Business

1. Clean Up Past Compliance

• File all pending ITRs and tax audit reports.
• Clear old TDS mismatches and demands where possible.

2. Share Capital and Valuation

• Ensure proper documentation for valuation reports.
• Check implications of angel tax-type provisions if applicable.

3. ESOP and Employee Tax Matters

• Review ESOP scheme structure.
• Understand TDS / perquisite implications for employees.

4. Ongoing Compliance Post-Funding

• Track utilisation of funds vs business plan.
• Keep Board and investor reporting aligned with tax and financials.

5. Work With Advisors

• Coordinate between CA, CS, and legal counsel.
• Keep a single source of truth for cap table and tax positions.

TDS on salary in India is one of the most common, and most sensitive, income tax obligations for employers. When handled correctly, employees are comfortable, payroll runs smoothly, and there are no surprises at year end. When handled casually, it leads to notices, penalties, and loss of trust inside the company.

This guide is for Indian employers, HR heads, and finance teams who want a clear, practical view of how TDS on salary works under the new income tax law, and what they need to do each month to stay compliant.

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1. What TDS on Salary Actually Covers

TDS on salary applies when you pay income that is treated as “salary” under the Income Tax law. This typically includes:

• Basic salary and allowances
• Bonuses and incentives
• Perquisites (where taxable)
• Certain reimbursements that are not exempt

Your obligation as an employer is to:

• Estimate the employee’s taxable income for the year
• Apply the correct tax rates (based on the chosen regime and declarations)
• Deduct tax at the time of each payment
• Deposit that tax with the government within due dates

The employee ultimately files their own return, but you are responsible for **correct deduction and deposit**.

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2. Key Steps in the TDS on Salary Process

A simple way to think about TDS on salary is as a recurring monthly cycle.

2.1 Collect Declarations and Investment Proofs

At the start of the year, and periodically during the year:

1. Ask employees for declarations of their planned investments and deductions (for example, under sections related to provident fund, life insurance, health insurance, home loan interest, etc.).

2. Towards the end of the year, collect proofs to support these declarations.

These details help you estimate the correct annual taxable income.

2.2 Compute Estimated Annual Tax

For each employee:

1. Calculate expected annual gross salary.

2. Subtract exemptions and deductions that apply based on law and valid declarations.

3. Apply the appropriate tax slab and any applicable surcharge and cess.

4. Divide the total tax by the remaining months to compute monthly TDS.

2.3 Deduct TDS Monthly

At each salary payout:

• Deduct the computed TDS amount from the employee’s salary.
• Ensure the deduction shows clearly in the payslip.

If the employee’s circumstances change (for example, change of salary, new investments, or regime switch where permitted), adjust calculations for the remaining months.

2.4 Deposit TDS and File Returns

After deducting TDS:

1. Deposit TDS with the government within prescribed timelines using the correct challan and codes.

2. File periodic TDS returns for salary, with accurate employee-wise details.

3. Generate and issue Form 16 to employees in time, so they can file their own returns.

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3. Common Mistakes Employers Make With Salary TDS

Even organised businesses often slip on the same issues.

3.1 Not Updating for Law Changes

If you continue to use old tax rates or ignore new rules on regimes, deductions, or exemptions, deductions may be too low or too high. Both create problems:

• Under-deduction can lead to demand and interest.
• Over-deduction creates employee dissatisfaction and refund dependency.

3.2 Weak Documentation

Typical gaps include:

• Missing or incomplete investment declarations
• No proofs collected at year end
• Inconsistent records for employees who join or leave mid-year

3.3 Late Deposit or Filing

Delays in depositing TDS or filing returns can attract interest, late fees, and penalties. Repeated defaults damage your track record with the department.

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4. Practical Compliance Checklist for Employers

Use this as a working list for your HR and finance teams.

4.1 At the Start of the Year

1. Update payroll systems for the latest tax slabs and rules under the new law.

2. Circulate a clear note to employees explaining:

• How TDS on salary will be calculated
• What declarations they need to provide
• Timelines for submissions

3. Set up a structured process (forms or HR portal) to capture declarations.

4.2 Every Month

1. Review payroll reports before processing to confirm TDS amounts look reasonable.

2. Check that new joiners and resignations have been correctly handled for salary and TDS.

3. Deposit TDS within the due date using the correct challan code.

4.3 Quarterly and Annually

1. Reconcile TDS ledgers with challans and payroll reports.

2. File accurate TDS returns within the prescribed dates.

3. Issue Form 16s to employees on time.

4. Review any notices or mismatches flagged by the income tax system.

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5. Linking TDS on Salary With the New Income Tax Law and Rules

Under the new income tax framework, TDS on salary is still driven by core sections in the Act and related Rules, but the **details matter**.

For example, you should:

• Align your payroll calculations with the latest provisions and rates notified by the Central Board of Direct Taxes (CBDT).
• Use official utilities and department guidance from the Income Tax portal to check rule-specific procedures and reporting formats.

Related: New Income Tax Law vs Rules for Indian business owners (link: /blog/business/new-income-tax-law-vs-rules-what-indian-business-owners-should-watch/)

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6. When to Seek Professional Help

You should involve a tax or legal advisor where:

• You have employees across multiple states with complex allowances and benefits.
• You are handling expatriate employees, NRIs, or cross-border salary structures.
• You receive repeated notices or mismatches on your TDS returns.

A small mistake repeated monthly across all employees can become a large exposure. It is better to set up robust processes once and then run them consistently.

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7. How FastLegal Can Help

FastLegal works with Indian businesses, startups, and professional firms to set up and maintain clean payroll and income tax compliance.

If you want to:

• Implement a correct TDS on salary process under the new income tax law
• Review and fix gaps in your existing payroll and TDS workflows
• Get clarity on how residential status, regimes, and deductions affect employee tax

you can schedule a consultation with FastLegal.

Visit: https://fastlegal.in/consulting

Share your current setup and questions, and the team can help you design and implement a practical, compliant TDS and payroll process for your business.

Before you can determine how much tax you pay in India, the law first asks a simple but powerful question: what is your residential status for tax purposes?

The new income tax framework keeps the same core idea as earlier law, but with updated conditions and thresholds. This post explains, in practical terms, how individuals and business owners should think about residential status under the new regime.

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1. Why Residential Status Matters

Residential status determines which income is taxed in India.

In broad terms:

• Residents are taxed on global income, subject to treaty relief.
• Non-residents are taxed mainly on income that accrues, arises, or is received in India.

This affects:

• Salaries and professional income
• Business profits
• Capital gains
• Interest, dividends, and other passive income

For founders, professionals, and NRIs, getting this wrong can lead to double taxation, notices, and disputes.

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2. Basic Categories of Residential Status

For individuals, the law generally classifies you as:

1. Resident and ordinarily resident (ROR)

2. Resident but not ordinarily resident (RNOR)

3. Non-resident (NR)

Each category has different tax consequences.

• ROR: broadest tax base, global income taxable.
• RNOR: in-between category with some relief for foreign income.
• NR: taxed mainly on Indian source income.

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3. Day-Count Tests: How Many Days in India?

Residential status is largely decided by days of physical presence in India during the relevant financial year, along with some historical tests.

While exact thresholds and conditions are set out in the new Act, the basic approach is:

1. Count the number of days you are physically present in India during the year.

2. Look at cumulative presence over the past few years for certain tests.

3. Apply special rules for:

• Indian citizens leaving India for employment
• Indian citizens or persons of Indian origin visiting India

For accurate status, you must maintain a clear record of your travel.

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4. Common Situations for Founders and Professionals

4.1 NRI Founder Spending More Time in India

An NRI founder who begins spending significant time in India to build operations may unintentionally become tax resident.

Practical steps:

• Track days in India using passports and travel records.
• Plan travel to manage thresholds where possible.
• Consider how residential status interacts with foreign salary, ESOPs, and dividend income.

4.2 Indian Professional Working Abroad

Indian residents who go abroad for employment may shift status over time.

Points to watch:

• Whether salary is paid in India or abroad
• Where services are rendered
• Whether they retain other Indian source income

Residential status changes can affect whether foreign salary becomes taxable in India.

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5. Impact on Business Owners and Their Companies

Residential status is not only about individuals filing returns. It also affects:

• How dividends, interest, and royalties are taxed when paid to or received from non-residents.
• Determination of permanent establishment (PE) or business connection in cross-border structures.

For example, if a key founder or decision-maker spends a lot of time in India, it may raise questions about where management and control are effectively exercised.

This is where residential status, treaty provisions, and domestic law intersect.

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6. Documentation and Practical Compliance

To avoid disputes:

1. Maintain travel logs

• Passport copies, boarding passes, and visa records.

2. Align tax positions with facts

• Do not claim non-resident status if you clearly meet resident criteria.

3. Use Double Taxation Avoidance Agreements (DTAA) responsibly

• Where there is a tie-breaker between two countries, follow treaty rules and document your position.

4. Review annually

• Residential status is determined year by year. Changes in personal or professional life can shift your status.

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7. What FastLegal Clients Should Focus On

For clients using FastLegal or similar services, the key steps are:

1. Confirm your residential status for the current and recent years using the new law tests.

2. Identify all Indian and foreign income sources.

3. Check how residential status changes your tax liability, including on:

• Foreign salary and consulting income
• ESOPs and equity gains
• Interest and dividends from foreign investments

4. Seek professional guidance where your facts are complex (multiple countries, remote work, cross-border roles).

Residential status under the new income tax law is the starting point for every return. Understanding it correctly ensures that all subsequent calculations, disclosures, and planning are on solid ground.

The new income tax framework is more than just a fresh bare Act. The real impact on your day-to-day decisions comes from how the Income-tax Act and the Income-tax Rules work together.

This post explains, in simple language, what Indian business owners and finance teams should focus on when reading the new Act alongside the Rules and official utilities.

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1. Act vs Rules: Who Does What

The Income-tax Act lays down the broad legal principles:

• Who is taxed
• On what income
• At what basic rates
• When tax becomes payable
• What offences and penalties exist

The Income-tax Rules and notifications fill in the operational details, such as:

• Forms and formats
• Timelines and procedures
• Methods of calculation
• Documentation and reporting requirements

For example:

• The Act may say that certain payments are subject to tax deduction at source.
• The Rules and related notifications will specify exact rates, thresholds, due dates, and forms.

As a business owner, you need to read both together. The Act tells you the “what”; the Rules tell you “how”.

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2. Why the New Framework Matters for Businesses

For Indian businesses, changes in the income tax law affect:

1. TDS and TCS obligations

• Which payments attract TDS or TCS
• Revised rates or thresholds
• Consequences of non-deduction or late deposit

2. Return filing and assessment process

• Due dates
• Types of returns
• Faceless assessment and appeal procedures

3. Deductions and incentives

• Which business expenses are allowed
• Conditions for claiming certain deductions

4. Penalties and prosecution risk

• Non-filing, under-reporting, mis-reporting
• TDS/TCS defaults

Keeping up with the bare Act alone is not enough; the Rules and subsequent amendments often change the practical outcome.

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3. Key Areas Where Rules Change the Ground Reality

When you review the new Act and related Rules, pay special attention to these areas.

3.1 TDS and TCS Sections

• Identify which sections of the Act impose TDS/TCS on your typical transactions.
• Then check the corresponding Rules and notifications for:
• Applicable rates
• Threshold limits
• Exemptions
• Special cases for non-residents

Action point for businesses:

• Prepare a simple TDS/TCS matrix for your major payment types (salaries, contractor payments, rent, professional fees, commissions, purchase of goods, foreign remittances).

3.2 Depreciation and Business Deductions

• The Act contains the broad rule that depreciation is allowed on eligible assets.
• The Rules and schedules specify rates for each block of assets, conditions, and method of calculation.

Action point:

• Revisit your depreciation chart to ensure it matches the latest block-wise rates and conditions.

3.3 Presumptive Taxation and Special Schemes

• Schemes for small businesses and professionals often appear as sections in the Act.
• The Rules clarify eligibility, turnover limits, and calculation steps.

Action point:

• Work with your tax advisor to check whether presumptive schemes are still optimal under the new law.

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4. Using the Official Rules Utility Effectively

The income tax department has provided utilities and tools to map old rules to new rules and to search the updated text.

Practical tips for using these tools:

1. Search by section or rule number

• Start from the bare Act section that applies to you.
• Use the utility to locate the relevant rule.

2. Bookmark frequently used rules

• TDS/TCS rules
• Return filing rules
• Assessment and appeal procedure rules

3. Keep a change log

• Maintain a simple internal note of rules that have changed and how they impact your processes.

This turns a long legal document set into something your finance team can actually work with every month.

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5. Building Internal Processes Around the New Law

Instead of treating the new Act and Rules as a one-time reading exercise, convert them into internal processes and checklists.

5.1 Compliance Calendar

Create or update a calendar covering:

• Return filing dates
• TDS/TCS deposit and return dates
• Advance tax instalments
• Audit and report deadlines, if applicable

5.2 Standard Operating Procedures

For each critical area:

• TDS and TCS
• Expense approvals
• Invoicing and revenue recognition
• Year-end closing and documentation

Document who is responsible for what and what steps they follow to stay compliant with the new law.

5.3 Periodic Review with Advisors

Schedule regular reviews with your tax advisor to:

• Check for new notifications and circulars
• Validate your interpretations of key sections and rules
• Adjust your processes where required

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6. What FastLegal Clients Should Do Next

If you are a FastLegal client or similar business owner, consider the following immediate steps:

1. Identify the top five sections and rules that impact your business the most.

2. Ask your advisor for a one-page summary of how the new law changes:

• TDS and TCS obligations
• Return filing and assessment process
• Penalties you should be most aware of

3. Update your internal checklists and templates (invoices, vendor onboarding, payment approvals) to reflect the new requirements.

The new Income-tax Act and Rules are detailed, but you don”t need to memorise everything. Focus on the parts that directly touch your business, and turn those into clear, repeatable processes.