The idea in one paragraph
The employer estimates what the employee's tax for the full financial year will be, divides it across the remaining months, deducts that much from each salary and deposits it with the government. Every time salary, bonus or declarations change, the estimate is recalculated and the remaining months absorb the difference.
Two regimes, one choice
- The new regime offers lower slab rates with very few exemptions and deductions
- The old regime keeps HRA, 80C, 80D and similar benefits at higher slab rates
- The employee chooses for the year; the employer computes on that basis
- Where no choice is communicated, the default regime applies
- The choice made with the employer does not stop a different final position at return filing
The annual cycle
| When | What happens |
|---|---|
| Start of the financial year | Employee declares regime and planned investments |
| Every month | Payroll recomputes projected tax and deducts one instalment |
| Mid-year | Salary revisions, bonuses and joiners change the projection |
| Last quarter | Investment proofs are collected and verified |
| After verification | Projection is corrected; remaining months absorb the difference |
| Year end | Annual TDS statement and Form 16 data are produced |
Common declaration heads
- Section 80C — provident fund, life insurance, tuition fees, principal repayment and similar
- Section 80D — health insurance premium for self and dependants
- HRA exemption — rent paid, with landlord details where the annual rent is significant
- Home-loan interest under the house-property head
- Previous-employer income for mid-year joiners
- Other income declared voluntarily by the employee
Where organisations get it wrong
- Collecting declarations only in January, creating a heavy last-quarter deduction
- Ignoring previous-employer income for mid-year joiners
- Accepting proofs without verification, then correcting after year end
- Not recomputing tax after arrears, bonus or a mid-year revision
- Treating reimbursements as exempt without the supporting bills
Note
Rates, slabs, limits and due dates change with each Finance Act. Treat this page as the process map and confirm current rates with your tax advisor or the department's official notifications before applying them.
This resource is shared for general guidance. Rules, rates and due dates change and vary by state and establishment — confirm the current position with your advisor before acting on it.
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