Statutory and compliance
TDS on salary: tax the employer holds back every month
TDS on salary is income tax that an employer deducts from an employee's monthly pay and deposits with the government on that employee's behalf, under the Income Tax Act, 1961. The employer estimates the employee's tax for the whole financial year, spreads it across the months, and reports each deduction so the employee can claim credit for it.
Last reviewed: September 2026
Also called: TDS, tax deducted at source, salary TDS
In plain English
The company works out roughly how much income tax an employee will owe for the year, takes a piece of it out of every month's pay, and sends that money to the government.
How it works in detail
The financial year opens with an estimate. The employer projects what the employee will earn across twelve months, subtracts the deductions and exemptions the employee declares, works out the tax on the rest and spreads that over the months remaining. Because it is an estimate, it moves. A mid-year increment, a bonus or proof that never turns up changes the figure, and the employer resets the monthly deduction for the months still left.
Two things then have to happen on time. The tax deducted has to reach the government, and a quarterly statement has to be filed reporting it against each employee's PAN. Record a wrong PAN and the employee cannot see the credit against their own tax record. The rates, the regimes and the filing dates are set each year by the Finance Act, so work from what your accountant tells you for this year.
A worked example
The setup
Suppose Anjali earns INR 78,000 a month, which comes to INR 9,36,000 for the year, and her accountant estimates her tax for the year in April.
The calculation
Say the estimate is INR 46,800 for the year; that figure is assumed for the example and is no rate. INR 46,800 / 12 = INR 3,900.00 held back each month. April pay works out at INR 78,000 - INR 3,900.00 = INR 74,100.00.The result
Anjali gets INR 74,100.00 in April with a tax line of INR 3,900.00 on her slip. If her declaration changes in November, the months still left are reworked.
Common mistakes
- Deducting nothing until January and squeezing the whole year's tax into February and March. Take-home collapses at the worst moment for the employee and the deposits are already late.
- Taking a rent or investment declaration in April and never asking for the proof. If nothing arrives, the exemption has to be reversed and the tax recovered before the year closes.
- Treating the deduction as optional because an employee asked you to skip it. The obligation sits on the employer, and a shortfall is recovered from the business along with interest.
How VTClock handles it
VTClock computes no income tax, deducts no TDS and files no quarterly statement. It produces the attendance-based salary figure for the month, and the tax work happens outside it.
Frequently asked questions
A new joiner worked somewhere else until October. Do I count that earlier salary?
Only if the employee gives you the previous employer's salary and tax details on the prescribed declaration. When they do, you add that income to what you will pay for the rest of the year and deduct on the combined figure. When they do not, you deduct on what you pay alone, and the employee usually ends up with tax still payable when they file. Ask every mid-year joiner for that declaration on day one.
Do I have to deduct tax from a worker paid daily wages?
The test is what the person earns from you across the financial year. How the payment is structured does not decide it. A daily-wage worker whose total earnings stay under the exemption limit has no tax to deduct, while one who works most of the year at a good rate may cross it. Give your accountant the days worked and the wages paid for each person and let them tell you who crosses. The limits change, so ask each year.
I deducted more than the employee ended up owing. Can I refund it in March?
You can adjust within the same financial year while months are still left, by reducing or stopping the deduction for the remaining months once the proof is in. Once the money has been deposited with the government and the year has closed, the employer cannot hand it back. The employee claims the excess as a refund when they file their return, using the credit shown against their PAN.
An employee says their tax credit is missing when they check their record. Why?
Almost always the quarterly statement. Either the deduction was never reported against that person, the PAN recorded for them is wrong or belongs to somebody else, or the statement for that quarter has not been filed. Deposited money only becomes credit once it is reported correctly against the right PAN. Ask your accountant to check the filed statement for the quarter in question and revise it if the details are off.
Related terms
- Form 16Form 16 is the certificate an employer gives a salaried employee after the financial year closes, showing the salary paid, the tax deducted from it and the tax deposited with the...
- Net salaryNet salary is what is left of a month's earnings after every deduction the employer is required or authorised to make has come off.
- Gross salaryGross salary is the total of everything an employee earns for a month before a single deduction is taken off: the fixed structure of basic pay and allowances, plus whatever was...
- CTCCTC, short for cost to company, is the total annual amount an employer expects to spend on one employee.
- Salary slipA salary slip is the statement an employer gives an employee for one wage period, setting out what was earned, what was deducted and what was paid.
- Professional taxProfessional tax is a tax on employment levied by some Indian states and collected by the employer out of the employee's monthly salary.
Modules that touch this
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