Stox N Tax

Income-Tax Deduction from Salaries – FY 2024-25: An In-Depth Analysis

Abstract

The Central Board of Direct Taxes (CBDT) issued Circular No. 3/2025 on February 20, 2025, providing comprehensive guidelines for the deduction of income-tax from salaries under Section 192 of the Income-Tax Act, 1961, for the financial year 2024-25. This article offers an in-depth analysis of the circular, elucidating the responsibilities of employers, the computation of taxable income, applicable tax rates, permissible deductions, and the implications of the new tax regime introduced by the Finance Act, 2025. The discussion is anchored in the existing legal framework and incorporates the latest updates to ensure compliance and optimal tax planning.​Income Tax India+3Income Tax India+3Income Tax India+3

Introduction

Section 192 of the Income-Tax Act, 1961, mandates that any person responsible for paying salaries shall deduct income-tax on the estimated income of the employee under the head ‘Salaries’ for that financial year. The CBDT periodically issues circulars to guide employers in accurately computing tax deductions at source (TDS) from salaries. Circular No. 3/2025 serves this purpose for the financial year 2024-25, delineating the procedures and considerations employers must adhere to.​

Employer’s Responsibility for Tax Deduction

Employers are obligated to deduct tax at source from salary payments based on the estimated income of the employee for the financial year. The tax must be deducted at the time of actual payment of salary, not on an accrual basis. Employers must consider all relevant provisions, including exemptions, deductions, and applicable tax rates, to determine the correct amount of TDS.​Income Tax India+1Income Tax India+1

Computation of Estimated Salary Income

The process of estimating an employee’s salary income involves several key components:​

  1. Inclusions in Salary Income:
    • Basic Salary: The fundamental component of an employee’s compensation.​Income Tax India
    • Allowances: Such as house rent allowance (HRA), leave travel allowance (LTA), and special allowances.​
    • Perquisites: Benefits provided by the employer, including rent-free accommodation, company car, or concessional loans.​
    • Bonus and Commissions: Additional incentives linked to performance or sales targets.​
  2. Exemptions and Deductions:
    • Standard Deduction: A flat deduction of ₹75,000 is available to all salaried individuals under the new tax regime. ​Income Tax India
    • House Rent Allowance (HRA): Exemptions can be claimed subject to specified conditions and limits.​
    • Leave Travel Allowance (LTA): Exemption for travel expenses incurred within India, subject to conditions.​

Tax Rates Applicable for FY 2024-25

The Finance Act, 2025, introduced revised tax slabs under the new tax regime, which are as follows:​Income Tax India

These slabs are applicable under Section 115BAC(1A) of the Income-Tax Act, 1961. ​Income Tax India

Option Between Old and New Tax Regimes

Employees have the option to choose between the old tax regime, which allows various exemptions and deductions, and the new tax regime, which offers lower tax rates but with limited exemptions and deductions. Employers must obtain a declaration from employees regarding their preferred tax regime at the beginning of the financial year. If an employee does not provide such a declaration, the employer should compute TDS based on the new tax regime.​

Deductions Under Chapter VI-A

Under the old tax regime, employees can claim deductions under Chapter VI-A of the Income-Tax Act, 1961. Some common deductions include:​

  • Section 80C: Deductions up to ₹1,50,000 for investments in specified instruments like Public Provident Fund (PPF), Employee Provident Fund (EPF), Life Insurance Premiums, etc.​
  • Section 80D: Deductions for premiums paid towards health insurance policies.​
  • Section 80E: Deductions on interest paid on education loans.​

Rebate Under Section 87A

A resident individual with a total income not exceeding ₹12,00,000 is eligible for a rebate under Section 87A. The amount of rebate is 100% of income-tax or ₹25,000, whichever is less. ​

Calculation of Tax Deducted at Source (TDS)

Employers should compute the total taxable income of the employee after considering all applicable exemptions and deductions. The income-tax liability should then be calculated based on the applicable tax slabs. The total tax liability should be divided by the number of months of employment to determine the monthly TDS amount.​

Employers are required to:

  • Deposit TDS: Within the due date prescribed under Rule 30 of the Income-Tax Rules, 1962. Generally, TDS deducted during a month must be deposited by the 7th of the following month, except for March, where the due date is 30th April.
  • Quarterly TDS Returns (Form 24Q): To be filed within prescribed due dates—
    • Q1 (Apr–Jun): 31st July
    • Q2 (Jul–Sep): 31st October
    • Q3 (Oct–Dec): 31st January
    • Q4 (Jan–Mar): 31st May
  • Issue of Form 16: Employers must issue Form 16 (TDS Certificate) to employees by 15th June following the end of the financial year. It must be digitally signed if issued electronically and should be in the format prescribed under Rule 31(1)(a).

Relief Under Section 89(1)

If an employee receives arrears or advance salary, resulting in higher tax liability, relief under Section 89(1) can be claimed. Employers must obtain Form 10E from employees to compute such relief while calculating TDS. This ensures equitable taxation by spreading the income over the years it pertains to.

Special Considerations for Perquisites and Exemptions

  • Valuation of Perquisites must be done in accordance with Rule 3 of the Income-Tax Rules.
  • Rent-free accommodation, concessional loans, ESOPs, and company car benefits are to be computed as per prescribed valuation norms.
  • Exempt allowances under Section 10 (such as HRA, LTA, transport allowance for disabled employees, etc.) must be carefully considered based on documentary support and eligibility.

Employers are expected to maintain evidence for claims made by employees such as rent receipts, insurance premiums, donation receipts, etc., especially if the employee has opted for the old regime.

Recent Amendments & Budget 2025 Highlights Affecting TDS on Salary

The Finance Act, 2025 has introduced the following relevant changes:

  1. Revised slab structure under Section 115BAC(1A) — now the default regime unless the employee opts out.
  2. Increased standard deduction: From ₹50,000 to ₹75,000 (under both regimes).
  3. Rebate under Section 87A extended for incomes up to ₹12,00,000.
  4. Additional exemption on leave encashment limit increased to ₹25 lakhs for non-government employees (from ₹3 lakhs).

Employers need to educate employees regarding these changes and incorporate declarations in payroll systems accordingly.

Employer’s Role as a Withholding Agent – A Fiduciary Duty

The circular reiterates that the employer is treated as an “assessee in default” if TDS is not deducted or not deposited properly. Hence, from a compliance and fiduciary standpoint:

  • Employers must set up robust payroll systems.
  • Ensure documentation and declarations are appropriately collected and verified.
  • Educate employees on regime selection and tax planning.
  • Keep track of timelines for deductions, deposits, and filings.

The ICAI has time and again emphasized the need for companies and tax practitioners to ensure due diligence in payroll tax compliance, especially with the increasing digitization and automated scrutiny under the Income Tax Department’s TDS-CPC system.

Conclusion

Circular No. 3/2025 is more than a routine compliance directive—it reflects the evolving policy framework around income-tax simplification, digitization, and dual regime navigation. With the introduction of a more attractive default tax regime, employers now carry increased responsibility in ensuring timely, accurate, and compliant TDS deduction and reporting.

As professionals, Chartered Accountants play a crucial role in:

  • Assisting clients in regime comparison and payroll structuring.
  • Designing TDS compliance systems.
  • Conducting internal audits of salary-related deductions and returns.
  • Providing employee education through tax awareness programs.

In this context, Circular No. 3/2025 is not just a guideline but an operational blueprint for compliant and efficient tax deduction from salary income in FY 2024-25.

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