Tax Deducted at Source (TDS) is an important part of payroll and tax compliance in India. For employers, it is not simply about deducting an amount from an employee’s salary. The employer also needs to calculate the correct amount, deduct it at the right time, deposit it with the government, maintain records, and provide the required certificates.

For employees, TDS can affect their monthly take-home salary and the tax they eventually pay or claim as a refund. For businesses, proper TDS handling helps keep payroll records accurate and reduces the risk of compliance issues.

What Is Tax Deducted at Source (TDS)?

TDS is a system where tax is deducted by the person making certain payments before the remaining amount is paid to the recipient. The deducted tax is then deposited with the government on behalf of the person whose income was subject to TDS.

In the case of salary, the employer generally calculates the employee’s estimated taxable income and deducts tax from salary payments when required. The Income Tax Department states that salary TDS is deducted at the time of payment.

TDS can also apply to several other types of payments, such as certain interest, commission, rent, professional fees and other specified payments. The applicable rate and threshold depend on the nature of the payment and the relevant provisions.

How TDS Works for Employers

Understanding how TDS works becomes easier when you look at it as a simple payroll process.

Suppose an employee has taxable income during the year and TDS is applicable. The employer first estimates the employee’s annual taxable salary based on the information available. This may include salary components, eligible deductions or exemptions, and the employee’s applicable tax regime.

The employer then calculates the expected tax liability and adjusts the TDS through salary payments during the year.

A basic TDS process looks like this:

Employee income → Tax calculation → TDS deduction → Deposit with government → Record and certificate

The exact calculation can vary depending on the employee’s income, declarations, applicable tax rules and other factors. This is why businesses should avoid treating TDS as a fixed percentage that can simply be deducted from every employee’s salary.

For the current tax year beginning April 1, 2026, salary TDS is governed under the Income-tax Act, 2025. The Income Tax Department explains that salary-related TDS provisions are now covered under Section 392 of the new Act.

TDS on Salary: What Employers Need to Check

Salary TDS requires regular attention because an employee’s taxable income may change during the year.

Before calculating TDS, an employer may need to consider:

• Employee’s salary and taxable components
• Tax regime selected or applicable
• Eligible deductions and exemptions
• Investment or tax-saving declarations, where applicable
• Income from previous employment, when relevant
• Changes in salary during the year
• Other information required for accurate tax calculation

Employees may provide information or supporting documents required by the employer for calculating salary TDS. The Income Tax Department also lists Form 16 as the certificate provided by an employer to an employee showing salary income and TDS details.

This makes proper documentation an important part of the payroll process.

What About TDS for Other Business Payments?

TDS is not limited to employee salaries. Businesses may also have TDS responsibilities when making certain payments to vendors, professionals, contractors, landlords or other recipients.

The applicable requirement depends on the type of payment, the recipient, applicable threshold and other conditions.

From April 1, 2026, the Income Tax Department’s new framework consolidates TDS provisions for non-salary payments under Section 393 of the Income-tax Act, 2025. The department has stated that the rates and monetary thresholds have broadly been retained, although the provisions and section numbering have been reorganised.

Therefore, businesses should check the applicable provision instead of relying on an old TDS section number or an outdated rate.

TDS Benefits for Employees and Businesses

TDS serves an important purpose for both taxpayers and the government.

For employees, one of the main benefits is that tax is collected throughout the year rather than requiring the entire tax liability to be paid at one time. Correct TDS also helps ensure that tax deducted from salary is properly reflected in the employee’s tax records.

For businesses, a structured TDS process can provide better control over payroll and payment records.

Some key TDS benefits include:

• Helps collect tax during the year
• Reduces the burden of paying a large tax amount at once
• Creates a record of tax deducted and deposited
• Supports accurate employee tax documentation
• Helps businesses manage tax-related payroll responsibilities
• Makes year-end tax reporting easier

However, these benefits depend on accurate calculation, timely deposits and proper records.

Form 16 and TDS Records

Form 16 is an important document for salaried employees. It is issued by the employer and contains details such as salary income and TDS for the relevant year.

Employees can use this information while preparing their income tax return. The Income Tax Department also provides tax-related information through its e-filing system, including TDS information available through Form 26AS and the Annual Information Statement (AIS).

For employers, maintaining proper payroll and TDS records is equally important. Errors in employee details, salary figures or deductions can create problems later, especially when employees compare their Form 16 with their tax records.

Common TDS Mistakes Employers Should Avoid

TDS mistakes often happen when payroll is managed manually or information is not updated regularly.

Some common issues include:

Using outdated tax information: Tax rules and reporting requirements can change. Payroll teams should work with current information.

Incorrect employee data: Wrong PAN details, salary information or declarations can affect TDS calculations and reporting.

Ignoring salary changes: Promotions, increments, bonuses and other changes can affect annual taxable income.

Missing payment or deposit timelines: Deducting tax is only one part of the responsibility. The deducted amount also needs to be handled and reported correctly.

Poor record keeping: Payroll and TDS records should be maintained in an organised manner so that information can be checked when required.

For businesses, these activities should be part of a broader compliance management process rather than handled only at the end of the financial year.

How Payroll Software Can Make TDS Easier

As the number of employees grows, calculating salary and TDS manually can become difficult. Payroll software can help keep employee salary information, attendance, payroll calculations and tax-related records organised in one place.

An HRMS or payroll system can reduce repetitive manual work and provide a clearer record of salary calculations. However, software does not remove the employer’s responsibility to use correct employee information and apply the applicable tax rules.

A well-managed Payroll management process should connect salary calculations with employee records, statutory requirements and required documentation.

TDS and the New Tax Year in 2026

Businesses should also be aware of the transition to the Income-tax Act, 2025.

The Income Tax Department has clarified that salary paid up to March 31, 2026 is governed by the earlier provisions, while salary paid from April 1, 2026 is governed by the corresponding provisions of the new Act. Employers were also required to reset salary TDS calculations from April 1, 2026 for the new tax year.

This is particularly relevant for businesses that use payroll software or maintain their own payroll calculations. Systems and processes should use the applicable provisions for the relevant tax period.

Final Thoughts

TDS is an important part of managing payroll and tax responsibilities for any growing business. Employers need to look beyond simply deducting tax from an employee’s salary. Correct calculation, timely handling, accurate records and proper documentation all form part of the process.

For startups and growing companies, having a structured payroll and compliance management process can make these responsibilities easier to manage. As the workforce grows, using organised HR and payroll systems can also reduce manual work and give the business better visibility over employee records.

Most importantly, employers should regularly check the latest requirements from the Income Tax Department rather than relying on old TDS rules or assumptions.