TDS on Salary vs TDS on Fixed Deposit

TDS on salary and TDS on fixed deposits are calculated differently. Salary TDS is based on projected annual income and slab rates. FD TDS is deducted at a flat rate once the interest threshold is crossed. When total income is combined at filing, this structural difference can influence the refund outcome.

How is TDS on Salary Calculated?

Under Section 192 of the Income Tax Act, employers deduct TDS on salary every month. The deduction is based on your estimated total income for the full financial year. Please note that no TDS will be deducted if your annual income is less than the taxable limit - ₹2.5 lakh (old tax regime) and ₹4 lakh (new tax regime).

Below is the step-by-step process.

Step 1: Estimate Gross Annual Salary

The employer first computes the employee’s projected total salary income for the financial year.

Components Typically Included

This gives the Gross Estimated Income for the year.

Step 2: Apply Exemptions and Deductions (Based on Tax Regime)

The deductions available depend on whether the employee opts for the old tax regime or the new tax regime under Section 115BAC.

A. Deductions Available Under the New Tax Regime (FY 2025–26)

B. Deductions Available Under the Old Tax Regime

Step 3: Compute Net Taxable Income

Once eligible deductions and exemptions are applied:

Formula:

Net Taxable Income = Gross Annual Income – Total Eligible Deductions & Exemptions

When is No TDS Required?

TDS is not required if tax liability becomes nil after applying:

• Basic exemption limit
• Eligible deductions
• Section 87A rebate (if applicable)

Employers must evaluate rebate eligibility under the chosen regime before deducting TDS.

Step 4: Calculate Annual Tax Liability

After arriving at the Net Taxable Income:

1. Apply slab rates based on the selected tax regime

2. Add surcharge (if applicable)

3. Add Health & Education Cess @ 4%

4. Reduce rebate under Section 87A (if eligible)

This results in the Total Annual Tax Liability.

Step 5: Monthly TDS Deduction

The final annual tax payable is divided by the number of remaining months in the financial year.

Formula: 

Monthly TDS = Total Annual Tax Liability ÷ Remaining Months of Service

If salary structure or declarations change during the year, employers adjust TDS in subsequent months.

How TDS on Fixed Deposit Works?

TDS on fixed deposit interest is governed by Section 194A of the Income Tax Act. Banks deduct tax once the total interest earned in a financial year crosses the prescribed limit.

As per current rules:

If interest exceeds this limit, the bank deducts TDS at:

• 10% if PAN is provided
• 20% if PAN is not provided

The key difference is that the bank does not calculate your total income. It does not apply to your slab rate. It deducts tax at a flat rate once the interest crosses the threshold.

That said, if your income is below the taxable limit, you can file Form 15G or Form 15H.

Is TDS Deducted from Salary Every Month?

Yes. Under Section 192 of the Income Tax Act, TDS on salary is deducted at the time of payment. Since salaries are generally paid monthly, employers deduct TDS each month.

The deduction is based on the employee’s estimated annual taxable income for the financial year and is spread across the remaining months of service.

If an employer fails to deduct or deposit TDS as required, they may be liable to pay interest and penalties under the Income Tax Act.

Is TDS on Salary Mandatory?

Yes. TDS deduction under Section 192 is mandatory for employers if the employee’s estimated annual taxable income exceeds the applicable basic exemption limit under the chosen tax regime.

If the projected income is below the taxable threshold after considering deductions and rebate (if applicable), no TDS is required.

The obligation to deduct TDS lies with the employer, and it applies even if the employee has not provided a PAN (in such cases, higher TDS provisions may apply as per law).

How Can You Claim Credit for TDS on Salary?

There is no separate process to “claim” TDS during the year.

TDS deducted by your employer is reflected in:

• Form 16
• Form 26AS
• Annual Information Statement (AIS)

When filing your Income Tax Return (ITR), the TDS amount is automatically adjusted against your total tax liability.

If the total TDS deducted exceeds your final tax payable, the excess amount becomes refundable and is processed after return verification.

Is TDS on Salary Refundable?

Yes. TDS on salary is refundable if the total tax deducted during the year is higher than the employee’s actual tax liability.

This may happen due to:

• Overestimation of income
• Lower actual investments than declared (or vice versa)
• Mid-year job changes
• Additional deductions becoming available later in the year

If excess tax has been deducted, the refund is issued after filing and verifying the income tax return, subject to processing by the Income Tax Department.