TDS on Salary: How It's Calculated and Why Your Payslip Doesn't Match Your CTC

Under Section 192 of the Income Tax Act, your employer is required to estimate your total taxable salary income for the financial year, work out the tax payable on that estimate using the slab rates for whichever regime applies to you, and deduct that tax in roughly equal instalments from your remaining monthly pay. It's an ongoing projection, not a transaction-by-transaction calculation, which is exactly why it doesn't behave like a flat percentage.

The mechanics, in the order your payroll system runs them:

Estimated annual taxable salary = (Monthly gross × 12) + bonuses − exemptions and deductions
Annual tax = Slab-rate tax on that estimate (plus cess)
Monthly TDS = Remaining annual tax ÷ Remaining months in the financial year

The slab rates and available exemptions depend on whether you're under the new tax regime or the old one, a separate decision covered in full in new vs old tax regime: which is better. Everything here about how the deduction mechanism works applies regardless of which regime you've picked; only the numbers going into the formula change.

Say your monthly gross salary is ₹1,00,000 with no other components, giving an estimated annual salary of ₹12,00,000. After the standard deduction and applicable slab tax under the new regime, suppose the estimated annual tax works out to roughly ₹78,000 including cess. If this estimate was set in April with 12 months remaining, TDS for that month is approximately ₹78,000 ÷ 12 ≈ ₹6,500.

If you then receive a ₹1,00,000 bonus in October, your employer recalculates: your revised estimated annual income is now ₹13,00,000, the tax on that revised figure is higher, and the remaining months absorb the increase, so your TDS for the rest of the year rises to cover the extra tax the bonus created, not just on the bonus itself but reconciled against what should have already been withheld.

Because the whole system is a running projection, several ordinary events during the year trigger a recalculation and change your TDS for the remaining months:

• A salary revision, promotion, or mid-year increment.
• A bonus, incentive, or other one-time payment.
• Submitting investment declarations or proof of deductions partway through the year.
• Switching employers mid-year, since the new employer starts the projection fresh.
• Choosing to switch tax regimes at the start of a new financial year.

None of these mean something went wrong. They mean the estimate got more accurate. A TDS figure that looks different in December than it did in April, on an unchanged base salary, is usually just the system correcting for something that happened in between.

This is the part that trips people up before TDS even enters the picture: CTC was never designed to equal your monthly bank credit divided across 12 months. Employer PF contribution and gratuity accrual are part of CTC because they're a genuine cost to your employer, but they don't reach your account monthly. They sit in retirement accounts you can access later. Strip those out and you get gross salary; strip out employee PF, professional tax and TDS from gross salary, and what's left is your actual take-home.

Figures are illustrative and depend heavily on your specific salary structure, PF contribution rate and regime. For the full structural breakdown of how CTC steps down to gross and then to net pay, CTC vs take-home salary covers that waterfall in detail. This article is specifically about the TDS line inside it, since that's the deduction people ask about most and understand least.

• Employee Provident Fund (PF). Typically 12% of basic salary, matched by an equal employer contribution that's part of CTC but not your monthly pay.
• Professional tax. A small, state-specific deduction, usually a fixed slab amount rather than a percentage, capped at a modest annual total in most states.
• TDS (income tax). Covered above, the one that actually moves in response to income changes rather than staying fixed.

If you want to work the whole thing in reverse, starting from a target take-home figure and finding the gross salary that produces it, how to calculate gross salary from net salary walks through exactly that.

After the financial year closes, your employer issues Form 16, a certificate showing your total salary paid, the exemptions and deductions applied, and the exact TDS deducted and deposited with the government on your behalf across the year. When you file your income tax return, you compare your actual final tax liability against what was already withheld. If the running projection over-collected, you get a refund; if it under-collected, most often because a mid-year change wasn't reported to payroll in time, you pay the balance. See what is Form 16 for how to actually read it and check it against your own payslips.

It's worth being precise here because the word "TDS" covers genuinely different mechanisms depending on who's being paid. Everything above is Section 192: TDS on an employer-employee salary relationship, driven by your projected annual income and the slab rates. If you're a freelancer or consultant invoicing a business client instead of drawing a salary, the client deducts TDS under a different section entirely, commonly 194J for professional services, at a fixed percentage of that specific payment, completely independent of your total annual income. KaroDesk's TDS Calculator covers that contractor/professional-fee scenario, not the salary scenario described in this article, worth knowing before you plug numbers into either one expecting the other answer.