Quick Answer

In India, salary is taxed through TDS (Tax Deducted at Source), which the employer deducts every month based on the employee’s projected annual income and chosen tax regime. Tax is calculated on taxable salary after eligible deductions and exemptions, under either the new regime (lower rates, fewer deductions, the default) or the old regime (more deductions and exemptions). Under the new regime for FY 2026-27, salary up to ₹12,75,000 a year can attract zero tax after the standard deduction and rebate. Employers also deduct Provident Fund (12% of basic), Professional Tax (up to ₹2,500 per year, state-specific), and ESI (3.25% employer share, for salaries up to ₹21,000 per month), and issue Form 16 each year.

How is Salary Taxed in India?

Salary in India is taxed under the head “Income from Salary” and collected through TDS, a withholding system where the employer deducts income tax before paying salary. The employer estimates the employee’s annual taxable income, applies the chosen tax regime and slab rates, deducts tax in twelve monthly instalments, deposits it with the government, and reports it.

Taxable salary is the gross salary minus exemptions (such as House Rent Allowance where eligible) and deductions (such as the standard deduction, and Section 80C investments under the old regime). The tax is then calculated on the remaining amount using the slab rates below. A 4% health and education cess applies on the tax.

Income Tax Slabs in India 2026 (Old vs New Regime)

India runs two parallel regimes. The new regime is the default and offers lower rates with fewer deductions. The old regime keeps higher rates but allows exemptions and deductions like HRA, 80C, and 80D.

New Tax Regime Slabs (FY 2026-27)

Standard deduction: ₹75,000.

With the Section 87A rebate, a salaried employee earning up to ₹12,75,000 a year can have zero tax under the new regime.

Old Tax Regime Slabs (FY 2026-27)

Standard deduction: ₹50,000.

Exemptions and deductions such as HRA, 80C (up to ₹1,50,000) and 80D apply.

A 4% health and education cess applies under both regimes.

Old vs New Regime – Employer View

Employees choose the regime, but employers must support payroll for both. The new regime usually reduces payroll administration for large teams.

How TDS on Salary is Calculated, with an Example

Take an employee on a gross salary of ₹15,00,000 a year under the new regime for FY 2026–27.

The same employee at ₹12,75,000 or less would pay zero tax under the new regime because of the standard deduction and the Section 87A rebate.

To model full employment cost including statutory contributions, use the India employee cost calculator.

Salary Components Subject to Tax

Most salary components are taxable unless specifically exempt.

• Basic pay is fully taxable and forms the base for PF and gratuity.
• House Rent Allowance (HRA) can be partly exempt under the old regime when supported by rent proof.
• Special allowances, bonuses, and performance pay are fully taxable.
• Perquisites such as company accommodation or a vehicle are valued and taxed under prescribed rules.
• ESOPs are taxed as a perquisite at exercise, with capital gains tax at sale.

For how to structure these efficiently, see tax optimization in India, and for salary composition see the salary structure in India guide.

Mandatory Salary Deductions Employers Must Manage

Beyond income tax, employers deduct and deposit several statutory amounts. A lapse is treated as an employer failure, not an employee one.

Professional Tax is a state-level levy, so rates and filing differ by state, which creates real complexity for companies hiring across multiple locations.

Salary Tax Compliance for Employers

Salary tax compliance runs all year, regardless of whether an employee is serving a probation period in India or has been confirmed. Employers calculate and deduct TDS monthly, deposit it on time, file quarterly TDS returns (Form 24Q), reconcile annually, and issue Form 16 to each employee.

Errors in Form 16, late deposits, or mismatches between tax deducted and deposited lead to interest, penalties, and audit exposure.

For foreign companies, this is where salary taxation meets payroll compliance risk, because Indian authorities look to the legal employer when something goes wrong. Running payroll without a recognised employer presence in India can also raise permanent establishment questions and misclassification disputes.

How Asanify Handles Salary Tax and Payroll in India

Asanify runs a compliance-first employer of record and payroll platform in India, backed by a direct legal entity in Kolkata. It manages TDS calculation and deposit, automated Form 24Q generation, Form 16 issuance, and PF, ESI, professional tax, and gratuity under one framework so salary tax is handled correctly each month rather than patched across vendors.

Pricing is USD 99 per employee per month for India, with a full HRMS included at no extra charge. Asanify is rated 4.9 out of 5 on G2 and ranks number 1 on G2 for ease of use in Core HR and Payroll, and it onboards employees in as little as 48 hours.

For companies hiring without a local entity, the Employer of Record India model means salary tax is calculated, deducted, and filed under a locally compliant employer, while the company keeps full operational control of the team.

For payroll specifics, see Payroll Outsourcing.

Conclusion

Understanding salary tax in India is essential for both employers and employees to ensure accurate TDS deductions, statutory compliance, and smooth payroll operations. By staying updated on the latest tax slabs, deductions, and filing requirements, businesses can reduce compliance risks and avoid costly penalties. For global companies hiring in India, partnering with an Employer of Record like Asanify simplifies payroll, tax management, and statutory filings while ensuring full compliance with Indian employment laws.

Frequently Asked Questions

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.