How to handle TDS on salary correctly — the most common payroll mistakes

TDS (Tax Deducted at Source) on salary under Section 192 of the Income Tax Act is the most significant payroll compliance obligation for most Indian employers. Errors in TDS computation — either over-deduction or under-deduction — create problems for both the employer and the employee. The most common mistakes are predictable and preventable.

Mistake 1: not collecting investment declaration from employees at the start of the year. At the beginning of each financial year, employees should submit a declaration of their planned tax-saving investments (80C, 80D, HRA, LTA, NPS, etc.) so TDS is computed correctly throughout the year. Companies that don't collect these declarations either under-deduct TDS (creating a large deduction in the final months when actual investments are not sufficient) or over-deduct throughout the year.

Mistake 2: ignoring the previous employer's salary for employees who joined mid-year. A new employee joining in July must provide Form 12B — a statement of salary and TDS from their previous employer — so that TDS for the remainder of the year is calculated on their total annual income, not just on what they earn with you. Ignoring this results in under-deduction and a year-end tax liability for the employee.

Mistake 3: not collecting actual investment proof (Form 12BB) at year-end. In January–March, employees must submit proof of actual investments — not just declarations. Companies that accept declarations without proof allow employees to claim deductions they haven't made, resulting in under-deduction of TDS.

Mistake 4: computing TDS on old tax regime when the employee has opted for new tax regime (or vice versa). From FY 2023-24, employees can choose the tax regime — old (with deductions) or new (lower slab rates, no deductions). The employer must compute TDS under the regime the employee has chosen and indicated to the employer.

Mistake 5: missing TDS on perquisites — company-provided car, ESOP perquisite at exercise, accommodation. These are taxable perquisites that must be added to salary income and TDS deducted.