Old Tax Regime Trap: Salaried Employees Face TDS Shock in Final Quarter

TDS Jump Threatens Salaried Workers

Many salaried individuals in India are bracing for a significant increase in their Tax Deducted at Source (TDS) during the final quarter of the financial year, running from January to March. This recurring issue disproportionately affects those who have chosen to remain under the old tax regime.

How TDS is Calculated

At the start of each financial year, employers request employees to declare planned tax-saving investments and expenses, such as Provident Fund (PF) contributions, Equity Linked Savings Schemes (ELSS), insurance premiums, and House Rent Allowance (HRA) claims. Based on these declarations, employers estimate annual tax liability and prorate TDS deductions across 12 months. The TDS deducted from April to December is an estimation based on these declared intentions, not actual spending.

The Proof Problem

The critical juncture arrives in January when employers require investment proofs to verify the declared tax-saving measures. By this time, employees have a clearer picture of their annual income, including bonuses, and the extent to which they have actually made their intended investments. Employers need these proofs before March to finalize tax calculations and ensure correct TDS deductions for the year.

Declared vs. Actual Investments

The core of the problem lies in the discrepancy between declared intentions and actual investments. Employees often declare significant tax-saving investments in April with good intentions. However, as the year progresses, many fall short. This can happen due to insufficient savings, delayed investments, or overestimation of deductions like those under Section 80C, home loan interest, or National Pension System (NPS).

When employees fail to submit proofs for their declared deductions in January, employers must withdraw those allowances from the tax calculation. This increases the employee's taxable income. The tax that should have been spread over the entire year is then compressed into the remaining three months, causing a sharp and often unwelcome spike in monthly TDS.

A Simple Illustration

Consider an employee earning ₹12 lakh annually under the old tax regime. If they declared ₹2 lakh in deductions in April, their employer might have deducted approximately ₹6,000 monthly as TDS from April to December. However, if by January they have only invested ₹1 lakh and cannot provide proof for the remaining ₹1 lakh, their taxable income rises by that amount. The shortfall in tax deduction must then be recovered in just three months, significantly boosting their TDS from January to March.

Missing Proofs, Not Money

In cases where employees have made the eligible investments but failed to submit the necessary proofs by the deadline, their TDS will still increase. However, they can claim these deductions when filing their Income Tax Return (ITR). Any excess tax deducted will be refunded by the Income Tax Department, meaning the cash flow is temporarily impacted, but the money is not lost.

Old Regime vs. New Regime

This TDS adjustment process is specific to the old tax regime due to its allowance for numerous deductions and exemptions. The new tax regime, while offering lower tax slab rates, generally permits only the standard deduction and has very few other exemptions. Consequently, employers do not need to verify investment proofs, and TDS remains relatively stable throughout the year for those opting for the new regime.

Navigating the Tax Season

For those under the old tax regime, January marks a crucial point where financial plans meet tax reality. Any shortfall in investments compared to declarations will immediately translate into higher TDS. To avoid end-of-year shocks, employees are advised to make conservative declarations in April, track their investments diligently, complete all tax-saving investments well before January, and submit proofs promptly. For predictable tax deductions and simpler compliance, the new tax regime may offer greater peace of mind despite fewer deduction avenues.