CBDT Circular 3/2025 Explained: How Employers Compute TDS on Salary Under Section 192 for FY 2024-25

Every salaried employee in India watches a line labelled "TDS" shrink the monthly take-home, yet few know which rulebook their payroll team follows. That rulebook is CBDT Circular No. 3/2025, issued by the Central Board of Direct Taxes on 20 February 2025, which tells every employer exactly how to deduct tax at source from "Salaries" under Section 192 of the Income-tax Act, 1961 for the financial year 2024-25 (assessment year 2025-26).

The circular incorporates amendments made by the Finance Act 2023 and the Finance (No.1) and Finance (No.2) Acts 2024. Its core message is straightforward: from FY 2024-25 the new tax regime under Section 115BAC(1A) is the default, the standard deduction in that regime has risen to Rs 75,000, and an employee who prefers the old regime must tell the employer in advance. Where the 2025 circular does not amend an earlier position, CBDT Circular No. 24/2022 continues to apply.

What the Section Says

Section 192(1) obliges any person responsible for paying salary to deduct income-tax on the estimated salary income of the employee at the average rate of income-tax for FY 2024-25. "Average rate" means the total tax on estimated annual salary divided by that salary, so the monthly TDS is spread evenly across the 12 months rather than loaded at year-end.

Because Section 115BAC(1A) is now the default regime, an employer must compute TDS under the new-regime slabs unless the employee files an intimation opting for the old regime. Circular 3/2025 confirms that this intimation is not the final return position: an employee may still switch regimes when filing the return under Section 139(1) by 31 July 2025, even if the employer deducted under the other regime through the year.

The standard deduction from salary under Section 16(ia) is Rs 75,000 in the new regime and Rs 50,000 in the old regime for FY 2024-25, the new-regime figure having been raised from Rs 50,000 by the Finance (No.2) Act 2024. The new-regime slabs the employer applies for FY 2024-25 are set out below.

Two further sub-sections matter at the payroll desk. Section 192(2) lets an employee who changed jobs during FY 2024-25 furnish salary details from the previous employer in Form 12B, so the current employer deducts on the combined figure. Section 192(2B) lets an employee declare other income (for example bank interest) and any loss under "Income from house property", so the employer can factor these in before computing the average rate. Compare both regimes for your own numbers on the old vs new regime calculator.

Section 192(1A) adds an option specific to non-monetary perquisites: the employer may choose to pay the tax on those perquisites itself, at the average rate, instead of deducting it from the employee's salary. Circular 3/2025 clarifies that this employer-borne tax is not treated as a further taxable perquisite in the employee's hands, so the liability does not spiral. Separately, the employer must deposit the tax deducted to the government by the 7th of the following month under Rule 30 and file the quarterly Form 24Q return; a delay in deposit attracts interest at 1.5% per month under Section 201(1A).

Worked Example

Consider Priya, a marketing manager whose employer estimates her FY 2024-25 gross salary at Rs 14,00,000 with no other declared income. Under the default new regime the employer first subtracts the Rs 75,000 standard deduction, leaving taxable income of Rs 13,25,000. The tax builds up slab by slab as follows.

Adding the 4% health and education cess of Rs 4,200 gives a full-year liability of Rs 1,09,200. Divided across 12 months, the employer deducts roughly Rs 9,100 as TDS each month. Priya's income is well above Rs 7,00,000, so the Section 87A rebate does not apply; for FY 2024-25 that rebate reaches only taxpayers whose new-regime total income stays at or below Rs 7,00,000. Under the current FY 2025-26 rules the rebate is larger, worth up to Rs 60,000 for income up to Rs 12,00,000.

Now suppose Priya files an intimation opting for the old regime and declares a Rs 1,50,000 Section 80C investment plus Rs 25,000 of Section 80D health premium. The employer subtracts the Rs 50,000 old-regime standard deduction and both deductions, leaving Rs 11,75,000. Old-regime tax works out to Rs 1,65,000 plus Rs 6,600 cess, or Rs 1,71,600. The comparison makes the choice concrete.

For Priya the new regime is Rs 62,400 cheaper, which is why the employer would keep deducting under the default unless she has substantially larger deductions. Model your own break-even with the income tax calculator and cross-check the monthly deduction on the TDS calculator.

Common Mistakes

The most frequent error since FY 2023-24 is assuming the old regime still applies by default. It does not: under Section 115BAC(1A) the new regime is automatic, and an employee who forgets to file the opt-out intimation will see new-regime TDS with only the Rs 75,000 standard deduction and none of the 80C or 80D benefits.

A second pitfall concerns the Section 80CCD(1B) additional Rs 50,000 NPS deduction. This deduction is not allowed in the new regime; it is available only in the old regime. An employer that honours an 80CCD(1B) claim while deducting under the new regime computes TDS incorrectly and exposes the employee to a shortfall demand under Section 143(1).

Employees also miss Circular 3/2025's point that the employer can only account for other income and house-property loss if they are declared under Section 192(2B). Undeclared interest income routinely surfaces in the Annual Information Statement and triggers a scrutiny query, since the tax on it was never deducted. Salary arrears are another trap: relief under Section 89(1) must be claimed by filing Form 10E on the e-filing portal before the return, or the relief is disallowed.

Finally, high earners should note the surcharge ceiling. In the new regime the top surcharge is capped at 25%, applying to income above Rs 2,00,00,000, and employers deducting under Section 192 must apply this 25% ceiling for new-regime employees. If your pay package includes perquisites such as rent-free accommodation, value them first on the perquisite tax calculator.

FAQ

Is the new tax regime compulsory for TDS on salary in FY 2024-25?

No. Section 115BAC(1A) makes the new regime the default, so the employer deducts under new-regime slabs unless the employee files an intimation choosing the old regime. Circular 3/2025 confirms the employee can still switch regimes when filing the return by 31 July 2025.

What standard deduction does the employer allow while computing TDS?

For FY 2024-25 the employer allows Rs 75,000 in the new regime and Rs 50,000 in the old regime under Section 16(ia). The Rs 75,000 figure was raised from Rs 50,000 by the Finance (No.2) Act 2024.

Can my employer consider my home-loan interest for TDS?

Interest on a self-occupied house-property loan (a loss under that head, up to Rs 2,00,000) can be set off only in the old regime, and only if you declare it to the employer under Section 192(2B). The new regime does not permit this set-off against salary.

When must the employer issue Form 16?

Under Rule 31, the employer must furnish Form 16 by 15 June following the financial year, so the Form 16 for FY 2024-25 was due by 15 June 2025. It certifies the salary paid and the TDS deposited against your PAN.

What happens if my employer deducts under the wrong regime?

You are not bound by the employer's deduction. You may compute tax under whichever regime is beneficial when filing your return, and any excess TDS is refunded while any shortfall is paid as self-assessment tax under Section 140A.

Does the Section 87A rebate reduce my monthly TDS?

Only if your new-regime total income for FY 2024-25 is Rs 7,00,000 or less, in which case the rebate makes the tax nil and the employer deducts no TDS. Above that threshold, as in a Rs 14,00,000 salary, no rebate applies. From FY 2025-26 the rebate is larger, worth up to Rs 60,000 for income up to Rs 12,00,000.

How do I verify the TDS my employer deducted?

Check Form 26AS and the Annual Information Statement on the income-tax portal against your payslips. Every rupee deducted under Section 192 should appear there within a quarter of deduction; a mismatch should be raised with the employer before you file.