Tax Deducted at Source (TDS) on salary is your employer\u2019s obligation to deduct income tax from your monthly pay based on your projected annual tax liability. Understanding how TDS is calculated helps you declare the right investments and allowances to your employer-reducing unnecessary deductions from your monthly salary.
How TDS on Salary Is Calculated
- At the start of the financial year, your employer estimates your total annual income and likely deductions
- Your expected annual tax is computed based on declared regime, deductions (HRA, 80C, 80D, etc.)
- This total tax is divided by 12 and deducted as TDS monthly
- Adjustments are made each month if your declarations change
The Investment Declaration Process
Most employers collect an investment declaration form in April (start of FY) and an actual proof of investment in January/February (for the year-end computation). The key declarations include:
- HRA: rent amount and landlord PAN
- Section 80C: ELSS, PPF, LIC premium, EPF (auto-included)
- Section 80D: health insurance premium receipts
- Section 24B: home loan interest certificate from lender
- NPS: contribution receipts
What Happens If You Don\u2019t Declare?
If no declarations are submitted, your employer deducts TDS on full taxable salary. This results in excess TDS throughout the year, which you can claim as a refund only after filing your ITR-locking up your money for months.
Reducing Excess TDS Mid-Year
You can revise your investment declaration with your employer at any point in the year. If you make large 80C investments in January, declare them immediately so TDS is corrected for the remaining February-March months.
Use the SaveTaxNow Calculator to compute your exact tax liability and ensure TDS is deducted correctly.