An employer must deduct income tax (TDS) from salary every month and deposit it, file quarterly returns and issue Form 16 at the end of the year. The challenge is that the tax depends on information that keeps changing - the employee's choice of tax regime, their declared investments, arrears, bonuses and joining date. Payroll software handles this by projecting the year's tax and spreading it across the remaining months. Here is how each step works.
Note: tax slabs, rebates, standard deduction, forms and section numbers change through Finance Acts and the new Income-tax Act - always check the rules applicable to the current financial year. Good payroll software updates these centrally.
Old vs new tax regime - collecting the employee's choice
The new tax regime is the default. An employee who wants the old regime (with deductions such as 80C and HRA exemption) must tell the employer. At the start of the year the software asks every employee to choose, on the self-service portal or app, and records the choice. Until a choice is made, TDS is worked out under the default regime.
Investment declarations and proofs
Employees on the old regime declare planned investments and expenses - provident fund, life insurance, ELSS, tuition fees, home loan interest, rent paid for HRA, and so on. The software uses declarations for monthly TDS during the year, then asks for proofs before the last quarter and recalculates using only verified amounts. Employees upload proofs themselves; HR approves them on screen instead of handling paper.
Projecting annual taxable salary
Each month the payroll engine estimates the year's income:
- Salary already paid in the year, including arrears and bonuses.
- Salary still to be paid for the remaining months at the current structure.
- Previous employer income for employees who joined mid-year (taken from their declaration).
- Minus exemptions and deductions allowed under the chosen regime, including the standard deduction.
Tax is then calculated on the projected taxable income using the applicable slabs, rebate and cess for the year.
Spreading tax evenly across the remaining months
The simplest fair method: monthly TDS = (projected annual tax − tax already deducted) ÷ months remaining.
Example: projected tax for the year is ₹60,000. By the end of September ₹24,000 has been deducted. Six months remain, so TDS from October is (₹60,000 − ₹24,000) ÷ 6 = ₹6,000 a month. If the employee receives a ₹50,000 bonus in December, the projection rises and the extra tax is spread over the remaining months - no shock deduction in March.
Quarterly returns and Form 16
TDS deducted is deposited by the due date each month, and salary TDS is reported in a quarterly return. The software produces the employee-wise deduction data in the format your tax consultant or the return preparation utility needs, so the challan figures and the return match. After the year ends it prepares the salary details for each employee's Form 16, which employees download from self-service.
Common mistakes and how software avoids them
- Deducting the whole year's balance in March because declarations were not updated - projection fixes this month by month.
- Ignoring previous employer income for mid-year joiners - the joining form captures it.
- Using declarations instead of proofs at year end - proof verification is built into the workflow.
- Regime mismatch - the employee's choice is recorded, dated and visible on their payslip.
- Challan and return mismatch - both are generated from the same locked payroll.
Netmore HRMS runs TDS alongside PF, ESI and Professional Tax in the same payroll, so one run gives you salary, statutory deductions, files and accounting entries.
Frequently asked questions
How is monthly TDS on salary calculated?
The software projects the employee's taxable salary for the full year, calculates tax under their chosen regime, subtracts tax already deducted, and divides the balance by the months remaining.
Which tax regime applies if the employee does not choose?
The new tax regime is the default. The employer uses it until the employee opts for the old regime.
Can employees submit investment proofs online?
Yes. Employees upload declarations and proofs on the self-service portal or app, and HR approves them on screen before TDS is recalculated.