TDS errors have a nasty property: they're invisible for months, then they surface all at once. An employee whose tax was under-deducted all year gets a shock in March when payroll claws back the shortfall from one payslip. An employee who was overdeducted waits until they file their return to get their money back. And the company that got it wrong owes interest, late fees, and possibly a disallowance of the underlying expense.
Looking for payroll software?
Check out Techimply's List of the Best Payroll Software in India for your business.
None of this is exotic. The errors repeat across companies, and nearly all of them are caught by a few checks. This covers what the errors are and where to look.
What Changed on 1 April 2026
Before anything else, because most of what you'll read online is now out of date.
The Income Tax Act, 2025, replaced the Income Tax Act, 1961, effective 1 April 2026. TDS on salary, governed by Section 192 for decades, now sits at Section 392. Non-salary TDS is Section 393.
The forms were renumbered too. Form 138 replaces Form 24Q for salary returns. Form 140 replaces 26Q for non-salary resident payments, and Form 139 replaces 27Q for non-residents.
Two things worth being clear about:
The computation method did not change. The average-rate method, the monthly deduction obligation, and the estimation approach are all identical. Rates, slabs, and exemption limits are unchanged.
Old periods use old references. Payments and credits from 1 April 2026 onward use the new act, new sections, and new forms. Corrections for earlier periods still use the old ones.
So if a vendor or an advisor is still citing Section 192 for a current-year deduction, that's a signal about how current their knowledge is.
How Salary TDS Actually Works
Understanding the mechanic explains most of the errors.
Unlike contractor TDS, which applies a flat percentage per payment, salary TDS uses an estimated annual income approach:
- Estimate the employee's total salary for the full financial year, including known bonuses and recurring allowances
- Subtract exemptions and the standard deduction under the applicable regime
- Compute annual tax using that regime's slab rates
- Add the 4% Health and Education Cess
- Divide across the remaining months of the year
That's the average rate method: annual tax divided by estimated annual income, applied monthly.
The consequences fall out immediately. TDS isn't a fixed percentage, it differs per employee, and any change to the estimate mid-year requires recomputation across the remaining months. That last point causes more errors than anything else.
There's also no employer-side threshold. A company with two employees has the same obligation as one with fifty thousand.
The Regime Default Nobody Communicates
The single most common error, and the easiest to fix.
The new regime is the default. If an employee doesn't explicitly tell you which regime they want, you must compute TDS under the new regime. Not the old one, not the one they used last year.
For FY 2025-26 the new regime carried a ₹75,000 standard deduction and a Section 87A rebate raised to ₹60,000 on total income up to ₹12 lakh, meaning a salaried employee with gross pay up to roughly ₹12.75 lakh paid zero income tax, provided the employer computed it correctly. The old regime's standard deduction is ₹50,000 with an 87A rebate up to ₹12,500 on taxable income not exceeding ₹5 lakh.
An employee choosing the old regime must say so, and for those needing to exercise the option formally, Form 10-IEA applies.
Where this goes wrong: the employee assumes their old-regime choice carries forward, the employer defaults to the new regime as required, and TDS comes out different from expectation. Or worse, the employer assumes old regime out of habit, deducts accordingly, and the whole year's computation is wrong.
The fix is administrative, not technical. Collect regime declarations at the start of the financial year, in writing, from everyone. Not the people who ask. Everyone.
Businesses often use document management software to securely store tax declarations, investment proofs, and employee payroll records for future reference.
The Errors That Actually Happen
Not recomputing after a change
A salary revision in August. A bonus in November. A joiner in October. Each changes the annual estimate, and each requires recomputing the tax and redistributing across remaining months.
Systems that treat TDS as a fixed monthly figure set in April produce a March shortfall. This is why the bonus month often shows a jump in TDS: the employer recalculated and is spreading the difference across what's left.
Investment proofs collected too late
Employees declare intended investments in April; proofs arrive in January or February. When declared and actual diverge, the whole year's deduction was based on the wrong number, and the correction lands in one or two payslips.
Collecting proofs in December rather than February gives you three months to spread the adjustment instead of one.
The mid-year joiner's previous income
An employee joining in October has income from their previous employer. If you compute TDS only on the salary you'll pay, you'll under-deduct because their actual annual income is higher and may sit in a higher slab.
The employee should furnish previous salary details, historically via form 12B. If they don't, you deduct on what you know, and they settle the difference at filing, which nobody enjoys.
Cess forgotten
The 4% Health and Education Cess applies over and above the computed tax. It's a small percentage of a large number and it's omitted more often than you'd think.
Perquisites not valued
Company car, accommodation, interest-free loans, ESOPs. These are taxable perquisites requiring valuation and inclusion. Payroll systems configured only for cash components miss them entirely.
Wrong section for non-salary payments
Not salary TDS, but it lives in the same process. Paying a consultant under the salary section, or applying the contractor rate to professional services, produces short-deduction notices.
What It Costs to Get Wrong
The penalties compound, which is why small errors get expensive.
Interest on late deposit: 1.5% per month under the late-deposit provision, from the date of deduction to the date of deposit. Calculated monthly, so part of a month counts as a full month.
Interest for not deducting at all: 1% per month.
Late filing fee: ₹200 per day, from the day after the due date until the return is filed, capped at the TDS amount for that quarter. This is automatic and non-waivable. No officer has discretion to reduce it.
Penalty for late returns: ₹10,000 to ₹1,00,000 where a return is filed more than a year late.
Expense disallowance: if you fail to deduct or deposit TDS on a payment, 30% of that payment is disallowed as a business expense, which increases your taxable income. This is frequently the largest cost and the one nobody models.
Many businesses integrate payroll with accounting software to ensure TDS expenses, tax liabilities, and payroll entries remain accurate throughout the financial year.
Prosecution: up to seven years for non-deposit of tax actually deducted. Rare, but it exists, and it reflects how the law views money withheld from an employee and not remitted.
The Deadlines
Monthly deposit: by the 7th of the following month. March has its own treatment.
Quarterly returns: Q1 by 31 July, Q2 by 31 October, Q3 by 31 January, Q4 by 31 May.
Form 16: by 15 June following the financial year.
Form 16A for non-salary: within 15 days of the quarterly return due date.
The Q4 return matters more than the others. It includes Annexure II, the full-year salary computation per employee, and the department uses that data to generate Part B of Form 16. Errors in Q4 propagate directly into your employees' Form 16 and their Form 26AS credit.
The correction window is two years from the end of the financial year. After that, errors become permanent. That's a meaningful change: mistakes you'd have fixed leisurely now have an expiry.
Catching Errors Before They Bite
Monthly
Reconcile challans against the return data. Challan mismatch is the most common cause of return rejection, and it's mechanical to check.
Validate PANs. A wrong PAN means the employee's credit doesn't appear in their Form 26AS, and they'll discover it at filing. Validate at onboarding, not at year-end. An employee management software helps maintain accurate employee records, reducing payroll errors caused by incorrect PAN or personal information.
Check the deposit went out by the 7th.
Quarterly
Compare deducted against deposited against filed. These three numbers should agree. When they don't, find out why now rather than in June.
Review the employees with unusual TDS. Anyone at zero, anyone at a rate that looks wrong for their salary. Five minutes of scanning catches configuration errors.
At the December mark
Run a projection. For each employee, compare TDS deducted so far against the tax that will actually be due. This is the single highest-value check in the year, because it's your last chance to spread a shortfall across three months instead of dumping it into March.
Chase investment proofs now. Not in February.
Before Q4
Reconcile Annexure II against your payroll records, because this data becomes Form 16.
Fix Form 138 errors before generating Form 16. Part A is system-generated from your filed return data. If the return had wrong PANs or challan mismatches, Part A will be wrong, and you'll need a correction statement before Form 16 can be issued correctly. Discovering this on 14 June is a bad afternoon.
What Your Software Should Do
- Default to the new regime unless the employee declares otherwise, and store that declaration
- Recompute automatically on any change to salary, bonus, or joining date
- Handle previous-employer income for mid-year joiners
- Apply cess automatically
- Value perquisites, or at least let you enter them
- Generate the return file directly, not a CSV you reformat
- Reconcile challans against return data
- Validate PAN format at entry
- Project year-end position on demand, so you can run the December check
Ask specifically whether the platform has been updated for the new Act references and forms. Some haven't.
Conclusion
Salary TDS runs on an estimated-annual-income method, not a flat rate, which means every midyear change requires recomputing and redistributing across remaining months. Most errors trace to that not happening. The new regime is the default. Collect written regime declarations from everyone in April, because assuming carries a whole year of wrong computation. From 1 April 2026, salary TDS sits under Section 392 of the Income Tax Act, 2025, and Form 138 replaces Form 24Q. The method didn't change, but the references did, and anything still citing Section 192 for a current deduction is stale. Run a projection in December. It's the highest-value hour in the payroll year, because it converts a March shock into a manageable three-month adjustment. Chase proofs early, validate PANs at onboarding, reconcile challans monthly, and remember the correction window closes at two years. The costs aren't just interest and the ₹200-a-day fee. Failing to deduct means 30% of the payment is disallowed as an expense, and that's usually the number that hurts.
