How to Calculate TDS on Salary in Tax Year 2026-27: The Six Steps, and the Cliff at ₹12.75 Lakh
Taxation · Salary · India · Tax Year 2026-27
How to Calculate TDS on Salary in Tax Year 2026-27: The Six Steps, and the Cliff at ₹12.75 Lakh
A fully worked calculation on a salary of ₹18,00,000 under the default new regime, plus the Section 392 renumbering that turned Form 16 into Form 130 from 1 April 2026.
Your payslip shows one number for TDS, and it almost never matches what a colleague on a similar salary pays. That is not an error. Salary TDS is not a flat percentage applied to your pay; it is your employer’s forecast of your entire annual tax bill, divided by the months left in the year, and revised whenever any input changes. Get the forecast right in April and the March payslip holds no surprises. Get it wrong and you either lend the government money for a year or face a demand you did not budget for.
Quick Summary
On a salary of ₹18,00,000 with ₹60,000 of declared interest income, standard deduction of ₹75,000 and an employer NPS contribution of ₹1,26,000, taxable income works out to ₹16,59,000. Tax across the new-regime slabs is ₹1,31,800, cess adds ₹5,272, and the total liability is ₹1,37,072. Deduct the ₹6,000 already withheld on interest and the balance of ₹1,31,072 spreads to ₹10,923 a month. From 1 April 2026 the governing provision is Section 392 of the Income-tax Act 2025, not Section 192.
What we know about salary TDS this year
Two things changed on 1 April 2026, and only one of them affects the arithmetic. The law was renumbered; the rates were not. Everything below is drawn from the statute, the notified rules or published departmental data.
- Salary TDS is now governed by Section 392 of the Income-tax Act 2025, which merges the old Section 192 and Section 192A into a single provision with eight sub-sections.
- The new regime remains the default. An employee who wants the old regime must say so in writing to the employer.
- Slab rates are unchanged for Tax Year 2026-27: nil up to ₹4 lakh, then 5%, 10%, 15%, 20%, 25% and 30% in ₹4 lakh steps, with 30% starting above ₹24 lakh.
- Standard deduction stays at ₹75,000 in the new regime and ₹50,000 in the old. Health and education cess remains 4% of the tax computed.
- The annual salary TDS certificate is now Form 130, not Form 16, and it is due by 15 June following the end of the tax year.
- CBDT provisional data put gross direct tax collections at ₹28,11,936 crore for FY 2025-26, with refunds of ₹4,71,531 crore issued during the year.
The six steps, and the number that survives each one
Every payroll system in the country runs the same sequence. What differs is the quality of the inputs. Follow the running figure through the six stages below and the logic stops being mysterious.
Step 6 is the one people forget exists. Section 392 obliges the employer to deduct the correct proportion of a moving estimate, not to stick to an April guess. That is why the TDS on a March payslip is frequently double the TDS on a June payslip in a year with a large bonus.
Inside step 3: the staircase, not the single rate
The most common misreading of a slab table is treating the top rate as the rate on everything. On taxable income of ₹16,59,000 the marginal rate is 20%, but only ₹59,000 is taxed at 20%. The first ₹4,00,000 is taxed at nothing at all. Each band contributes a separate slice.
Stack those slices in order and the bill climbs in a staircase rather than a straight line. The steepest single step in this example is the ₹12 lakh to ₹16 lakh band, which alone adds ₹60,000. Anyone whose income crosses into that band mid-year will see their monthly TDS jump sharply, because the recalculation loads the extra tax onto the months that remain.
first ₹4L
5% band
10% band
15% band
20% band
4% cess
The cliff at ₹12.75 lakh that changes everything below it
Below a certain salary, monthly TDS is not small. It is nil. The Section 87A rebate of up to ₹60,000 wipes out tax entirely for a resident individual with taxable income up to ₹12 lakh, and the ₹75,000 standard deduction lifts the equivalent gross salary to roughly ₹12,75,000. Cross that line by a rupee of taxable income and the rebate falls away, which is why the bar chart below has a hard edge in the middle rather than a gentle slope.
No tax at all
Rebate zone
15% band
20% to 25%
30% band
The two deductions that still work in the default regime
The new regime removed most of the familiar deductions, which is why the second step of the calculation looks so short. Two matter for most salaried employees, and one of them is badly underused.
The first is the flat standard deduction of ₹75,000, applied automatically against salary income with no proof and no declaration. The second is the employer’s contribution to the National Pension System, which remains deductible in the new regime at up to 14% of salary for the purpose. In the worked example that contribution is ₹1,26,000, consistent with 14% of a ₹9,00,000 basic. It removes ₹1,26,000 from taxable income at a marginal rate of 20%, which is worth about ₹26,208 including cess.
The catch is structural. This deduction only exists if your employer actually operates a corporate NPS facility and you have opted in, and it usually requires restructuring salary so the contribution comes out of the cost to company rather than being added to it. It is a payroll decision made once a year, not a tax-saving investment bought in March.
| Gross salary | Taxable income | Tax plus cess | Monthly TDS | Effective rate |
|---|---|---|---|---|
| ₹12,00,000 | ₹11,25,000 | Nil after rebate | Nil | 0.00% |
| ₹15,00,000 | ₹14,25,000 | ₹97,500 | ₹8,125 | 6.50% |
| ₹18,00,000 | ₹17,25,000 | ₹1,50,800 | ₹12,567 | 8.38% |
| ₹21,00,000 | ₹20,25,000 | ₹2,14,500 | ₹17,875 | 10.21% |
| ₹24,00,000 | ₹23,25,000 | ₹2,92,500 | ₹24,375 | 12.19% |
The ₹6,000 line only exists if you file Form 122
Step 4 of the calculation subtracts ₹6,000 of tax already deducted by a bank on interest income. Your employer has no way of knowing that number. Banks report to the department, not to your payroll team. Unless you tell them, the employer computes TDS on salary alone, ignores both the ₹60,000 of interest and the ₹6,000 of credit, and the mismatch resurfaces when you file your return.
The mechanism for telling them is Form 122, notified under Rule 204 of the Income-tax Rules 2026 and prescribed under Section 392(4)(a). It merges the old Form 12B, used when changing jobs, and Form 12BAA, used since October 2024 to report other TDS and TCS credits. In one declaration it covers salary from a previous employer, loss under house property and other income with the tax already withheld on it.
Worked example: the same person, with and without the declaration
With Form 122 filed, the employer includes ₹60,000 of interest, computes a liability of ₹1,37,072, claims the ₹6,000 credit and deducts ₹10,923 a month, which is ₹1,31,072 across the year. Without it, the employer computes on salary alone. Taxable income drops to ₹15,99,000, the monthly deduction falls to about ₹10,387, and roughly ₹12,400 of tax on the interest is never withheld. The ₹6,000 credit is then claimed only at filing, leaving about ₹6,400 to pay as self-assessment tax, potentially with interest for a shortfall in advance tax. The declaration does not change the tax. It changes whether you pay it in twelve instalments or one lump.
The timing that actually matters
File Form 122 and the investment declaration in April, not in January. A declaration made in month ten forces the whole adjustment into the last two or three payslips. Employers are permitted to increase or decrease the deduction for that reason, and the correction is legitimate, but it lands as a cash flow shock in the months when most households can least absorb it.
Form 16 is now Form 130: the renaming that trips up filings
The Income-tax Act 2025 consolidated a scattered set of provisions into Sections 392, 393 and 394, and the forms were renumbered to match. Content is largely unchanged; the labels are not. A payroll team that issues a document titled Form 16 for Tax Year 2026-27 is issuing a certificate under a repealed rule.
| What you knew it as | What it is now | What it does | When it applies |
|---|---|---|---|
| Section 192 | Section 392 | The obligation to deduct tax from salary | Salary paid on or after 1 April 2026 |
| Form 16 | Form 130 | Annual salary TDS certificate in three parts | Due by 15 June 2027 for this tax year |
| Form 24Q | Form 138 | Quarterly salary TDS statement filed by the employer | 31 July, 31 October, 31 January, 31 May |
| Form 12BB | Form 124 | Employee declaration of investments and rent | Start of the tax year, with proofs later |
| Forms 12B and 12BAA | Form 122 | Previous salary, house property loss, other TDS or TCS credit | Whenever the position changes |
| Form 26Q | Form 140 | Quarterly non-salary TDS for residents | Same quarterly calendar |
| Form 27Q | Form 144 | Quarterly TDS on payments to non-residents | Same quarterly calendar |
| Section references | Payment codes | Four-digit codes replace section citations in returns | All statements from Q1 of this year |
The deadlines with money attached
Tax deducted must be deposited by the 7th of the following month, with March allowed until 30 April. A late quarterly statement attracts a fee of ₹200 for every day of delay, capped at the tax deducted for that quarter, and a penalty range of ₹10,000 to ₹1,00,000 also exists for incorrect or unfiled statements. Interest runs at 1% a month where tax should have been deducted and was not, and 1.5% a month where it was deducted but not deposited. Form 130 can only be generated from the departmental portal after the corresponding quarterly statement is processed, so a delayed return quietly delays every employee’s certificate.
When the number on your payslip looks wrong
Excess deduction is not rare. Refunds of ₹4,71,531 crore were issued in FY 2025-26, and a meaningful share of that is salary TDS withheld from people whose declarations arrived late or never arrived at all. Work through this order before assuming an error.
What is still unclear
The transition year has genuine loose ends, and anyone telling you otherwise has not filed under the new rules yet.
- Form numbering is being reported inconsistently across professional publications, particularly for the quarterly salary statement and the TCS return. Confirm the number against the departmental portal before filing rather than trusting a summary table.
- Software readiness varies. Payment codes replaced section citations, and mismatches between challan codes and statement codes are still being corrected quarter by quarter.
- Departmental practice on the first Form 130 cycle is untested, since the first certificates are due only in June 2027.
- Employer NPS structures differ. Whether 14% of salary is genuinely available to you depends on your salary structure and your employer’s scheme, not on the statute alone.
- Nothing here accounts for surcharge, which becomes relevant well above the incomes modelled, or for perquisites, which are valued under separate rules and can move taxable income materially.
Six habits that keep the March payslip boring
Frequently asked questions
How is TDS on salary calculated for Tax Year 2026-27?
The employer estimates your annual income, subtracts eligible deductions such as the ₹75,000 standard deduction and employer NPS contribution, applies the slab rates to the balance, adds 4% cess, subtracts any tax credits you have declared, and divides the remainder across the remaining months. In the worked example, ₹1,31,072 across twelve months gives ₹10,923 a month.
What is the TDS on a salary of ₹18 lakh under the new regime?
With only the standard deduction, taxable income is ₹17,25,000, tax plus cess is ₹1,50,800, and monthly TDS is about ₹12,567. Add an employer NPS contribution of ₹1,26,000 and declared interest income of ₹60,000 with ₹6,000 of credit, and the monthly figure falls to ₹10,923. Your actual number depends entirely on what you declare.
Is Section 192 still valid, or has it been replaced by Section 392?
Both, depending on the period. Section 192 of the Income-tax Act 1961 governs salary paid up to 31 March 2026. For salary paid on or after 1 April 2026, the governing provision is Section 392 of the Income-tax Act 2025, which also absorbed the old Section 192A on premature provident fund withdrawals. The mechanics of computation did not change.
At what salary does TDS start being deducted?
Under the default new regime, the employer must deduct once estimated income exceeds the basic exemption of ₹4 lakh, but the Section 87A rebate of up to ₹60,000 reduces the actual liability to nil for taxable income up to ₹12 lakh. With the ₹75,000 standard deduction, that corresponds to a gross salary of roughly ₹12,75,000 before any real deduction begins.
Will I get Form 16 or Form 130 for this year?
For salary earned in FY 2025-26, your employer issues Form 16, due by 15 June 2026. For salary earned in Tax Year 2026-27, the certificate is Form 130, due by 15 June 2027. The content is functionally the same, but the form number, governing rule and section references printed on it are new. A Form 16 issued for this year is technically non-compliant.
How do I tell my employer about interest income and TDS already deducted on it?
Through Form 122, prescribed under Section 392(4)(a) and Rule 204 of the Income-tax Rules 2026. It merges the old Form 12B and Form 12BAA, and covers salary from a previous employer, house property loss, and other income with the TDS or TCS already collected on it. Submitting it lets the employer offset the credit instead of over-deducting.
What happens if my employer deducts more TDS than my actual liability?
The excess is refundable when you file your return, with interest once the return is processed, but that is a wait of a year or more. Faster options are to file or revise your declarations mid-year so the employer reduces the deduction across the remaining months, and to check that payroll used the regime you intended. Refunds of ₹4,71,531 crore were issued in FY 2025-26, so this is a common situation.
Can I switch from the new regime to the old regime after my employer starts deducting?
The regime you declare to your employer governs how TDS is computed for the rest of the year, and switching mid-year with payroll is at the employer’s discretion. Separately, a salaried taxpayer without business income can still choose the other regime when filing the return, and any difference is settled as a refund or additional tax at that stage.
The short version
Salary TDS is an estimate, revised monthly, of a number that is only final on 31 March. Under the new regime the slabs are unchanged, the rebate keeps most salaries up to about ₹12.75 lakh at nil, and the two deductions worth having are the ₹75,000 standard deduction and employer NPS at up to 14% of salary. What changed on 1 April 2026 is the labelling: Section 392 instead of 192, Form 130 instead of Form 16, Form 122 instead of Forms 12B and 12BAA. Declare early, reconcile quarterly, and the March payslip holds no surprises.
