TDS on Salary (Section 192)

TDS on Salary, governed by Section 192 of the Income Tax Act, 1961, is the mechanism through which Indian employers deduct income tax at source from an employee’s salary before it is paid out. Standing for Tax Deducted at Source, this provision ensures that the central government collects income tax progressively throughout the financial year rather than as a lump sum at year-end.

Under Section 192, every person responsible for paying salary income, whether a private company, public sector enterprise, partnership firm, LLP, HUF, or even a sole proprietor, is legally required to withhold tax based on the employee’s estimated annual taxable income and the applicable income tax slab rates. The deducted amount must then be deposited with the government within prescribed timelines and reported through quarterly TDS returns (Form 24Q) and the annual Form 16 issued to employees.

For multinational employers operating in India, accurate TDS deduction is one of the most complex payroll compliance activities, which is why global payroll providers like Mercans play a critical role in ensuring zero errors and full statutory adherence.

Important update: With the Income Tax Act, 2025 coming into effect from 1 April 2026, the provisions of Section 192 have been consolidated under Section 392 of the new Act for salary TDS. However, the underlying obligations, rates, and compliance framework remain largely unchanged, and Section 192 continues to apply to all salary payments made on or before 31 March 2026.

Who is Required to Deduct TDS Under Section 192?

Section 192 applies to anyone responsible for paying salary income to an employee. This includes:

• Private and public limited companies
• Partnership firms, LLPs, and sole proprietorships
• Government and semi-government entities (drawing and disbursing officers)
• Hindu Undivided Families (HUFs) with payroll
• Trusts, NGOs, cooperative societies, and educational institutions
• Foreign companies with employees in India

The key trigger is the existence of an employer-employee relationship. Payments to consultants, freelancers, or independent professionals fall under different TDS sections (such as Section 194J), not Section 192. Similarly, director’s remuneration is generally taxed under Section 194J unless there is a clear employee relationship.

When is TDS Deducted on Salary?

A core principle of Section 192 is that TDS is deducted at the time of actual payment of salary, not at the time of accrual. This means tax is withheld whenever the employer disburses salary, whether on time, in advance, or as arrears. This rule applies equally to monthly payroll, bonus payments, leave encashment, and other taxable salary components.

How is TDS on Salary Calculated?

Unlike most TDS sections that prescribe a flat rate, Section 192 uses the average rate of income tax applicable to the employee’s estimated annual income. The basic formula is:

TDS per month = Estimated total annual tax liability ÷ Number of months in the financial year

The employer follows these steps:

• Estimate gross annual salary including basic pay, dearness allowance, HRA, perquisites, bonuses, and other allowances.
• Apply applicable exemptions under Section 10 such as HRA (House Rent Allowance ) , LTA (Leave Travel Allowance ), and standard deduction.
• Consider other income declared by the employee through Form 12BB (such as home loan interest under Section 24).
• Deduct eligible Chapter VI-A deductions (Section 80C, 80D, 80CCD, etc.) if the employee opts for the old tax regime.
• Apply income tax slab rates under the chosen tax regime (old or new).
• Add health and education cess at 4%.
• Divide the annual tax liability by the number of remaining months in the financial year to arrive at the monthly TDS amount.

If the employee’s estimated annual income is below the basic exemption limit, no TDS needs to be deducted.

Please find below details on the Tax rates, slabs, and rebate benefits as published by Press India Bureau on 1st FEB 2026.

Old Tax Regime vs. New Tax Regime for TDS

Employees can choose between the old tax regime, which offers extensive deductions and exemptions, and the new tax regime, which provides lower slab rates but limited deductions. The employer is required to deduct TDS based on the regime declared by the employee at the start of the financial year. If no declaration is made, the new tax regime is treated as the default under current rules. This choice significantly impacts the monthly TDS amount and must be carefully evaluated by every salaried taxpayer.

TDS Deposit, Return Filing, and Form 16

Employers must comply with strict deadlines under Section 192:

• Monthly TDS Deposit: TDS deducted in any month must be deposited with the government by the 7th of the following month. For TDS deducted in March, the deadline extends to 30th April.
• Quarterly TDS Return (Form 24Q): Employers must file Form 24Q every quarter, reporting employee-wise salary paid and TDS deducted. Annexure II in the Q4 return contains the detailed annual salary breakup of every employee.
• Annual Form 16: Employers must issue Form 16, the TDS certificate, to every employee by 15th June following the end of the financial year. Form 16 is the most important document for employees to file their ITR (Income Tax Return).
• PAN Compliance: Without a valid PAN, TDS must be deducted at the higher of the prescribed rate or 20%.

Consequences of Non-Compliance Under Section 192

Failure to comply with Section 192 carries serious consequences:

• Interest on late deduction: 1% per month from the date the tax was deductible to the date of actual deduction.
• Interest on late deposit: 1.5% per month from the date of deduction to the date of actual deposit.
• Late filing fee under Section 234E: ₹200 per day, capped at the total TDS amount.
• Penalty under Section 271H: Up to ₹1,00,000 for late or incorrect TDS returns.
• Disallowance of expense: 30% of the salary expense can be disallowed under Section 40(a)(ia) if TDS is not deducted or deposited.
• Treatment as assessee in default under Section 201(1), exposing the employer to recovery proceedings.

Special Situations Under Section 192

Several scenarios require careful handling under Section 192:

• Mid-year joiners: The new employer must consider previous salary and TDS through Form 12B to avoid short deduction.
• Multiple employers: Employees with simultaneous employment must declare income from each employer under Section 192(2).
• Salary arrears: Relief under Section 89(1) must be considered if arrears push the employee into a higher slab.
• Non-monetary perquisites: Employers can choose to bear the tax on perks, in which case no further TDS applies to that component.
• Foreign currency salary: Converted using the telegraphic transfer buying rate as per Rule 26.
• Expatriate employees: Residential status determines applicable slabs and exemptions, and DTAA provisions may apply.

Why TDS Compliance Matters for Global Employers

For multinational corporations and EOR clients in India, accurate TDS on salary is one of the most sensitive aspects of payroll. A single miscalculation can trigger employee dissatisfaction, ITR mismatches in Form 26AS, TRACES notices, interest, and reputational damage. As the regulatory environment evolves further with the Income Tax Act, 2025 and consolidation of TDS provisions under Section 392, employers must invest in compliance-grade payroll systems and expert local partners to stay audit-ready.

How Mercans Simplifies TDS on Salary Compliance in India

Mercans is a global leader in payroll technology and Employer of Record (EOR) services, supporting clients across more than 160 countries with proprietary SaaS platforms and in-country experts. In India, Mercans takes complete ownership of TDS on salary computation, deposit, and reporting under Section 192, including:

• Accurate monthly TDS calculation aligned with the chosen tax regime
• Timely TDS challan deposit before statutory deadlines
• Quarterly Form 24Q filings with Annexure II in Q4
• Annual Form 16 issuance to all employees
• Reconciliation with Form 26AS and TRACES
• Handling expat tax, perquisite valuations, ESOP taxation, and arrears under Section 89
• Real-time visibility through Mercans’ proprietary global payroll dashboards

By operating its own legal entity in India, Mercans eliminates third-party dependencies and ensures end-to-end compliance with Income Tax, Provident Fund (PF), Employees’ State Insurance (ESI), Professional Tax, and Gratuity obligations. Whether you need fully managed payroll outsourcing, an Employer of Record solution to hire in India, or AI-powered payroll software that scales globally, Mercans delivers compliant, secure, and audit-ready payroll for organizations of every size.

Partner with Mercans through its global payroll outsourcing solutions to simplify TDS on salary management and complete payroll compliance in India.

Frequently Asked Questions (FAQs)

1. What is the rate of TDS on salary under Section 192?

Section 192 does not have a fixed TDS rate. Instead, TDS is deducted at the average rate of income tax applicable to the employee’s estimated annual taxable income under the chosen tax regime. The employer calculates the total annual tax liability, divides it by the number of months in the financial year, and deducts that amount monthly. This is why two employees with the same CTC may have different TDS amounts based on their declarations, regime choice, and eligible deductions.

2. When must an employer deposit TDS deducted under Section 192?

TDS deducted in any month (April to February) must be deposited with the government by the 7th of the following month. For TDS deducted in March, the deadline is extended to 30th April. Late deposits attract interest at 1.5% per month until the actual date of payment, along with additional fees and penalties under Sections 234E and 271H.

3. What is the difference between Form 16 and Form 24Q?

Form 16 is the annual TDS certificate issued by the employer to each employee, showing the total salary paid, deductions claimed, and TDS deposited during the financial year. Employees use it to file their income tax returns. Form 24Q, on the other hand, is the quarterly TDS return filed by the employer with the Income Tax Department, reporting consolidated salary TDS data for all employees. Annexure II of Q4 contains the detailed annual breakup that ultimately feeds into Form 16.

4. Can an employee claim a refund if excess TDS is deducted under Section 192?

Yes. If the total TDS deducted exceeds the employee’s actual tax liability for the year, the excess amount can be claimed as a refund while filing the Income Tax Return (ITR). Employees should reconcile their TDS with Form 26AS and the Annual Information Statement (AIS) on the income tax portal before filing. Refunds are credited directly to the registered bank account after the return is processed.

5. How does Mercans help businesses manage TDS on Salary compliance?

Mercans manages the entire Section 192 compliance lifecycle, including accurate monthly TDS computation under the old or new tax regime, timely challan deposits, quarterly Form 24Q filings with Annexure II in Q4, annual Form 16 issuance, and reconciliation with Form 26AS on TRACES. With its own legal entity in India and proprietary global payroll technology, Mercans helps employers avoid interest, penalties, and TRACES notices while delivering a seamless tax experience to employees, including expats, ESOP holders, and mid-year joiners.