TDS on Salary: How to Check If Your Employer Is Deducting Correctly

Under Section 192 of the Income Tax Act, employers are required to deduct Tax at Source (TDS) from salary payments at the average rate of income tax computed on the basis of the rates in force for the relevant financial year. The employer estimates the employee's annual salary, applies the applicable tax slab rates after accounting for declared deductions and exemptions, and spreads the total TDS equally across monthly salary payments. However, errors in this process are surprisingly common, and the financial impact on employees can be significant, ranging from unexpected tax demands to blocked refunds that take months to process.

Step 1: Verify Your Regime Selection

Since FY 2023-24, the new tax regime is the default. If you submitted an investment declaration at the start of FY 2026-27 opting for the old regime, confirm that your employer's payroll system has recorded this correctly. Check your April 2026 salary slip: if TDS is being deducted at a rate that seems low and no deductions are being considered, the system may be computing tax under the new regime despite your old-regime declaration. The difference can be substantial. For an employee earning Rs 15 lakh with Rs 3.5 lakh in deductions, the new regime would result in approximately Rs 30,000-40,000 less TDS per year, but this shortfall would become a tax demand at the time of ITR filing.

Step 2: Cross-Check Declaration Against Actual Investments

At the start of the financial year, most employers ask employees to submit an estimated investment declaration covering Section 80C investments, HRA rent payments, home loan interest, health insurance premiums, and other deductions. TDS is computed based on these projections. If your actual investments fall short of the declared amounts, the employer will adjust (increase) TDS in February and March, often resulting in a sharp reduction in take-home salary during those months. Conversely, if you make additional investments not included in the original declaration, you may overpay TDS and will need to claim a refund through your ITR.

The remedy is to submit a revised declaration to your employer whenever there is a material change in your investment plan. Most payroll portals allow mid-year declaration updates. A revised declaration in October or November gives the employer enough time to adjust remaining monthly TDS without causing a large spike in any single month.

Step 3: Reconcile Form 26AS and AIS Quarterly

Form 26AS, available on the TRACES portal and the income tax e-filing website, shows all TDS credits against your PAN for the financial year. The Annual Information Statement (AIS) provides a more comprehensive view, including TDS, tax collected at source, specified financial transactions, and information received from reporting entities. Check these statements quarterly to ensure that every TDS deduction reflected in your salary slip is correctly reported to the government against your PAN. Discrepancies arise when the employer deposits TDS but quotes an incorrect PAN or uses the wrong financial quarter code.

If you find a mismatch, the correct course of action is to immediately notify your employer's payroll or finance department with the details. The employer can file a TDS correction statement (Form 24Q revision) to rectify the error. Do not wait until ITR filing to discover that TDS credits are missing from your 26AS, as this delays refund processing.

Step 4: Verify Special Components

Certain salary components require specific treatment for TDS purposes. Leave encashment is taxable for private sector employees but exempt up to Rs 25 lakh for government employees. Gratuity is exempt up to Rs 20 lakh under the Payment of Gratuity Act. Performance bonuses and variable pay are part of salary and subject to full TDS. Reimbursements that are not supported by bills (telephone, fuel, medical) may be treated as taxable perquisites. ESOPs are taxable as perquisites at the time of exercise (the difference between market value and exercise price), with TDS deducted in the month of exercise.

Each of these components should be verified in Part B of Form 16, which provides a detailed break-up of salary, exemptions claimed, and deductions allowed. Use the Oquilia Salary Breakup Calculator to input your CTC components and verify the expected TDS against what your employer is deducting each month.