From April 1st, 2026, the Tax Deducted at Source (TDS) on salary is governed by the Income Tax Act 2025, replacing the Income Tax Act 1961 that had been in effect for over 60 years. According to reports from 1 Finance Research, while the tax rates and slabs remain unchanged, the forms, section numbers, and calculation methods have been completely restructured. Under Section 393 of the new Act, employers cut TDS only when estimated yearly income crosses the basic exemption limit, with the final tax figure calculated after applying all eligible deductions and rebates. The new tax regime continues to be the default option for all taxpayers, now codified under Section 202, with taxpayers still able to elect the old regime if it works better for their specific deductions.
Under the new tax regime, salaries up to ₹12.75 lakh become completely tax-free after applying the ₹75,000 standard deduction. As reported by 1 Finance Research, this reduces taxable income to exactly ₹12 lakh, which exceeds the ₹4 lakh basic exemption limit. Applying progressive slabs on the remaining ₹12 lakh generates tax liability of approximately ₹60,000, which is fully offset by the Section 87A rebate of up to ₹60,000, resulting in zero tax liability. The old tax regime allows more deductions including HRA and Section 80C investments, with a ₹50,000 standard deduction plus exemptions. For FY 2025-26 returns filed in 2026, taxpayers continue claiming these under the familiar Section 80C and Section 80D, while from Tax Year 2026-27 onwards, the same investments will be claimed under Section 123 and Section 126 respectively.
Employers follow a 5-step method to calculate monthly TDS, as detailed by 1 Finance Research. The process begins with estimating yearly gross salary, subtracting deductions and exemptions, applying slab rates, adding rebates and surcharges, and then dividing the annual tax by 12 months. For example, an employee earning ₹15 lakh with taxable income of ₹14.25 lakh under the new regime generates ₹93,750 in tax liability, with an average TDS rate of 6.5%. A 4% health and education cess adds ₹3,750, bringing total yearly tax to ₹97,500, or ₹8,125 monthly. The TDS threshold on interest income has been raised to ₹1 lakh, with the two separate declaration forms — 15G and 15H — merged into a single Form 121, cutting down on paperwork.
According to 1 Finance Research, TDS refunds are processed when actual tax liability is lower than the deducted amount. Employers must provide Form 130 by June 15th as the official salary TDS certificate, replacing the old Form 16. The refund process involves filing the Income Tax Return by July 31st to compare actual tax against TDS deducted. Taxpayers can check TDS details in their Form 130 and Annual Information Statement on the income tax portal, with refunds typically processed within weeks for excess deductions. For FY 2025-26 returns, the return continues under the old Act framework, while Tax Year 2026-27 onwards, the new Act provisions will apply.
