Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act requires employers to deduct tax from an employee’s salary at the time of payment. For HR and finance teams, calculating TDS accurately is one of the most complex monthly tasks.
With the introduction of the new tax slabs for FY 2026-27, understanding how TDS is calculated is more important than ever.
Old vs. New Tax Regime
Starting FY 2023-24, the New Tax Regime was made the default. However, employees can still opt for the Old Tax Regime if they have significant investments (like 80C, 80D, HRA exemptions, and Home Loan interest).
Income Tax Slabs (New Regime FY 2026-27)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 to ₹6,00,000 | 5% |
| ₹6,00,001 to ₹9,00,000 | 10% |
| ₹9,00,001 to ₹12,00,000 | 15% |
| ₹12,00,001 to ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
[!NOTE] Under the New Regime, income up to ₹7,00,000 is effectively tax-free due to the rebate under Section 87A. A Standard Deduction of ₹50,000 is also applicable.
Step-by-Step TDS Calculation
Employers must estimate the annual income of the employee and divide the total tax liability by 12 to calculate the monthly TDS.
Step 1: Calculate Gross Annual Income Include Basic, HRA, Allowances, and any bonuses. Example: ₹10,00,000
Step 2: Apply Exemptions (Old Regime Only) Deduct HRA exemption, LTA, and Section 10 exemptions. Example: ₹1,00,000 (HRA) -> Taxable drops to ₹9,00,000
Step 3: Apply Standard Deduction A flat ₹50,000 is deducted from the salary in both regimes. Taxable drops to ₹8,50,000
Step 4: Deduct Investments (Section 80C, 80D) If under Old Regime, deduct PF, LIC, PPF up to ₹1.5 Lakhs (80C), and Medical Insurance (80D). Taxable drops to ₹7,00,000
Step 5: Calculate Annual Tax Liability Apply the slab rates to the final taxable income. Let’s assume the final tax is ₹32,500. Add 4% Health & Education Cess. Total Tax = ₹33,800
Step 6: Calculate Monthly TDS Divide the annual tax by 12 months. Monthly TDS = ₹33,800 / 12 = ₹2,816 per month
[!IMPORTANT] If an employee fails to provide PAN, TDS must be deducted at a flat rate of 20% or the applicable slab rate, whichever is higher.
Simplify TDS with AccoNova
Manually keeping track of employee investment declarations, rent receipts, and tax regime switches is a nightmare.
AccoNova’s Zero-Touch Payroll allows employees to submit IT declarations directly through their portal. The system automatically computes the optimized TDS month-on-month and generates Form 16 at year-end with zero manual effort.