TDS calculation
How TDS is calculated on vendor payments and employee salaries — auto-fill flow, worked examples, higher rates, and overrides
TDS calculation
When you record a bill, the system pre-fills the TDS rate from the vendor's assigned section and shows the estimated deduction. You can override the rate before saving.
Auto-fill flow
When you create a bill or record a payment, the system follows these steps:
- Check vendor section — reads the TDS section assigned to the vendor (e.g., 194C, 194J, 194I).
- Verify PAN — confirms the vendor has a valid PAN on file. If PAN is missing, the rate is raised to at least 20% per Section 206AA.
- Check threshold — if the bill amount is below the section's annual threshold, a warning appears. You decide whether TDS applies based on aggregate payments to that vendor during the year.
- Apply rate — pre-fills the TDS rate and shows the estimated deduction. The net payment reflects the reduced amount.
Non-salary TDS examples
Section 194J — Professional fees
You pay a consultant ₹1,00,000 for professional services:
| Field | Value |
|---|---|
| Gross payment | ₹1,00,000 |
| TDS section | 194J (professional) |
| TDS rate | 10% |
| TDS amount | ₹10,000 |
| Net payment to vendor | ₹90,000 |
The threshold for Section 194J is ₹50,000 (FY 2025-26). Since ₹1,00,000 exceeds this limit, TDS applies.
Section 194C — Contractor payment
You pay a contractor (individual) ₹50,000 for a project:
| Field | Value |
|---|---|
| Gross payment | ₹50,000 |
| TDS section | 194C (individual) |
| TDS rate | 1% |
| TDS amount | ₹500 |
| Net payment to contractor | ₹49,500 |
Section 194C has two threshold checks: ₹30,000 for a single payment and ₹1,00,000 for aggregate payments in the year. This ₹50,000 single payment exceeds ₹30,000, so TDS applies.
Note: For companies, firms, and other non-individual entities, the rate is 2% instead of 1%.
Section 194I — Rent
You pay monthly rent of ₹60,000 for your office:
| Field | Value |
|---|---|
| Monthly rent | ₹60,000 |
| TDS section | 194I (land & building) |
| TDS rate | 10% |
| TDS amount | ₹6,000 |
| Net rent payment | ₹54,000 |
The threshold for Section 194I is ₹50,000 per month (₹6,00,000 per year for FY 2025-26). Since ₹60,000 exceeds this, TDS applies from the first month.
Salary TDS calculation
Salary TDS under Section 192 uses income tax slab rates instead of a flat percentage. The system estimates the employee's annual tax liability and deducts TDS proportionally each month.
Calculation steps
- Gross annual salary — total of basic pay, HRA, special allowance, and other components across 12 months.
- Less: Standard deduction — ₹75,000 (new regime, FY 2025-26).
- Less: Other exemptions — HRA exemption under Section 10(13A), if applicable.
- Taxable income — gross salary minus all deductions.
- Tax on taxable income — apply the new regime slab rates.
- Less: Rebate under Section 87A — up to ₹60,000 if taxable income does not exceed ₹12,00,000.
- Add: Health & Education Cess — 4% on the tax amount after rebate.
- Monthly TDS — divide the annual tax by 12 (or remaining months in the year).
Worked example
An employee earns ₹15,00,000 gross annual salary:
| Step | Calculation | Amount |
|---|---|---|
| Gross salary | ₹15,00,000 | |
| Less: Standard deduction | ₹75,000 | |
| Taxable income | ₹15,00,000 − ₹75,000 | ₹14,25,000 |
| Tax: 0% on first ₹4,00,000 | ₹0 | |
| Tax: 5% on ₹4,00,001–₹8,00,000 | ₹4,00,000 × 5% | ₹20,000 |
| Tax: 10% on ₹8,00,001–₹12,00,000 | ₹4,00,000 × 10% | ₹40,000 |
| Tax: 15% on ₹12,00,001–₹14,25,000 | ₹2,25,000 × 15% | ₹33,750 |
| Total tax before cess | ₹93,750 | |
| No rebate (income exceeds ₹12,00,000) | — | |
| Health & Education Cess | ₹93,750 × 4% | ₹3,750 |
| Annual tax | ₹97,500 | |
| Monthly TDS | ₹97,500 ÷ 12 | ₹8,125 |
Zero-tax threshold
Under the new regime, employees with gross salary up to ₹12,75,000 pay zero tax. The standard deduction of ₹75,000 brings their taxable income to ₹12,00,000, and the Section 87A rebate (₹60,000) eliminates the entire tax liability.
New regime slab rates (FY 2025-26)
| Income slab | Rate |
|---|---|
| Up to ₹4,00,000 | 0% |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
No PAN — higher rate
Under Section 206AA, if a vendor or employee does not provide a valid PAN, TDS is deducted at the highest of:
- The rate specified in the relevant section
- The rate in force under the Finance Act
- 20%
In practice, this means 20% for most sections. For example, a contractor payment normally attracts 1% TDS under Section 194C — without PAN, the system applies 20% instead.
An inoperative PAN (not linked with Aadhaar) is treated the same as no PAN. The system flags vendors with missing PAN during bill creation.
Note: Section 206AB (higher rates for non-filers of income tax returns) was abolished from 1 April 2025. You no longer need to verify the deductee's ITR filing status.
Overriding TDS
You can manually adjust the TDS rate on any bill:
- Lower deduction certificate — when a vendor holds a Section 197 certificate for a reduced rate or nil deduction. Record the certificate in the vendor's profile and the system applies the reduced rate automatically. See Lower deduction certificates.
- Exemption or specific agreement — when a payment is exempt from TDS or covered by a contractual arrangement, change the TDS rate on the bill before saving.
Related articles
- TDS sections — section-wise rates, thresholds, and vendor configuration
- TDS overview — what TDS is and your compliance responsibilities
- TDS challans — depositing deducted TDS to the government
- Lower deduction certificates — applying reduced rates with Section 197 certificates
- Form 16 generation — annual salary TDS certificates