TDS on salary (Section 192)

TDS on salary is the income tax an employer deducts from an employee’s salary each month and pays to the government on the employee’s behalf, under Section 192 of the Income-tax Act, 1961. It is not a separate tax and not a flat percentage: the employer estimates the tax on the whole year’s salary and deducts it at the average rate, spread across the twelve months. In a central government office the employer for this purpose is the Drawing and Disbursing Officer , and for a pensioner it is the paying bank.

One point frames everything below, and most competing explainers miss it. From 1 April 2026 the governing provision is Section 392 of the new Income-tax Act, 2025, which replaced Section 192 for salary paid on or after that date. The method did not change: the same average-rate computation, the same monthly duty, the same default new regime and the same slabs carry over, and only the section number and the form numbers were renumbered when the 2025 Act consolidated the law. Section 192 still governs salary paid up to 31 March 2026 and every return for the earlier years, so it remains the term to know; this article uses “Section 192” throughout and flags the 2025 Act equivalent where it matters.

This article explains how TDS on salary works: the average-rate method with a worked example, the DDO’s duties and the forms, the default regime at source and how to change it, reporting other income under Section 192(2B), what happens on short deduction, and the separate treatment of pension and family pension.

The average-rate method

Section 192(1) sets the rate. The employer must deduct tax at the average rate of income tax, which the section defines as the income tax computed on the estimated total salary income for the financial year, at the rates in force, divided by that estimated income. The deduction is made at the time of actual payment of salary, not when it accrues, and the annual liability is spread evenly across the twelve monthly payments rather than applied as a slab to any one month.

So the DDO runs the whole year’s tax computation at the start of the year, on an estimate, and takes one-twelfth of it each month. The steps are: estimate the annual salary income, subtract the standard deduction and any deduction the employee is entitled to, compute the tax under the regime that applies, add the four per cent health and education cess, and divide by twelve.

A worked example

Take a central government officer whose monthly gross pay is Rs. 1,25,000 (basic pay, dearness allowance , house rent allowance and transport allowance together), so the estimated annual gross is Rs. 15,00,000. Under the new regime for the financial year 2026-27:

The slab tax of Rs. 93,750 is built up as nil on the first Rs. 4 lakh, 5 per cent on the next Rs. 4 lakh (Rs. 20,000), 10 per cent on the next Rs. 4 lakh (Rs. 40,000) and 15 per cent on the Rs. 2.25 lakh above Rs. 12 lakh (Rs. 33,750). There is no Section 87A rebate here, because the taxable income is above Rs. 12,00,000.

The contrast shows why many government employees see little or no monthly TDS. Take an officer whose annual gross is Rs. 9,60,000. After the Rs. 75,000 standard deduction the taxable income is Rs. 8,85,000, the slab tax works out to Rs. 28,500, and because the taxable income is below Rs. 12,00,000 the Section 87A rebate wipes the entire tax out. The monthly TDS is nil. This is why the new-regime rebate, which makes income up to Rs. 12 lakh tax-free, leaves a large part of the government workforce with no salary TDS at all.

Mid-year adjustments

The estimate is revised as the year runs. If a dearness allowance arrear or an increment is paid part-way through the year, the DDO recomputes the annual tax on the higher figure and spreads the additional tax over the remaining months, which is why the TDS on a payslip can jump for the rest of the year after an arrear rather than appear as a one-off spike. The DDO also corrects for any excess or shortfall deducted in the earlier months. Where an arrear relates to earlier years, the DDO can give Section 89 relief while computing the TDS, so the employee is not overtaxed on a bunched payment.

A second worked example: the old regime with deductions

The old regime can produce a lower monthly TDS where the employee has substantial deductions to declare. Take the same officer, annual gross Rs. 15,00,000, but with a rented house and the usual investments, opting for the old regime and declaring them in Form 12BB:

Here the old-regime tax of Rs. 84,760 is below the new-regime figure of Rs. 97,500 for the same salary, because the deductions total Rs. 6,55,000. This is the calculation the DDO runs only if the employee opts for the old regime and files Form 12BB with proof; without that, the deduction runs under the new regime and none of these deductions is allowed. The old versus new tax regime article covers when each wins.

Perquisites and what counts as salary for TDS

Salary for Section 192 is not just pay in the bank. Section 17(1) defines salary to include basic pay, allowances, and perquisites, and Section 17(2) values the perquisites, which are the non-cash benefits an employer provides. The DDO must add the taxable value of any perquisite to the salary before computing the TDS, and must give the employee a statement of perquisites in Form 12BA along with Form 16.

For most central government employees the taxable perquisite value is small, because the two largest perquisites are valued on concessional government-specific rules. Government accommodation is valued not at market rent but at the licence fee the government charges, which is why the house rent allowance is not drawn by an employee in an official residence: the accommodation itself is the benefit, and its perquisite value is the licence fee. An official car used partly for private travel is valued on the fixed monthly figures in Rule 3 rather than on actual cost. Cash allowances such as dearness allowance and transport allowance are fully part of salary and are taxed in the ordinary way, subject to any specific exemption.

The practical effect is that a government employee’s Form 16 usually shows salary made up of pay and cash allowances, with a modest or nil perquisite line, so the average-rate computation runs mostly on the cash components. An employee should still check the perquisite figures in Form 12BA, because an error there flows straight into the taxable salary and the TDS.

The DDO’s duties and the forms

In a government office the DDO is the person responsible for paying salary, and so is the employer for Section 192. The duties are specific and the forms are prescribed.

• Obtain the regime choice. At the start of the year the DDO asks each employee which tax regime they want, so the monthly deduction is computed correctly.
• Compute and deduct the TDS monthly at the average rate.
• Deposit the deducted tax to the credit of the Central Government under Section 200. A government deductor who pays without a challan accounts for it by book adjustment through Form 24G filed by the Pay and Accounts Officer; otherwise the tax is deposited by the seventh of the following month.
• File the quarterly return in Form 24Q under Section 200(3) and Rule 31A, due by 31 July, 31 October, 31 January and 31 May for the four quarters. The fourth-quarter return carries the full annual salary breakup and tax computation for each employee in its Annexure II.
• Issue Form 16, the salary TDS certificate, under Section 203 and Rule 31, by 15 June following the financial year. Part A is downloaded from TRACES and carries the tax deposited; Part B is the salary and tax computation.

Under the Income-tax Act, 2025, from the financial year 2026-27, these forms are being renumbered (Form 16, Form 24Q and Form 12BB become their equivalents under the Income-tax Rules, 2026), but the duties are unchanged, and the DDO’s obligations to deduct, deposit, return and certify carry over exactly.

The regime at source, and how to change it

From the financial year 2024-25 the new regime under Section 115BAC(1A) is the default for TDS. The rule, confirmed by CBDT Circular No. 4/2023 dated 5 April 2023, is that the DDO must ask each employee to intimate their choice of regime. If the employee intimates the old regime, the DDO deducts under the old-regime slabs and allows the deductions the employee declares. If the employee intimates nothing, the DDO must deduct under the new regime.

The intimation to the employer is only for deducting TDS. It is not the final choice of regime: a salaried employee can still opt for the other regime when filing the return, and can switch from year to year. So an employee deducted under the new regime through the year can move to the old regime in the return if it works out better, and claim the refund of any excess TDS. The old versus new tax regime article works through which is better in common cases.

One deduction survives in the new regime and is worth flagging, because it reduces the monthly TDS: the employer’s contribution to the National Pension System under Section 80CCD(2), up to 14 per cent of basic pay and dearness allowance for a central government employee, is allowed even in the new regime. The old-regime deductions, 80C , the HRA exemption and home-loan interest, are allowed at source only if the employee has opted for the old regime and declared them.

Reporting other income under Section 192(2B)

An employee can ask the DDO to take account of income other than salary, so that the total tax is collected through the salary TDS and no large gap is left for advance tax. Section 192(2B), with Rule 26B, lets the employee report income under any other head, such as bank interest, and the tax already deducted on it. The DDO folds this into the computation.

There is one important limit. The only loss the employee can report to reduce salary TDS is a loss under the head income from house property, which is the home-loan interest set-off; no other head’s loss can be adjusted at source, and the reported other income cannot bring the salary TDS below zero.

The related declarations matter for anyone claiming deductions at source. Form 12BB, under Rule 26C, is the form on which the employee claims the HRA exemption, Leave Travel Concession, home-loan interest and the Chapter VI-A deductions, with documentary evidence, so the DDO can allow them while computing TDS. Form 12B is used to report salary from a previous employer in the same year when an employee changes jobs, and Form 12BA is the statement of perquisites.

What happens on short or non-deduction

The consequences fall on both the DDO and the employee.

A DDO who fails to deduct or to deposit the tax is treated as an assessee in default under Section 201(1). Interest runs under Section 201(1A) at 1 per cent a month from the date the tax was deductible to the date it was deducted, and at 1.5 per cent a month from the date it was deducted to the date it was deposited. In government, where salary flows through the DDO, the more common issue is not evasion but a delay in deposit or a mismatch in the return.

For the employee, if the salary TDS is not enough to cover the year’s tax, because of large other income that was not reported, the shortfall must be met by advance tax, or interest under Section 234B and Section 234C applies. The deducted tax appears in the employee’s Form 26AS and the Annual Information Statement, and the employee gets credit for it under Section 199 in the year the income is assessable. An employee who expects the TDS to exceed the actual liability can apply to the assessing officer under Section 197, in Form 13, for a certificate authorising a lower or nil deduction.

TDS on pension and family pension

Pension is taxed as salary, so Section 192 applies to it, and the paying bank is the deductor. CBDT Circular No. 761 dated 13 January 1998 confirms that the pension-paying bank deducts TDS exactly as an employer does, must allow the Chapter VI-A deductions and Section 89 relief, and must issue Form 16. The Rs. 75,000 standard deduction in the new regime, or Rs. 50,000 in the old, applies to a pensioner, because pension is salary. The central government pension article covers how the pension itself is computed.

A special provision helps the very old. Under Section 194P, a specified bank can compute the income of a resident aged 75 or above who has only pension and interest income from that same bank, allow the deductions, and deduct the tax, which exempts that pensioner from filing a return.

Family pension is treated differently, and this is a common source of confusion. A family pension paid to the spouse or dependant of a deceased employee is taxed under the head income from other sources, not salary, so the salary standard deduction does not apply to it. Instead, Section 57(iia) allows a deduction of one-third of the family pension or a fixed ceiling, whichever is lower, and the ceiling is Rs. 25,000 in the new regime (raised by the Finance (No. 2) Act, 2024) or Rs. 15,000 in the old regime. Because family pension is other-sources income, the routine monthly Section 192 deduction does not run on it in the way it does on service pension.

How TDS reconciles with the return

The monthly TDS is provisional. It is the employer’s best estimate of the year’s tax, collected in advance, and it is trued up when the employee files the income-tax return. If the TDS deducted exceeds the actual liability, because the employee moved to the old regime in the return, or had deductions the DDO did not allow, or had a part-year of service, the excess comes back as a refund. If the TDS fell short, because of other income or a change of employer, the balance is paid as self-assessment tax with the return, with interest under Section 234B and Section 234C where advance tax should have covered it.

This is why the Form 26AS and the Annual Information Statement matter. The credit an employee claims in the return must match the TDS shown in Form 26AS, which is populated from the DDO’s Form 24Q. A mismatch, most often from a wrong PAN in the return or a late deposit by the deductor, holds up the credit and the refund. The sensible order is to collect Form 16 by 15 June, check its figures against Form 26AS and the Annual Information Statement, resolve any gap with the DDO, and only then file. The tax the employee ultimately owes is fixed by the return, not by the TDS; the TDS is the mechanism that collects most of it through the year.

Where to check the current-year rules

The CBDT issues a fresh explanatory circular on TDS on salaries each year, setting out the slabs, the deductions and the computation for that financial year. The latest confirmed circular is Circular No. 3/2025 dated 20 February 2025, for the financial year 2024-25. A new circular follows each year, so for the current year check incometaxindia.gov.in for the latest circular number. The slabs and the standard deduction used in the worked example above are the financial year 2026-27 figures, unchanged from 2025-26.

See also

• Income tax for pensioners
• Income tax for government employees
• Old versus new tax regime
• Standard deduction
• Section 87A rebate
• Section 89 relief
• Professional tax
• House rent allowance
• City classification for HRA
• Form 16
• Form 26AS
• Advance tax
• Take-home salary for central government employees
• Dearness allowance
• Basic pay
• Central government pension
• Family pension
• National Pension System
• Unified Pension Scheme
• Old Pension Scheme
• Commutation of pension
• Central Board of Direct Taxes
• Department of Pension and Pensioners’ Welfare
• Central government employees in India
• 7th Central Pay Commission
• Leave encashment
• Gratuity for central government employees
• Income tax calculator
• 7th CPC salary calculator
• HRA exemption calculator

External references

• Income Tax Department
• Income-tax circulars, CBDT
• TRACES

References

1. Income-tax Act, 1961, Section 192 (deduction of tax at source on salary at the average rate), and Section 392 of the Income-tax Act, 2025, which replaces it for salary paid on or after 1 April 2026.
2. Income-tax Act, 1961, Sections 200 and 203 (deposit of tax and issue of the TDS certificate), Section 199 and Rule 37BA (credit for TDS), and Section 201(1A) (interest on failure to deduct or deposit).
3. Income-tax Act, 1961, Section 115BAC(1A) and (6) (the new regime and the intimation of the option); CBDT Circular No. 4/2023 dated 5 April 2023 (new regime as the default for TDS).
4. Income-tax Rules, 1962, Rules 26A, 26B, 26C, 31 and 31A, and Forms 16, 24Q, 12BB and 12B.
5. CBDT Circular No. 3/2025 dated 20 February 2025 (TDS on salaries for the financial year 2024-25); CBDT Circular No. 761 dated 13 January 1998 (TDS on pension by the paying bank).
6. Income-tax Act, 1961, Section 16(ia) (standard deduction), Section 57(iia) (family pension deduction), Section 87A (rebate) and Section 80CCD(2) (employer NPS contribution); Finance (No. 2) Act, 2024 (family-pension deduction raised to Rs. 25,000).