TDS on salary under the Income-tax Act, 2025: section 392, new regime default and Forms 124, 130 and 138

From 1 April 2026, TDS on salary is governed by the Income-tax Act, 2025, where section 392 replaces section 192 of the 1961 Act, and by the Income-tax Rules, 2026. The familiar forms have new numbers: the employee's statement of claims (old Form 12BB) is Form 124, the perquisites statement (old 12BA) is Form 123, the quarterly salary TDS return (old Form 24Q) is Form 138, and the annual salary TDS certificate (old Form 16) is Form 130, to be issued by 15 June after the tax year. The new tax regime remains the default; an employee who wants the old regime must tell the employer. Payroll software must apply all of this, project tax every month and generate the new forms. Form 16 was still issued in June 2026 for FY 2025-26, because that year fell under the old Act.

This guide is part of the payroll and HR software comparison overview. It explains what the software must do; it is not personal tax advice.

Old and new references at a glance

Form numbers come from the Income-tax Rules, 2026 as summarised by the department's FAQs and professional commentary. Confirm on the Income Tax Department website, which can be slow or refuse automated access, and on the e-filing portal.

How the monthly TDS calculation works

The employer estimates the employee's taxable salary for the whole tax year, calculates tax under the chosen regime, and deducts it in equal parts over the remaining months, adjusting as salary, declarations and proofs change.

Illustrative example, new regime, tax year 2026-27. Annual salary ₹14,00,000, no other income declared.

Rebate case. Salary ₹12,50,000: taxable ₹11,75,000; tax before rebate = ₹20,000 + ₹37,500 = ₹57,500, fully covered by the rebate of up to ₹60,000 for income up to ₹12 lakh under the new regime. TDS = nil. Software that ignores the rebate over-deducts every month.

Slabs and rebate are from the 2025 Act as summarised in official and professional sources for tax year 2026-27; check them each budget.

New regime by default, old regime on request

Under section 202 the new regime applies unless the taxpayer opts out. In payroll this means:

• the software assumes the new regime unless the employee submits an option for the old regime;
• the employee's choice for TDS purposes is usually captured at the start of the year in the self-service portal;
• employees without business income can still choose the regime when filing their return, so the payroll choice is not final, but a wrong choice can cause short deduction and interest;
• under the old regime, claims for HRA, home loan interest and Chapter VIII deductions (the old 80C, 80D and so on, now renumbered) are declared on Form 124 with proofs.

The software should show employees a side-by-side estimate of both regimes, with a disclaimer, and lock declarations at proof-submission deadlines you set.

Other salary situations software must handle

1. Mid-year joiners: previous employer salary and TDS from Form 127 included in the projection.
2. Perquisites: car, accommodation, loans and other benefits valued under the rules and shown on Form 123.
3. Arrears: relief for salary arrears (formerly section 89) needs the employee's data for earlier years.
4. Employer NPS contribution: deduction rules differ by regime.
5. Professional tax: deducted from salary income; see ESI, PT and LWF.
6. No PAN: higher deduction rules apply; flag missing PANs at onboarding.
7. Leavers: final month's tax recomputed with the settlement.

Deposits, returns and certificates

Late filing and short deduction lead to fees, interest and possible disallowance of salary expense. The employer remains responsible even if the vendor's software makes the error, so test with real cases. See failure patterns.

Demo tests for salary TDS

• New regime employee at ₹12,50,000 (expect nil) and at ₹14,00,000 (expect about ₹6,825 a month).
• Old regime employee with HRA, home loan interest and the old 80C-type investments declared on Form 124.
• Mid-year joiner with previous employer data.
• An employee whose proofs fall short in January, forcing higher deductions in the last quarter.
• Generation of Form 138 for a quarter and Form 130 for a test year.

Add the results to your parallel run and the selection checklist.

Frequently asked questions

Is Form 16 abolished?

For tax year 2026-27 onwards the salary certificate is Form 130 under the 2025 Act. Form 16 still applied to FY 2025-26, issued in 2026 under the 1961 Act.

Do employees have to choose a regime every year?

For salary TDS the employer needs the employee's choice each year; without it, the new regime applies by default.

Can payroll software file returns directly?

Most generate the return file for upload through the department's systems or a facilitation route. Check what your vendor automates.

What if the software calculates TDS wrongly?

The employer is liable for short deduction and interest. The contract may allow you to recover costs from the vendor, but not shift the legal duty.

Sources

• Income Tax Department — Income-tax Act, 2025, Rules, 2026 and form FAQs
• Income Tax e-filing portal — returns, certificates and taxpayer services
• TRACES — TDS statements and certificates
• e-Gazette of India — notification of the Rules, 2026