regime, and if old regime: HRA claim, Section 80C investments (PF, ELSS, PPF, LIC premium, home loan principal), Section 80D (medical insurance), home loan interest under Section 24, and other deductions.
The employer (payroll team or payroll software) calculates the estimated annual taxable income, applies the applicable tax slab (new regime: INR 0-3 lakh = nil, INR 3-6 lakh = 5%, INR 6-9 lakh = 10%, INR 9-12 lakh = 15%, INR 12-15 lakh = 20%, above INR 15 lakh = 30%; old regime has different slabs), deducts a standard deduction of INR 75,000 (new regime) or INR 50,000 (old regime), and divides the annual tax by 12 to get the monthly TDS.
Form 24Q: Filing the Quarterly Return
Form 24Q is the quarterly TDS return for salaries, filed on the TRACES/TIN-NSDL portal. The return requires: employer TAN, employee PAN (mandatory - if employee has not submitted PAN, TDS must be deducted at the higher of 20% or the applicable rate), TDS amount per employee per month, and verification by authorized signatory.
Form 24Q for Q4 (January to March) requires additional data: the full-year salary, total TDS for the year, and Form 16 data reconciliation. Errors in Form 24Q directly affect the employee's Form 26AS (tax credit statement) - if 24Q shows wrong PAN, the employee's Form 26AS will not reflect the TDS deducted, and the employee will be unable to claim the credit when filing their personal income tax return.
Wrong PAN in Form 24Q has cascading employee impact
If a single employee's PAN is entered incorrectly in Form 24Q, that employee will see no TDS credit in their Form 26AS, potentially owe tax plus interest at return filing time, and have to go through a correction process. Collect and verify all employee PANs at onboarding. Do not process salaries without a valid PAN - the 20% default TDS rate applies if PAN is not submitted.
Form 16: Issuing the Annual Certificate
Form 16 Part A is downloaded from the TRACES portal by the employer after the Q4 Form 24Q is processed and the data is available (typically by late May/early June). Part A shows the TAN, employee PAN, quarterly TDS amounts and challans, and total TDS for the year. This part is directly extracted from the government database - the employer cannot modify it.
Form 16 Part B is prepared by the employer and shows: gross salary, allowances (HRA, conveyance, medical, etc.), deductions under Chapter VI-A (80C, 80D, etc.), net taxable salary, and TDS deducted. Part B must reconcile with Part A - the total TDS in Part B must equal Part A.
Employers must issue Form 16 by 15 June. Failure to issue Form 16 carries a penalty of INR 100 per day under Section 272A(2)(g). Employees who do not receive Form 16 should be escalated immediately - they need it to file their personal income tax returns (ITR deadline: 31 July for non-audit individuals).
Glossary terms referenced in this guide