Every April, your employer asks one important question: Which tax regime do you want to choose for the new financial year? Your answer directly affects the Tax Deducted at Source (TDS) from your salary every month and, ultimately, your monthly take-home pay.
With the new tax regime continuing as the default option and the Union Budget 2025 introducing revised tax slabs and an enhanced rebate under Section 87A, understanding how TDS under the new tax regime on salary is calculated has become more important than ever. Choosing the wrong regime could result in higher TDS deductions during the year or missed tax-saving opportunities.
In this guide, you’ll learn how salary TDS is calculated under the new tax regime for FY 2025-26 (AY 2026-27), the latest tax slabs, the deductions that are still available, and the practical steps you can take to optimise your tax outgo and maximise your take-home salary.
What Is TDS on Salary and Why Does the Regime Choice Matter?
Tax Deducted at Source (TDS) is the income tax that your employer deducts from your salary every month before paying it to you. Under the Income-tax Act, employers are required to estimate your annual tax liability and deduct the appropriate amount of tax throughout the financial year. The deducted tax is then deposited with the government on your behalf.
The amount of TDS deducted depends largely on the tax regime you choose. Your selected regime determines the applicable tax slabs, deductions, exemptions, and ultimately your annual tax liability.
Under the old tax regime, you can claim various deductions and exemptions such as:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Section 80C investments (up to ₹1.5 lakh)
- Section 80D (health insurance)
- Home loan interest deduction under Section 24(b)
- Other eligible deductions
Under the new tax regime, most of these deductions and exemptions are not available. Instead, you benefit from lower tax rates, an enhanced standard deduction of ₹75,000 for salaried employees and pensioners, and an increased rebate under Section 87A.
The New Tax Regime Is the Default Option
From FY 2023-24 onwards, the new tax regime became the default tax regime for individual taxpayers.
This means that if you do not inform your employer of your preferred tax regime at the beginning of the financial year, your salary TDS will generally be calculated under the new tax regime by default.
If the old tax regime is more beneficial based on your deductions and exemptions, you should communicate your choice to your employer within the prescribed timeline so that the correct TDS is deducted during the year.
New Tax Slabs Under the New Regime for FY 2025-26
The following tax slabs apply under the new tax regime for FY 2025-26 (AY 2026-27).
| Annual Taxable Income | Tax Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 to ₹8,00,000 | 5% |
| ₹8,00,001 to ₹12,00,000 | 10% |
| ₹12,00,001 to ₹16,00,000 | 15% |
| ₹16,00,001 to ₹20,00,000 | 20% |
| ₹20,00,001 to ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
In addition, eligible resident individuals with a taxable income up to ₹12 lakh can claim a rebate of up to ₹60,000 under Section 87A. For salaried employees and pensioners, the ₹75,000 standard deduction effectively increases the zero-tax salary threshold to ₹12.75 lakh, provided there is no income taxed at special rates (such as certain capital gains).
What Does This Mean for Your Monthly TDS?
Suppose your annual gross salary is ₹12 lakh.
- Gross Salary: ₹12,00,000
- Less: Standard Deduction: ₹75,000
- Taxable Income: ₹11,25,000
Since the taxable income is below ₹12 lakh, the tax calculated under the slab rates is fully offset by the Section 87A rebate, reducing your income tax liability to zero.
As a result, your employer may not deduct any TDS from your monthly salary, allowing you to receive a higher take-home salary throughout the financial year.
However, this assumes that:
- your salary is your only taxable income,
- you do not have income taxed at special rates (such as certain capital gains), and
- your employer has complete and accurate information about your income.
If you have additional taxable income from sources such as fixed deposits, rent, or capital gains, your final tax liability may differ, and additional tax may become payable while filing your Income Tax Return (ITR).reduces your tax to zero. Therefore, your monthly TDS deduction could be nil, which means more cash in hand every month.
Key Change 1: Higher Standard Deduction Reduces Your Taxable Salary
One of the biggest reliefs for salaried employees and pensioners is the enhanced standard deduction under the new tax regime.
For FY 2025-26 (AY 2026-27), the standard deduction continues at ₹75,000, compared with ₹50,000 under the old regime. Since this deduction is available automatically, it directly reduces your taxable salary before your employer calculates TDS.
Similarly, the family pension deduction remains ₹25,000 or one-third of the pension, whichever is lower, providing additional relief to eligible family pensioners.
Practical Example
Consider Ramesh, a software engineer in Pune with an annual gross salary of ₹14,00,000.
| Particulars | Amount |
|---|---|
| Gross Salary | ₹14,00,000 |
| Less: Standard Deduction | ₹75,000 |
| Taxable Salary | ₹13,25,000 |
Under the new tax regime:
- Income tax (before cess): approximately ₹93,750
- Health & Education Cess (4%): ₹3,750
- Total tax liability: ₹97,500
- Approximate monthly TDS: ₹8,125
Without the enhanced standard deduction, Ramesh’s taxable income would have been ₹13.50 lakh, resulting in a slightly higher annual tax liability and higher monthly TDS.
Key Change 2: Enhanced Section 87A Rebate
Another major benefit under the new tax regime is the enhanced Section 87A rebate.
Eligible resident individuals with a taxable income up to ₹12 lakh can claim a rebate of up to ₹60,000, reducing their income tax liability to zero.
For salaried employees, the ₹75,000 standard deduction increases the effective zero-tax salary threshold to ₹12.75 lakh, provided there is no income taxed at special rates.
Who Benefits the Most?
The revised rebate particularly benefits:
- Salaried employees earning up to ₹12.75 lakh
- Young professionals and first-time taxpayers
- Employees with minimal deductions under the old regime
- Individuals without significant HRA or home loan benefits
- Pensioners receiving taxable pension income
For many employees in this income range, monthly TDS may reduce substantially or even become nil, improving monthly cash flow.
Key Change 3: Form 12BAA Makes TDS More Accurate
To improve the accuracy of salary TDS calculations, the Income-tax Department introduced Form 12BAA.
This form enables employees to inform their employer about tax already deducted (TDS) or tax collected at source (TCS) on other income during the financial year, allowing the employer to consider these credits while computing salary TDS.
Earlier, employees often had to wait until filing their Income Tax Return (ITR) to claim these credits, leading to excess TDS deductions during the year.
What You Should Do
To make the most of this facility:
- Submit Form 12BAA to your employer whenever applicable.
- Report any TDS deducted on income such as bank interest or rent.
- Provide details of any eligible TCS credits.
- Update your employer if your income situation changes during the year.
- Keep supporting documents available for verification if required.
This helps ensure that the TDS deducted from your salary is closer to your actual tax liability, reducing the chances of large refunds or tax demands at the time of filing your return.
Key Change 4: Old Regime vs New Regime for Salary TDS
The tax regime you choose directly affects how your employer computes monthly TDS.
| Particulars | Old Tax Regime | New Tax Regime |
|---|---|---|
| Standard Deduction | ₹50,000 | ₹75,000 |
| HRA Exemption | Available | Not Available |
| Section 80C | Up to ₹1.5 lakh | Not Available |
| Section 80D (Health Insurance) | Available | Not Available |
| Employer NPS Contribution (Section 80CCD(2)) | Available | Available |
| Zero-Tax Threshold (with applicable rebate) | Lower | Up to ₹12 lakh taxable income |
| Default Regime | No | Yes |
Generally:
- The new regime suits employees with limited deductions and exemptions.
- The old regime may still be beneficial for employees claiming substantial HRA, home loan interest, health insurance, and Section 80C deductions.
Choosing the appropriate regime at the beginning of the financial year helps ensure that your monthly TDS closely matches your final tax liability.
One Important Deduction Still Available
Although most deductions have been withdrawn under the new regime, one valuable benefit continues.
The employer’s contribution to the National Pension System (NPS) under Section 80CCD(2) remains deductible.
If your employer offers NPS as part of your salary structure, this deduction can meaningfully reduce your taxable income even under the new tax regime. It is worthwhile checking your CTC structure with your HR or payroll team.
Key Change 5: Switching Tax Regimes and Its Impact on TDS
Salaried employees enjoy the flexibility to choose between the old and new tax regimes every financial year.
Typically, employers ask employees to declare their preferred regime at the beginning of the year so that TDS can be computed correctly.
Keep these points in mind:
- Inform your employer of your preferred regime at the start of the financial year.
- If no choice is communicated, salary TDS is generally computed under the new tax regime.
- You can still change your regime while filing your Income Tax Return, subject to the provisions of the Income-tax Act.
- If your final choice differs from the regime used for TDS during the year, you may receive a refund or have additional tax payable when filing your return.
- Taxpayers having business or professional income are subject to different switching rules than salaried employees.
Choosing the correct tax regime at the beginning of the year helps ensure that your monthly TDS accurately reflects your expected tax liability, improves your monthly cash flow, and reduces the likelihood of unexpected tax adjustments when filing your return.
How to Decide Which Regime Is Better for You
There is no universal answer to this question. The right tax regime depends on your income, eligible deductions, salary structure, and financial commitments. While the new tax regime benefits many salaried employees, the old regime can still be advantageous if you claim substantial deductions and exemptions.
As a general rule:
- The new tax regime is usually more beneficial if your deductions under the old regime are relatively low and you prefer a simpler tax structure.
- The old tax regime may result in lower tax if you regularly claim deductions such as:
- Section 80C investments (PPF, EPF, ELSS, life insurance, etc.)
- House Rent Allowance (HRA)
- Section 80D (health insurance)
- Home loan interest under Section 24(b)
- Other eligible deductions and exemptions
A Practical Framework
The following guidelines can help you evaluate both options:
- If your total deductions and exemptions under the old regime are around ₹3.75 lakh or more, the old regime may be more tax-efficient, depending on your income level.
- If your deductions are well below ₹3.75 lakh, the new tax regime is often the better choice because of its lower slab rates and simplified structure.
- If your gross salary is up to ₹12.75 lakh, the new regime can result in zero income tax for many salaried employees after considering the ₹75,000 standard deduction and the Section 87A rebate, provided there is no income taxed at special rates.
- For individuals earning above ₹15 lakh, the choice becomes highly dependent on the value of deductions claimed under the old regime. A detailed comparison is essential before making a decision.
Always Compare Both Regimes
Rather than relying on general rules, calculate your tax liability under both regimes using your actual:
- Salary structure
- Investment declarations
- Home loan details
- Health insurance premiums
- Other eligible deductions and exemptions
Even a modest difference in deductions can change which regime offers the lower tax liability.
Smart Steps to Manage TDS on Salary in FY 2025-26
Understanding the new tax rules is only the first step. Managing your TDS on salary effectively throughout the financial year can improve your monthly cash flow and help you avoid unnecessary refunds or tax demands when filing your Income Tax Return (ITR).
Here are some practical steps to follow:
1. Declare Your Tax Regime Early
Inform your employer about your preferred tax regime at the beginning of the financial year, ideally in April. This allows your payroll team to calculate TDS correctly from the first salary itself.
2. Estimate Your Eligible Deductions
Before choosing a regime, calculate all the deductions and exemptions you are eligible to claim under the old regime, including:
- Section 80C investments
- House Rent Allowance (HRA)
- Section 80D (health insurance)
- Home loan interest under Section 24(b)
- Employer NPS contribution under Section 80CCD(2)
- Any other applicable deductions
Comparing both regimes using your actual numbers leads to a more informed decision.
3. Submit Form 12BAA, Where Applicable
If tax has already been deducted or collected on your other income during the year, provide the relevant details to your employer through Form 12BAA, wherever applicable.
This enables your employer to factor those credits into your salary TDS calculation, helping reduce excess tax deductions during the year.
4. Review Your Tax Position During the Year
Your financial situation can change during the year due to events such as:
- Purchasing a home
- Starting or repaying a home loan
- Moving to rented accommodation
- Salary revision
- Receiving additional income
Review your tax position whenever a significant change occurs. If necessary, update your investment declarations or provide revised information to your employer in accordance with your company’s payroll process.
5. File Your Income Tax Return on Time
Even if the correct amount of TDS has been deducted, filing your ITR before the due date is essential.
Timely filing helps you:
- Claim any eligible tax refund
- Pay any additional tax due, if applicable
- Avoid interest and penalties
- Maintain a clean tax compliance record
6. Align Your Investments With Your Financial Goals
Your investment decisions should not be driven solely by tax savings.
If you choose the new tax regime, many traditional tax-saving deductions are no longer available. Instead of investing purely to claim deductions, you can focus on building a portfolio that matches your:
- Financial goals
- Investment horizon
- Risk tolerance
- Liquidity requirements
Goal-based investing often results in better long-term financial outcomes than investing only to reduce tax.
Many investors continue investing in tax-saving products simply out of habit. While these products may still have value, they should fit your overall financial plan rather than being selected solely to reduce TDS. help you see the full picture and make decisions that work in your favour for the long term.
Final Words
The changes to TDS on salary under the new tax regime for FY 2025-26 provide meaningful tax relief for many salaried employees. With revised tax slabs, a ₹75,000 standard deduction, an enhanced Section 87A rebate, and the introduction of Form 12BAA, the new regime offers a simpler and more tax-efficient experience for a large section of taxpayers.
That said, there is no one-size-fits-all solution. The most suitable tax regime depends on your salary structure, eligible deductions, investments, home loan commitments, and overall financial goals. Before making your choice, compare your tax liability under both regimes using your actual income and deductions rather than relying on general assumptions.
Remember that tax planning is only one part of your financial journey. The money you save through efficient tax planning can be redirected towards investments that support your long-term objectives, whether that means building wealth, planning for retirement, funding your children’s education, or creating an emergency corpus.
Frequently Asked Questions
1. What happens if I do not inform my employer about my tax regime choice?
If you do not declare your preferred tax regime, your employer will generally compute your TDS under the new tax regime, as it is the default regime.
If the old regime would have been more beneficial because of your deductions and exemptions, you may end up with higher TDS during the year. You can choose the appropriate regime while filing your Income Tax Return (subject to the applicable provisions of the Income-tax Act), and any excess tax deducted can be claimed as a refund.
2. Can I switch from the new tax regime to the old regime after the financial year has started?
For TDS purposes, employers generally calculate tax based on the regime you declare at the beginning of the financial year and may not revise it during the year.
However, salaried individuals can choose the appropriate tax regime while filing their Income Tax Return, subject to the applicable rules. If the regime selected while filing differs from the one used for TDS calculations, the difference will be adjusted through a tax refund or additional tax payable, as applicable.
3. Is HRA exemption available under the new tax regime?
No. House Rent Allowance (HRA) exemption is generally not available under the new tax regime.
If you receive a substantial HRA and pay significant rent, compare your tax liability under both regimes before making your choice, as the old regime may still result in lower overall tax.
4. What is Form 12BAA, and when should I submit it?
Form 12BAA enables employees to provide details of eligible TDS and TCS credits arising from non-salary income so that employers can consider them while calculating salary TDS.
Where applicable, you should submit the form to your employer at the beginning of the financial year or whenever there is a material change in your TDS or TCS credits during the year. This helps improve the accuracy of your monthly TDS deductions.
5. If my salary is below ₹12.75 lakh, will my employer deduct any TDS?
For many salaried employees opting for the new tax regime, a gross salary of up to ₹12.75 lakh may result in no income tax liability after considering the ₹75,000 standard deduction and the Section 87A rebate, provided the conditions for the rebate are satisfied, and there is no income taxed at special rates.
If your employer has all the necessary information and computes your taxable income correctly, TDS may be nil. However, if you have additional taxable income, taxable perquisites, or income taxed at special rates (such as certain capital gains), your final tax liability and TDS position may differ. Always review your overall income before assuming that no TDS will be deducted.
Disclaimer
The information provided in this blog is for educational and informational purposes only and should not be construed as investment advice. Please consult a qualified financial advisor before making any investment decisions. Shashikant Chanderkumar Mudaliar (ARN: 319377), operating under the brand name VSJ FinMart, is an AMFI-registered Mutual Fund Distributor (MFD) and does not provide investment advisory services. Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Please read all scheme-related documents carefully before investing. Registration details can be verified at www.amfiindia.com/locate-distributor.